<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 6, 1996.
REGISTRATION NOS. 2-96544
811-4263
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
[_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 23
AND/OR [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[_]
AMENDMENT NO. 24 [X]
FLAGSHIP TAX EXEMPT FUNDS TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ONE DAYTON CENTRE 45402
ONE SOUTH MAIN STREET (ZIP CODE)
DAYTON, OHIO
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE: (513) 461-0332
PLEASE SEND COPY OF
COMMUNICATIONS TO:
RICHARD P. DAVIS RICHARD T. PRINS, ESQ.
PRESIDENT SKADDEN, ARPS, SLATE,
FLAGSHIP TAX EXEMPT FUNDS TRUST MEAGHER & FLOM
ONE DAYTON CENTRE 919 THIRD AVENUE
ONE SOUTH MAIN STREET NEW YORK, NEW YORK 10022
DAYTON, OHIO 45402 (212) 735-3000
(NAME AND ADDRESS OF
AGENT FOR SERVICE)
It is proposed that this filing will become effective (check appropriate box)
[_]
Immediately upon filing pursuant to paragraph (b)
[X]
on September 26, 1996 pursuant to paragraph (b), or
[_]
60 days after filing pursuant to paragraph (a)(1)
[_]
on (date) pursuant to paragraph (a)(1)
[_]
75 days after filing pursuant to paragraph (a)(2), or
[_]
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF BENEFICIAL
INTEREST PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, AND WILL FILE A RULE 24F-2 NOTICE WITH THE COMMISSION FOR ITS MOST
RECENT FISCAL YEAR ENDED MAY 31, 1996.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
FLAGSHIP TAX EXEMPT FUNDS--
PROSPECTUS
Part A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fees and Expenses
Item 3. Condensed Financial Financial Highlights
Information............
Item 4. General Description of Investing in Mutual Funds; About Flagship
Registrant............. Tax Exempt Fund; What the Funds Own and
Their Strategies; Our State Tax Exempt
Funds; Their Flagship National Tax Exempt
Funds; About the Trust; The Funds and
Their Objectives
Item 5. Management of the Fund.. How the Funds are Managed
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other How to Buy Shares; How to Sell Shares; Fees
Securities............. and Expenses; Taxes; Distributions and
Yield; About the Trust
Item 7. Purchase of Securities How to Buy Shares; How Fund Shares are
Being Offered.......... Priced; Distributions and Yield
Item 8. Redemption or How to Sell Shares; How to Exchange Shares;
Repurchase............. Shareholder Services; About the
Distributor; Additional Information
Item 9. Legal Proceedings....... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
FLAGSHIP HIGH YIELD MUNICIPAL BOND
FUND--PROSPECTUS
Part A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fees and Expenses
Item 3. Condensed Financial Financial Highlights
Information............
Item 4. General Description of Investing in Mutual Funds; About Flagship
Registrant............. High Yield Municipal Bond Fund; What the
Fund Owns and Its Strategies; About the
Trust; The Fund and Its Objectives
Item 5. Management of the Fund.. How the Fund is Managed
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other How to Buy Shares; How to Sell Shares; Fees
Securities............. and Expenses; Taxes; Distributions and
Yield; About the Trust
Item 7. Purchase of Securities How to Buy Shares; How Fund Shares are
Being Offered.......... Priced; Distributions and Yield
Item 8. Redemption or How to Sell Shares; How to Exchange Shares;
Repurchase............. Shareholder Services; About the
Distributor; Additional Information
Item 9. Pending Legal Not Applicable
Proceedings............
PART B FOR FLAGSHIP TAX EXEMPT FUNDS AND FLAGSHIP HIGH YIELD MUNICIPAL BOND FUND
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Table of Contents
Item 12. General Information and Not Applicable
History................
Item 13. Investment Objectives
and Policies..... ..... Investment Objectives and Policies
Item 14. Management of the Officers and Trustees
Registrant.............
Item 15. Control Persons and
Principal Holders of
Securities............. Officers and Trustees
Item 16. Investment Advisory and Investment Advisory Services; Distributor;
Other Services......... Officers and Trustees; Custodian and
Transfer Agent
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices........
Item 18. Capital Stock and Other Shares of the Fund
Securities.............
Item 19. Purchase, Redemption and Purchase, Redemption and Pricing of Shares;
Pricing of Securities Exchange and Reinvestment Privileges;
Being Offered.......... Systematic Withdrawal Plan; Shares of the
Fund; Dividend Payment Options
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A ITEM
NO. LOCATION
--------- --------
<C> <S> <C>
Item 20. Tax Status.............. Taxes
Item 21. Underwriters............ Distributor
Item 22. Calculation of Yield and Total Return Calculation
Performance Data.......
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
Prospectus dated September 26, 1996
FLAGSHIP TAX EXEMPT FUNDSSM
INVESTING IN MUTUAL FUNDS
Flagship and your financial consultant want you to understand both the bene-
fits and risks of mutual fund investing.
Mutual funds sell their shares to investors and invest the proceeds in a port-
folio of securities. A mutual fund allows you to pool your money with that of
other investors in order to obtain professional investment management which
generally enables you to obtain greater diversification of your investments
and to simplify your recordkeeping.
While mutual funds offer significant opportunities, they also carry risk, in-
cluding possible loss of principal due to interest rate risk and credit risk.
Unlike savings accounts and certificates of deposit, mutual funds are not in-
sured or guaranteed by any financial institution or government agency.
Your financial consultant can help you determine how investing in one of these
mutual funds may suit your unique needs, time horizon and risk tolerance.
TABLE OF CONTENTS PAGE
ABOUT THE FUNDS
<TABLE>
<S> <C>
Fees and Expenses.......................................................... 2
Financial Highlights....................................................... 4
The Funds and Their Objectives............................................. 9
What the Funds Own and Their Strategies.................................... 10
Flagship State Tax Exempt Funds............................................ 11
Flagship National Tax Exempt Funds......................................... 14
How the Funds are Managed.................................................. 14
ABOUT YOUR INVESTMENT
How to Buy Shares.......................................................... 16
How to Sell Shares......................................................... 19
How to Exchange Shares..................................................... 19
Shareholder Services....................................................... 20
How Fund Shares are Priced................................................. 20
Taxes...................................................................... 20
Distributions and Yield.................................................... 21
About the Distributor...................................................... 22
About the Trust............................................................ 23
Additional Information..................................................... 23
Flagship Application....................................................... 24
</TABLE>
ABOUT FLAGSHIP TAX EXEMPT FUNDS
Flagship Tax Exempt Funds Trustsm (the "Funds") is an open-end management in-
vestment company composed of separate series. As described in this Prospectus,
the Funds include State, National and Insured Fund portfolios. Each is de-
signed for individual and corporate investors with different income needs and
tax considerations. The investment adviser ("Manager") for the Funds is Flag-
ship Financial Inc., a registered investment adviser since 1978.
On July 16, 1996, Flagship Resources Inc. ("Flagship"), parent of the Manager
for the Funds, signed an Agreement and Plan of Merger with The John Nuveen
Company, pursuant to which Flagship shall be merged with and into The John
Nuveen Company. The transaction is expected to close on or about November 30,
1996. The Funds' board of trustees has approved the transaction, which is con-
tingent upon shareholder approval of new advisory agreements. It is antici-
pated that after the transaction the same management team will continue to
manage the Funds' portfolios, and there will be no material changes in portfo-
lio investment objectives or policies.
Each Tax Exempt Fund seeks high current after tax income exempt from federal
income taxes and, for those State identified funds, from the personal income
taxes or intangibles tax, if any, of the Fund's particular state, consistent
with liquidity and preservation of capital. The Funds invest primarily in
portfolios of municipal securities.
From time to time new Funds may be added. Only the All-American, Intermediate,
and Limited Term National Funds are registered and available for sale in Illi-
nois, Nebraska, New Hampshire and Washington. Other National Funds will also
be registered and available in the above states when they are offered to the
public.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. Please read and retain it for future reference.
Information concerning the Flagship High Yield Municipal Bond Fund, a nation-
al, diversified series of the Flagship Tax Exempt Funds TrustSM is also avail-
able in a separate Prospectus.
A Statement of Additional Information ("SAI") dated September 26, 1996, con-
taining more detailed information, has been filed with the Securities and Ex-
change Commission and is incorporated herein by reference, making it a part of
this Prospectus. A copy of the SAI or the Flagship High Yield Municipal Bond
Fund Prospectus can be obtained without charge by telephoning the Funds toll-
free at 1-800-414-7447, or for TDD, 1-800-360-4521.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE 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.
-- 1 --
<PAGE>
FEES AND EXPENSES
Various costs and expenses may be incurred directly or indirectly when invest-
ing in any Flagship Tax Exempt Fund. Your future expenses could be more or
less than those in the table below. Data reflects the declining sales charge
Flagship utilizes for Class A Shares and a contingent deferred sales charge
("CDSC") for Class B and Class C Shares, and a no-fee, no-load structure for
institutional investors for Class R Shares. Class R Shares are subject to a
minimum purchase requirement
of $1,000,000. If investing for the long term, shareholders of Class B and
Class C Shares could ultimately pay more fees than if they had invested at the
maximum sales charge in Class A Shares. Class C Shares, while authorized, are
not currently offered by all Funds. Class B Shares automatically convert to
Class A Shares after eight years. The Funds' 12b-1 plan and management fee are
more fully described under "How The Funds are Managed" and "About the Distrib-
utor", respectively.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS
TRANSACTION AFTER FEE WAIVERS & REIMBURSEMENT
EXPENSE ARRANGEMENTS
<CAPTION>
EXAMPLE OF EXPENSES AN INVESTOR
IN A FLAGSHIP 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
--------------------------------- -----------------
TOTAL FUND
MAXIMUM MAXIMUM OPERATING
FRONT END CDSC EXPENSES
SALES IMPOSED WITHOUT
CHARGE ON MANAGE- TOTAL FUND WAIVER OR
IMPOSED ON REDEMP- MENT OTHER OPERATING REIMBURSE-
CLASS PURCHASES TIONS FEE 12B-1 FEE EXPENSES EXPENSES MENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State long-term
Funds
Alabama (a) 4.2% N/A% 0.10% 0.40% 0.10% 0.60% 3.19%
Arizona A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.07
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.63
California (b) 4.2 N/A 0.30 0.40 0.20 0.90
Colorado (a)* 4.2 N/A 0.10 0.40 0.40 0.90 1.27
Connecticut A (a)* 4.2 N/A 0.35 0.40 0.15 0.90 1.03
C (a)* N/A 1.0(c) 0.35 0.95(e) 0.15 1.45 1.58
Florida A (a)* 4.2 N/A 0.35 0.40 0.20 0.95 1.02
C (b)* N/A 1.0(c) 0.35 0.95(e) 0.20 1.50 1.55
Georgia A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.08
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.63
Kansas (a) 4.2 N/A 0.25 0.40 0.25 0.90 1.08
Kentucky A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.02
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.57
Louisiana A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.09
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.64
Michigan A (a)* 4.2 N/A 0.40 0.40 0.15 0.95 1.01
C (a)* N/A 1.0(c) 0.40 0.95(e) 0.15 1.50 1.56
Missouri A (a)* 4.2 N/A 0.35 0.40 0.20 0.95 1.05
C (a)* N/A 1.0(c) 0.35 0.95(e) 0.20 1.50 1.60
New Jersey (a) 4.2 N/A 0.20 0.40 0.10 0.70 1.63
New Mexico (a) 4.2 N/A 0.30 0.40 0.20 0.90 1.09
New York A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.20
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.77
North Carolina A (a)* 4.2 N/A 0.45 0.40 0.10 0.95 1.03
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50 1.58
Ohio A (a)* 4.2 N/A 0.45 0.40 0.10 0.95 1.02
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50 1.56
Pennsylvania A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.13
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.68
South Carolina
(a) 4.2 N/A 0.20 0.40 0.10 0.70 1.53
Tennessee A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.01
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.56
Virginia A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.06
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.60
Wisconsin (a) 4.2 N/A 0.30 0.40 0.20 0.90 1.51
Class B Shares
(b) N/A 5.0(d) 0.40 0.95(e) 0.15 1.50
Class C Shares
(b) N/A 1.0(c) 0.40 0.95(e) 0.15 1.50
Class R Shares
(b) N/A N/A 0.40 0.00 0.15 0.55
(All state funds not
otherwise noted
above)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State long-term
Funds
Alabama (a) $48 $60 $74 $114
Arizona 51 71 92 154
25(c) 48 82 180
California (b) 51 69 N/A N/A
Colorado (a)* 51 69 90 148
Connecticut 51 69 90 148
25(c) 46 79 174
Florida 51 71 92 154
25(c) 48 82 180
Georgia 51 71 92 154
25(c) 48 82 180
Kansas (a) 51 69 90 148
Kentucky 51 69 90 148
25(c) 46 79 174
Louisiana 51 69 90 148
25(c) 46 79 174
Michigan 51 71 92 154
25(c) 48 82 180
Missouri 51 71 92 154
25(c) 48 82 180
New Jersey (a) 49 63 79 125
New Mexico (a) 51 69 90 148
New York 51 69 90 148
25(c) 46 79 174
North Carolina 51 71 92 154
25(c) 48 82 180
Ohio 51 71 92 154
25(c) 48 82 180
Pennsylvania 51 71 92 154
25(c) 48 82 180
South Carolina
(a) 49 63 79 125
Tennessee 51 71 92 154
25(c) 48 82 180
Virginia 51 71 92 154
25(c) 48 82 180
Wisconsin (a) 51 69 90 148
Class B Shares
(b) 67 92 106(d) 164
Class C Shares
(b) 25(c) 48 82 180
Class R Shares
(b) 6 18 30 68
(All state funds not
otherwise noted
above)
</TABLE>
-- 2 --
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS
TRANSACTION AFTER FEE WAIVERS & REIMBURSEMENT
EXPENSE ARRANGEMENTS
<CAPTION>
EXAMPLE OF EXPENSES
AN INVESTOR IN A FLAGSHIP FUND
WOULD PAY THE FOLLOWING DOLLAR
AMOUNT OF EXPENSE ON A $1,000
INVESTMENT ASSUMING
(1) 5% ANNUAL RETURN AND
(2) REDEMPTION AT THE END
OF EACH PERIOD
--------------------------------- -------------------
TOTAL FUND
MAXIMUM MAXIMUM OPERATING
FRONT END CDSC EXPENSES
SALES IMPOSED WITHOUT
CHARGE ON MANAGE- TOTAL FUND WAIVER OR
IMPOSED ON REDEMP- MENT OTHER OPERATING REIMBURSE-
CLASS PURCHASES TIONS FEE 12B-1 FEE EXPENSES EXPENSES MENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other State Funds
California
Intermediate (b) 3.0% N/A% 0.10% 0.40% 0.20% 0.70% %
Florida
Intermediate A (a) 3.0 N/A 0.20 0.40 0.20 0.80 1.67
C (a) N/A 1.0(c) 0.10 0.95(e) 0.20 1.25 2.25
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
Kentucky
Limited Term A (a) 2.5 N/A 0.10 0.40 0.20 0.70 1.67
C (a) N/A 1.0(c) 0.10 0.70 0.20 1.00 1.98
Michigan
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
New Jersey
Intermediate (a) 3.0 N/A 0.10 0.40 0.20 0.70 1.71
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
New York
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
Ohio
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
National Funds
All-American A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.02
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.57
Intermediate A (a)* 3.0 N/A 0.20 0.40 0.20 0.80 1.17
C (a)* N/A 1.0(c) 0.20 0.95(e) 0.20 1.35 1.73
Limited Term A (a)* 2.5 N/A 0.35 0.40 0.10 0.85 .84
C (a)* N/A 1.0(c) 0.35 0.70(f) 0.10 1.15 1.43
Short Term (b)* 2.5 N/A 0.10 0.40 0.20 0.70
U.S. Territories
(b) 4.2 N/A 0.10 0.40 0.10 0.60
Insured Funds
Insured (b)* 4.2 N/A 0.30 0.40 0.20 0.90
Insured Intermediate (b)* 3.0 N/A 0.10 0.40 0.20 0.70
Insured Limited Term (b)* 2.5 N/A 0.10 0.40 0.20 0.70
Class B Shares
(b)
Intermediate N/A 3.0(d) 0.20 0.75(e) 0.10 1.05
Limited Term N/A 3.0(d) 0.20 0.75(e) 0.10 1.05
Class C Shares
(b)
Intermediate N/A 1.0(c) 0.20 0.95(e) 0.10 1.25
Limited Term N/A 1.0(c) 0.20 0.70(e) 0.10 1.00
Class R Shares
(b)
Intermediate N/A N/A 0.40 0.00 0.15 0.55
Limited Term N/A N/A 0.30 0.00 0.15 0.55
(All
intermediate
and limited
term funds not
otherwise noted above)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other State Funds
California
Intermediate (b) $37 $52 $N/A $N/A
Florida
Intermediate 38 55 73 126
23(c) 40 69 134
Limited Term (b) 32 47 N/A N/A
Kentucky
Limited Term 32 47 63 110
20(c) 32 55 122
Michigan
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
New Jersey
Intermediate (a) 37 52 68 114
Limited Term (b) 32 47 N/A N/A
New York
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
Ohio
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
National Funds
All-American 51 71 92 154
25(c) 48 82 180
Intermediate 38 55 73 126
24(c) 43 74 162
Limited Term 33 51 71 127
22(c) 37 63 140
Short Term (b)* 32 47 N/A N/A
U.S. Territories
(b) 48 60 N/A N/A
Insured Funds
Insured (b)* 51 69 N/A N/A
Insured Intermediate (b)* 37 52 N/A N/A
Insured Limited Term (b)* 32 47 N/A N/A
Class B Shares
(b)
Intermediate 42 56 58(d) 105
Limited Term 42 56 58(d) 105
Class C Shares
(b)
Intermediate 23(c) 40 69 151
Limited Term 20(c) 32 55 122
Class R Shares
(b)
Intermediate 6 18 30 68
Limited Term 5 15 25 54
(All
intermediate
and limited
term funds not
otherwise noted above)
</TABLE>
*Diversified Funds. All other Funds are non-diversified.
(a) Percentage based on actual fees incurred from the previous fiscal year
restated to reflect current fees and operating expenses.
(b) Funds are scheduled to commence operations in 1996 through 1997. These
amounts are based on estimates and assume management fee waiver. In
addition, the Manager has agreed to reimburse the funds for any initial
period's total fund operating expenses in excess of the above. No
reimbursement is currently indicated.
(c) No initial sales load; 1% contingent deferred sales charge if redeemed
within 1 year of purchase. Example of expenses would be $10 less in year 1
if no redemption occurs.
(d) No initial sales load; contingent deferred sales charge of 5% declining to
1% in the 6th year if redeemed. Class B expenses in years 9 through 10 are
based on Class A expenses, because the shares automatically convert to
Class A after 8 years. If you did not redeem, the example of expenses
would be $52, $44, and $24 less in years 1, 3 and 5 respectively. For
Intermediate and Limited Term Funds, the contingent deferred sales charge
is 3% declining to 1% in the 4th year. Expenses in years 6 through 10 are
based on Class A expenses because of automatic conversion after 5 years.
If you did not redeem, the example of expenses would be $31 and $22 less
in years 1 and 3 respectively.
(e) Of this amount, 0.75% is an asset based sales charge and 0.20% is a
service fee.
(f) Of this amount, 0.50% is an asset based sales charge and 0.20% is a
service fee.
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses that an investor will bear directly or indirectly.
These expenses should not be considered a representation of actual future
expenses as future actual expenses may be greater or less than those shown.
-- 3 --
<PAGE>
FINANCIAL HIGHLIGHTS
This table provides per share income and capital changesfor a share of benefi-
cial interest in all Class A Shares of the Funds from the date of commencement
of operations toMay 31, 1996, and for a share of beneficial interest in all
Class C Shares of each of the Funds with Class C Shares outstanding from the
date of commencement of operations
to May 31, 1996. Class B and Class R Shares were not offered to the public
during the fiscal year. The information was derived from audited financial
statements and financial highlights audited by Deloitte & Touche LLP, indepen-
dent auditors, whose reports and related notes appear in the SAI.
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE FUNDS
Alabama
(4/11/94)
1994(a) $ 9.58 $.03 $.09 $ .12 $.04 $.04 $ 9.66 9.34%
1995 $ 9.66 $.52 $.28 $ .80 $.52 $.52 $ 9.94 8.77%
1996 $ 9.94 $.53 ($.17) $ .36 $.53 $.53 $ 9.77 3.72%
Arizona
Class A
-------
(10/29/86)
1987(a) $ 9.58 $.35 ($.47) ($ .12) $.34 $.34 $ 9.12 (2.67%)
1988 $ 9.12 $.64 $ .64 $.64 $.64 $ 9.12 7.45%
1989 $ 9.12 $.64 ($.60) $1.24 $.64 $.64 $ 9.72 14.04%
1990 $ 9.72 $.64 ($.12) $ .52 $.64 $.64 $ 9.60 5.53%
1991 $ 9.60 $.64 $.21 $ .85 $.64 $.64 $ 9.81 9.19%
1992 $ 9.81 $.65 $.32 $ .97 $.65 $.65 $10.13 10.25%
1993 $10.13 $.63 $.69 $1.32 $.64 $.64 $10.81 13.37%
1994 $10.81 $.60 ($.38) $ .22 $.60 $.60 $10.43 1.92%
1995 $10.43 $.58 $.42 $1.00 $.58 $.58 $10.85 10.03%
1996 $10.85 $.57 ($.12) $ .45 $.57 $.57 $10.73 4.21%
Class C
-------
(2/7/94)
1994(a) $11.22 $.14 ($.79) ($ .65) $.14 $.14 $10.43 (16.61%)
1995 $10.43 $.52 $.41 $ .93 $.52 $.52 $10.84 9.32%
1996 $10.84 $.51 ($.11) $ .40 $.51 $.51 $10.73 3.75%
Colorado
(5/4/87)
1987(a) $ 9.58 $.10 ($.41) ($ .31) $ 9.27 (43.74%)
1988 $ 9.27 $.62 ($.46) $ .16 $.65 $.65 $ 8.78 2.13%
1989 $ 8.78 $.63 $.46 $1.09 $.63 $.63 $ 9.24 12.83%
1990 $ 9.24 $.62 ($.12) $ .50 $.61 $.61 $ 9.13 5.59%
1991 $ 9.13 $.60 $.17 $ .77 $.61 $.61 $ 9.29 8.75%
1992 $ 9.29 $.61 $.27 $ .88 $.61 $.61 $ 9.56 9.80%
1993 $ 9.56 $.60 $.55 $1.15 $.60 $.07 $.67 $10.04 12.41%
1994 $10.04 $.58 ($.37) $ .21 $.58 $.05 $.63 $ 9.62 2.03%
1995 $ 9.62 $.57 $.30 $ .87 $.56 $.56 $ 9.93 9.54%
1996 $ 9.93 $.54 ($.13) $ .41 $.55 $.55 $ 9.79 4.14%
Connecticut
Class A
-------
(7/13/87)
1988(a) $ 9.58 $.54 ($.31) $ .23 $.56 $.56 $ 9.25 3.09%
1989 $ 9.25 $.63 $.55 $1.18 $.64 $.01 $.65 $ 9.78 13.36%
1990 $ 9.78 $.63 ($.13) $ .50 $.63 $.01 $.64 $ 9.64 5.34%
1991 $ 9.64 $.63 $.20 $ .83 $.63 $.63 $ 9.84 8.97%
1992 $ 9.84 $.63 $.21 $ .84 $.63 $.63 $10.05 8.81%
1993 $10.05 $.61 $.61 $1.22 $.61 $.61 $10.66 12.48%
1994 $10.66 $.59 ($.39) $ .20 $.60 $.09 $.69 $10.17 1.70%
1995 $10.17 $.58 $.22 $ .80 $.59 $.59 $10.38 8.21%
1996 $10.38 $.57 ($.14) $ .43 $.58 $.58 $10.23 4.18%
Class C
-------
(10/4/93)
1994(a) $11.06 $.33 ($.84) ($ .51) $.33 $.06 $.39 $10.16 (6.48%)
1995 $10.16 $.53 $.20 $ .73 $.53 $.53 $10.36 7.53%
1996 $10.36 $.52 ($.14) $ .38 $.52 $.52 $10.22 3.71%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATE FUNDS
Alabama
(4/11/94)
1994(a) 357 0.00% 2.42% 0.00%
1995 1,880 0.16% 5.47% 120.19%
1996 3,256 0.48% 5.24% 42.03%
Arizona
Class A
-------
(10/29/86)
1987(a) 31,652 0.84% 6.17% 40.13%
1988 33,696 0.86% 6.96% 68.47%
1989 29,433 0.92% 6.85% 37.28%
1990 32,066 0.85% 6.63% 37.13%
1991 38,933 0.78% 6.62% 18.23%
1992 51,123 0.44% 6.55% 33.75%
1993 72,778 0.44% 6.03% 20.04%
1994 82,676 0.64% 5.48% 21.08%
1995 80,406 0.82% 5.59% 26.79%
1996 80,094 0.69% 5.20% 38.15%
Class C
-------
(2/7/94)
1994(a) 1,122 1.20% 4.36% 21.08%
1995 1,621 1.36% 5.01% 26.79%
1996 1,970 1.23% 4.64% 38.15%
Colorado
(5/4/87)
1987(a) 1,583 0.03% 13.96% 113.96%
1988 7,561 0.55% 7.03% 138.37%
1989 7,545 0.67% 7.04% 18.94%
1990 7,386 0.87% 6.70% 15.55%
1991 9,108 0.84% 6.62% 29.11%
1992 15,699 0.49% 6.42% 39.07%
1993 26,656 0.41% 6.05% 30.49%
1994 35,796 0.37% 5.71% 41.76%
1995 34,892 0.50% 5.99% 37.84%
1996 33,637 0.55% 5.41% 69.76%
Connecticut
Class A
-------
(7/13/87)
1988(a) 25,609 0.54% 6.54% 70.55%
1989 48,990 0.70% 6.62% 32.57%
1990 73,046 0.60% 6.55% 30.74%
1991 103,552 0.67% 6.49% 18.68%
1992 141,215 0.65% 6.30% 18.16%
1993 184,743 0.66% 5.88% 19.31%
1994 202,607 0.65% 5.52% 30.19%
1995 203,210 0.73% 5.84% 25.01%
1996 202,219 0.74% 5.52% 24.22%
Class C
-------
(10/4/93)
1994(a) 4,360 1.22% 4.77% 30.19%
1995 5,536 1.28% 5.27% 25.01%
1996 7,243 1.29% 4.96% 24.22%
</TABLE>
-- 4 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida
Class A
-------
(6/15/90)
1991(a) $ 9.58 $.64 $.29 $ .93 $ .64 $.64 $ 9.87 9.81%
1992 $ 9.87 $.66 $.33 $ .99 $ .67 $.01 $.68 $10.18 10.32%
1993 $10.18 $.63 $.61 $1.24 $ .64 $.02 $.66 $10.76 12.49%
1994 $10.76 $.60 ($.38) $ .22 $ .60 $.60 $10.38 2.00%
1995 $10.38 $.58 $.26 $ .84 $ .59 $.59 $10.63 8.43%
1996 $10.63 $.57 ($.24) $ .33 $ .57 $.57 $10.39 3.14%
Class C
-------
(9/14/95)
1996 $10.65 $.35 ($.26) $ .09 $.35 $.35 $10.39 1.30%
Florida
Intermediate
Class A
-------
(2/1/94)
1994(a) $ 9.70 $.12 ($.04) $ .08 $ .12 $.12 $ 9.66 1.75%
1995 $ 9.66 $.46 $.33 $ .79 $ .40 $.40 $10.05 8.42%
1996 $10.05 $.46 ($.12) $ .34 $ .46 $.05 $.51 $ 9.88 3.41%
Class C
-------
(2/2/94)
1994(a) $ 9.70 $.11 ($.06) $ .05 $ .09 $.09 $ 9.66 1.33%
1995 $ 9.66 $.40 $.33 $ .73 $ .34 $.34 $10.05 7.80%
1996 $10.05 $.40 ($.11) $ .29 $ .41 $.05 $.46 $ 9.88 2.88%
Georgia
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.10 ($.13) ($ .03) $ .09 $.09 $ 9.46 (1.80%)
1987 $ 9.46 $.62 ($.24) $ .38 $ .62 $.01 $.02 $.65 $ 9.19 4.13%
1988 $ 9.19 $.66 $.11 $ .77 $ .66 $.66 $ 9.30 8.61%
1989 $ 9.30 $.65 $.59 $1.24 $ .66 $.66 $ 9.88 13.77%
1990 $ 9.88 $.65 ($.22) $ .43 $ .64 $.64 $ 9.67 4.55%
1991 $ 9.67 $.64 $.28 $ .92 $ .64 $.64 $ 9.95 9.90%
1992 $ 9.95 $.63 $.21 $ .84 $ .63 $.63 $10.16 8.81%
1993 $10.16 $.62 $.45 $1.07 $ .61 $.61 $10.62 10.84%
1994 $10.62 $.59 ($.39) $ .20 $ .59 $.59 $10.23 1.83%
1995 $10.23 $.58 $.23 $ .81 $ .58 $.58 $10.46 8.31%
1996 $10.46 $.57 ($.25) $ .32 $ .58 $.58 $10.20 3.05%
Class C
-------
(1/4/94)
1994(a) $10.91 $.19 ($.69) ($ .50) $ .20 $.20 $10.21 (10.96%)
1995 $10.21 $.52 $.23 $ .75 $ .52 $.52 $10.44 7.72%
1996 $10.44 $.51 ($.25) $ .26 $ .52 $.52 $10.18 2.48%
Kansas
(1/9/92)
1992(a) $ 9.58 $.19 $.07 $ .26 $ .19 $.19 $ 9.65 5.95%
1993 $ 9.65 $.58 $.73 $1.31 $ .58 $.58 $10.38 14.15%
1994 $10.38 $.56 ($.47) $ .09 $ .57 $.07 $.64 $ 9.83 0.62%
1995 $ 9.83 $.55 $.18 $ .73 $ .55 $.55 $10.01 7.80%
1996 $10.01 $.54 ($.18) $ .36 $ .54 $.54 $ 9.83 3.63%
Kentucky
Class A
-------
(5/4/87)
1987(a) $ 9.58 $.02 ($.23) ($ .21) $ 9.37 (29.63%)
1988 $ 9.37 $.66 $.02 $ .68 $ .67 $.67 $ 9.38 7.79%
1989 $ 9.38 $.67 $.60 $1.27 $ .67 $.01 $.68 $ 9.97 14.31%
1990 $ 9.97 $.66 ($.05) $ .61 $ .66 $.05 $.71 $ 9.87 6.92%
1991 $ 9.87 $.66 $.32 $ .98 $ .66 $.66 $10.19 10.37%
1992 $10.19 $.66 $.27 $ .93 $ .66 $.01 $.67 $10.45 9.46%
1993 $10.45 $.64 $.62 $1.26 $ .65 $.65 $11.06 12.41%
1994 $11.06 $.62 ($.40) $ .22 $ .63 $.63 $10.65 1.90%
1995 $10.65 $.61 $.35 $ .96 $ .62 $.62 $10.99 9.42%
1996 $10.99 $.61 ($.17) $ .44 $ .61 $.61 $10.82 4.04%
Class C
-------
(10/4/93)
1994(a) $11.46 $.36 ($.81) ($ .45) $ .36 $.36 $10.65 (5.88%)
1995 $10.65 $.55 $.35 $ .90 $ .56 $.56 $10.99 8.82%
1996 $10.99 $.54 ($.17) $ .37 $ .55 $.55 $10.81 3.38%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Florida
Class A
-------
(6/15/90)
1991(a) 136,509 0.19% 6.86% 152.36%
1992 276,811 0.26% 6.59% 49.72%
1993 369,123 0.45% 6.01% 22.60%
1994 372,082 0.58% 5.51% 31.92%
1995 341,374 0.73% 5.71% 52.67%
1996 318,456 0.83% 5.36% 93.93%
Class C
-------
(9/14/95)
1996 1,175 1.38% 4.59% 93.93%
Florida
Intermediate
Class A
-------
(2/1/94)
1994(a) 964 0.29% 3.79% 28.15%
1995 3,898 0.67% 4.74% 105.01%
1996 4,995 0.76% 4.48% 66.18%
Class C
-------
(2/2/94)
1994(a) 1,058 0.68% 3.42% 28.15%
1995 1,765 1.19% 4.19% 105.01%
1996 3,079 1.34% 3.88% 66.18%
Georgia
Class A
-------
(3/27/86)
1986(a) 8,384 0.83% 5.48% 5.98%
1987 33,388 0.71% 6.37% 40.71%
1988 29,701 0.91% 7.14% 46.35%
1989 35,637 0.96% 6.74% 23.08%
1990 36,034 0.84% 6.62% 34.30%
1991 44,829 0.72% 6.60% 24.09%
1992 70,650 0.57% 6.31% 21.19%
1993 101,196 0.62% 5.88% 29.51%
1994 123,068 0.70% 5.47% 39.48%
1995 113,354 0.83% 5.79% 39.94%
1996 107,862 0.80% 5.46% 59.41%
Class C
-------
(1/4/94)
1994(a) 4,348 1.27% 4.55% 39.48%
1995 6,973 1.38% 5.18% 39.94%
1996 9,433 1.34% 4.90% 59.41%
Kansas
(1/9/92)
1992(a) 9,552 0.40% 5.11% 59.26%
1993 62,585 0.11% 5.74% 55.70%
1994 80,060 0.26% 5.37% 93.45%
1995 83,683 0.54% 5.67% 71.50%
1996 96,694 0.57% 5.31% 54.90%
Kentucky
Class A
-------
(5/4/87)
1987(a) 6,063 0.18% 2.66% 45.30%
1988 40,945 0.51% 7.09% 36.42%
1989 72,059 0.67% 6.94% 32.03%
1990 111,234 0.75% 6.63% 56.69%
1991 142,449 0.72% 6.65% 23.35%
1992 207,395 0.62% 6.39% 5.07%
1993 309,223 0.61% 5.96% 14.74%
1994 369,495 0.58% 5.60% 12.26%
1995 394,457 0.68% 5.85% 28.28%
1996 410,808 0.71% 5.50% 16.69%
Class C
-------
(10/4/93)
1994(a) 11,172 1.08% 4.96% 12.26%
1995 15,831 1.23% 5.27% 28.28%
1996 20,647 1.27% 4.93% 16.69%
</TABLE>
-- 5 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kentucky Limited
Term
Class A
-------
(9/14/95)
1996 $ 9.75 $.31 $.04 $ .35 $.31 $.31 $9.79 5.45%
Class C
-------
(9/14/95)
1996 $ 9.75 $.29 $.04 $ .33 $.29 $.29 $9.79 5.12%
Louisiana
Class A
-------
(9/12/89)
1990(a) $ 9.58 $.44 $.04 $ .48 $.43 $.43 $ 9.63 6.52%
1991 $ 9.63 $.66 $.40 $1.06 $.67 $.67 $10.02 11.47%
1992 $10.02 $.65 $.35 $1.00 $.65 $.07 $.72 $10.30 10.35%
1993 $10.30 $.64 $.67 $1.31 $.63 $.05 $.68 $10.93 13.12%
1994 $10.93 $.61 ($.40) $ .21 $.62 $.04 $.66 $10.48 1.77%
1995 $10.48 $.60 $.32 $ .92 $.60 $.60 $10.80 9.20%
1996 $10.80 $.59 ($.08) $ .51 $.60 $.60 $10.71 4.77%
Class C
-------
(2/2/94)
1994(a) $11.29 $.16 ($.81) ($ .65) $.16 $.16 $10.48 (17.21%)
1995 $10.48 $.54 $.32 $ .86 $.54 $.54 $10.80 8.59%
1996 $10.80 $.53 ($.09) $ .44 $.54 $.54 $10.70 4.12%
Michigan
Class A
-------
(6/27/85)
1986(a) $ 9.58 $.65 $.57 $1.22 $.66 $.66 $10.14 14.76%
1987 $10.14 $.71 ($.14) $ .57 $.70 $.06 $.76 $ 9.95 6.60%
1988 $ 9.95 $.72 $.15 $ .87 $.72 $.72 $10.10 8.95%
1989 $10.10 $.71 $.57 $1.28 $.71 $.71 $10.67 13.12%
1990 $10.67 $.70 ($.06) $ .64 $.70 $.70 $10.61 6.21%
1991 $10.61 $.69 $.20 $ .89 $.70 $.70 $10.80 8.73%
1992 $10.80 $.69 $.32 $1.01 $.69 $.69 $11.12 9.74%
1993 $11.12 $.68 $.65 $1.33 $.68 $.68 $11.77 12.27%
1994 $11.77 $.66 ($.43) $ .23 $.66 $.03 $.69 $11.31 1.87%
1995 $11.31 $.65 $.28 $ .93 $.65 $.65 $11.59 8.57%
1996 $11.59 $.63 ($.22) $ .41 $.63 $.63 $11.37 3.61%
Class C
-------
(6/22/93)
1994(a) $11.86 $.54 ($.52) $ .02 $.55 $.03 $.58 $11.30 .19%
1995 $11.30 $.58 $.28 $ .86 $.58 $.58 $11.58 7.98%
1996 $11.58 $.56 ($.22) $ .34 $.57 $.57 $11.35 2.96%
Missouri
Class A
-------
(8/3/87)
1988(a) $ 9.58 $.49 ($.26) $ .23 $.51 $.51 $ 9.30 2.98%
1989 $ 9.30 $.65 $.57 $1.22 $.65 $.01 $.66 $ 9.86 13.70%
1990 $ 9.86 $.65 ($.10) $ .55 $.65 $.65 $ 9.76 5.89%
1991 $ 9.76 $.65 $.28 $ .93 $.65 $.65 $10.04 9.92%
1992 $10.04 $.65 $.29 $ .94 $.65 $.01 $.66 $10.32 9.70%
1993 $10.32 $.64 $.60 $1.24 $.63 $.06 $.69 $10.87 12.54%
1994 $10.87 $.61 ($.34) $ .27 $.61 $.03 $.64 $10.50 2.42%
1995 $10.50 $.60 $.22 $ .82 $.60 $.60 $10.72 8.19%
1996 $10.72 $.58 ($.21) $ .37 $.58 $.58 $10.51 3.51%
Class C
-------
(2/2/94)
1994(a) $11.33 $.02 ($.83) ($ .81) $.02 $.02 $10.50 (17.62%)
1995 $10.50 $.53 $.23 $ .76 $.54 $.54 $10.72 7.60%
1996 $10.72 $.51 ($.21) $ .30 $.52 $.52 $10.50 2.84%
New Jersey
(9/16/92)
1993(a) $ 9.58 $.38 $.54 $ .92 $.38 $.38 $10.12 13.02%
1994 $10.12 $.57 ($.23) $ .34 $.57 $.10 $.67 $ 9.79 3.24%
1995 $ 9.79 $.55 $.30 $ .85 $.55 $.55 $10.09 9.16%
1996 $10.09 $.55 ($.16) $ .39 $.55 $.55 $ 9.93 3.97%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kentucky Limited
Term
Class A
-------
(9/14/95)
1996 8,389 0.37% 4.37% 47.52%
Class C
-------
(9/14/95)
1996 1,767 0.64% 4.12% 47.52%
Louisiana
Class A
-------
(9/12/89)
1990(a) 16,678 0.44% 6.40% 32.42%
1991 27,762 0.38% 6.79% 57.02%
1992 38,873 0.49% 6.43% 42.51%
1993 54,483 0.61% 5.95% 29.25%
1994 66,821 0.66% 5.56% 22.40%
1995 68,145 0.83% 5.80% 43.90%
1996 72,005 0.80% 5.46% 26.24%
Class C
-------
(2/2/94)
1994(a) 1,501 1.23% 4.79% 22.40%
1995 3,220 1.37% 5.21% 43.90%
1996 5,658 1.35% 4.87% 26.24%
Michigan
Class A
-------
(6/27/85)
1986(a) 44,647 0.81% 7.01% 79.15%
1987 82,007 0.78% 6.71% 89.44%
1988 73,481 0.94% 7.11% 78.48%
1989 84,608 0.96% 6.80% 54.03%
1990 102,519 0.95% 6.54% 46.75%
1991 134,243 0.90% 6.56% 23.01%
1992 176,584 0.81% 6.34% 11.48%
1993 227,333 0.81% 5.85% 9.55%
1994 242,993 0.75% 5.56% 27.78%
1995 250,380 0.80% 5.82% 36.57%
1996 248,422 0.82% 5.42% 54.01%
Class C
-------
(6/22/93)
1994(a) 30,042 1.25% 4.89% 27.78%
1995 37,122 1.35% 5.25% 36.57%
1996 41,365 1.37% 4.86% 54.01%
Missouri
Class A
-------
(8/3/87)
1988(a) 7,786 0.50% 6.32% 118.90%
1989 13,028 0.69% 6.80% 68.60%
1990 19,080 0.66% 6.64% 35.84%
1991 43,391 0.58% 6.57% 44.08%
1992 76,069 0.47% 6.39% 31.73%
1993 144,775 0.55% 5.99% 33.26%
1994 187,347 0.62% 5.52% 34.30%
1995 205,089 0.67% 5.78% 40.08%
1996 212,717 0.80% 5.37% 37.66%
Class C
-------
(2/2/94)
1994(a) 1,877 1.15% 4.44% 34.30%
1995 3,989 1.20% 5.19% 40.08%
1996 6,220 1.35% 4.79% 37.66%
New Jersey
(9/16/92)
1993(a) 2,388 0.00% 5.43% 75.40%
1994 4,880 0.01% 5.52% 90.63%
1995 7,723 0.36% 5.75% 33.58%
1996 11,114 0.44% 5.42% 15.61%
</TABLE>
-- 6 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Jersey
Intermediate
(9/16/92)
1993(a) $ 9.70 $.34 $ .45 $ .79 $.34 $.34 $10.15 11.07%
1994 $10.15 $.53 ($ .10) $ .43 $.52 $.02 $.54 $10.04 4.27%
1995 $10.04 $.50 $ .22 $ .72 $.51 $.51 $10.25 7.42%
1996 $10.25 $.51 ($ .11) $ .40 $.51 $.51 $10.14 3.89%
New Mexico
(9/16/92)
1993(a) $ 9.58 $.37 $ .46 $ .83 $.37 $.37 $10.04 11.72%
1994 $10.04 $.53 ($ .33) $ .20 $.53 $.03 $.56 $ 9.68 1.92%
1995 $ 9.68 $.52 $ .33 $ .85 $.52 $.52 $10.01 9.25%
1996 $10.01 $.51 ($ .19) $ .32 $.52 $.52 $ 9.81 3.18%
New York
Class A
-------
(1/16/91)
1991(a) $ 9.58 $.22 $ .11 $ .33 $.22 $.22 $ 9.69 8.14%
1992 $ 9.69 $.68 $0.41 $1.09 $.68 $.68 $10.10 11.71%
1993 $10.10 $.66 $ .88 $1.54 $.66 $.07 $.73 $10.91 15.87%
1994 $10.91 $.64 ($ .37) $ .27 $.64 $.16 $.80 $10.38 2.38%
1995 $10.38 $.62 $ .24 $ .86 $.62 $.62 $10.62 8.74%
1996 $10.62 $.60 ($ .17) $ .43 $.60 $.60 $10.45 4.15%
Class C
-------
(3/4/96)
1996(a) $10.89 $.12 ($ .44) ($ .32) $.12 $.12 $10.45 (11.83%)
North Carolina
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.08 ($ .40) ($ .32) $.09 $.09 $ 9.17 (19.48%)
1987 $ 9.17 $.61 ($ .36) $ .25 $.61 $.01 $.62 $ 8.80 2.54%
1988 $ 8.80 $.62 $ .13 $ .75 $.62 $.62 $ 8.93 8.77%
1989 $ 8.93 $.62 $ .66 $1.28 $.62 $.62 $ 9.59 14.78%
1990 $ 9.59 $.61 ($ .13) $ .48 $.61 $.61 $ 9.46 5.16%
1991 $ 9.46 $.61 $ .24 $ .85 $.61 $.61 $ 9.70 9.28%
1992 $ 9.70 $.60 $ .27 $ .87 $.60 $.60 $ 9.97 9.30%
1993 $ 9.97 $.58 $ .55 $1.13 $.59 $.59 $10.51 11.66%
1994 $10.51 $.57 ($ .42) $ .15 $.58 $.58 $10.08 1.30%
1995 $10.08 $.57 $ .15 $ .72 $.57 $.57 $10.23 7.45%
1996 $10.23 $.55 ($ .18) $ .37 $.55 $.55 $10.05 3.67%
Class C
-------
(10/4/93)
1994(a) $10.84 $.32 ($ .78) ($ .46) $.32 $.32 $10.06 (6.26%)
1995 $10.06 $.51 $ .16 $ .67 $.51 $.51 $10.22 6.97%
1996 $10.22 $.49 ($ .18) $ .31 $.50 $.50 $10.03 3.01%
Ohio
Class A
-------
(6/27/85)
1986(a) $ 9.58 $.66 $ .56 $1.22 $.68 $.68 $10.12 14.71%
1987 $10.12 $.71 ($ .25) $ .46 $.71 $.05 $.76 $ 9.82 5.33%
1988 $ 9.82 $.71 $ .23 $ .94 $.71 $.01 $.72 $10.04 10.12%
1989 $10.04 $.69 $ .51 $1.20 $.70 $.70 $10.54 12.36%
1990 $10.54 $.69 ($ .09) $ .60 $.69 $.69 $10.45 5.86%
1991 $10.45 $.68 $ .28 $ .96 $.69 $.69 $10.72 9.57%
1992 $10.72 $.68 $ .33 $1.01 $.68 $.68 $11.05 9.77%
1993 $11.05 $.66 $ .54 $1.20 $.66 $.66 $11.59 11.20%
1994 $11.59 $.64 ($ .38) $ .26 $.64 $.64 $11.21 2.24%
1995 $11.21 $.64 $ .22 $ .86 $.64 $.64 $11.43 7.99%
1996 $11.43 $.62 ($ .21) $ .41 $.63 $.63 $11.21 3.59%
Class C
-------
(8/3/93)
1994(a) $11.69 $.46 ($ .49) ($ .03) $.46 $.46 $11.20 (0.17%)
1995 $11.20 $.57 $ .23 $ .80 $.57 $.57 $11.43 7.50%
1996 $11.43 $.55 ($ .21) $ .34 $.56 $.56 $11.21 3.03%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey
Intermediate
(9/16/92)
1993(a) 5,649 0.40% 4.84% 28.93%
1994 9,321 0.16% 5.10% 26.50%
1995 9,217 0.69% 5.04% 35.32%
1996 8,318 0.60% 4.90% 17.46%
New Mexico
(9/16/92)
1993(a) 31,499 0.14% 5.28% 36.11%
1994 51,167 0.40% 5.24% 38.88%
1995 52,150 0.67% 5.48% 38.06%
1996 51,173 0.68% 5.10% 57.40%
New York
Class A
-------
(1/16/91)
1991(a) 9,496 0.16% 6.14% 17.41%
1992 20,701 0.18% 6.89% 36.89%
1993 33,996 0.28% 6.28% 45.65%
1994 48,434 0.30% 5.83% 59.70%
1995 49,018 0.43% 6.15% 58.69%
1996 49,643 0.70% 5.58% 53.53%
Class C
-------
(3/4/96)
1996(a) 633 1.35% 4.49% 53.53%
North Carolina
Class A
-------
(3/27/86)
1986(a) 13,960 0.67% 4.75% 17.30%
1987 66,110 0.49% 6.48% 68.72%
1988 68,077 0.83% 6.93% 75.14%
1989 87,539 0.92% 6.66% 21.17%
1990 96,348 0.94% 6.40% 34.37%
1991 108,917 0.99% 6.36% 11.52%
1992 131,488 0.98% 6.10% 16.91%
1993 169,944 0.95% 5.70% 11.52%
1994 196,087 0.89% 5.41% 21.23%
1995 191,850 0.91% 5.73% 34.67%
1996 185,016 0.90% 5.32% 54.16%
Class C
-------
(10/4/93)
1994(a) 4,161 1.49% 4.65% 21.23%
1995 6,049 1.46% 5.13% 34.67%
1996 6,589 1.45% 4.77% 54.16%
Ohio
Class A
-------
(6/27/85)
1986(a) 76,998 0.75% 7.18% 62.12%
1987 153,333 0.76% 6.78% 108.69%
1988 157,511 0.88% 7.16% 84.63%
1989 195,135 0.93% 6.79% 37.45%
1990 231,311 0.96% 6.56% 41.83%
1991 268,213 1.02% 6.53% 13.88%
1992 325,273 0.95% 6.24% 17.50%
1993 410,467 0.96% 5.81% 14.93%
1994 445,272 0.93% 5.48% 9.14%
1995 445,566 0.95% 5.78% 31.25%
1996 443,077 0.92% 5.41% 30.93%
Class C
-------
(8/3/93)
1994(a) 25,674 1.46% 4.79% 9.14%
1995 28,461 1.50% 5.21% 31.25%
1996 34,939 1.47% 4.84% 30.93%
</TABLE>
-- 7 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania(e)
Class A
-------
(10/29/86)
1987(a) $ 9.58 $.35 ($ .75) ($ .40) $.35 $.35 $ 8.83 (7.77%)
1988 $ 8.83 $.65 $ .18 $ .83 $.65 $.65 $ 9.01 9.70%
1989 $ 9.01 $.64 $ .48 $1.12 $.64 $.64 $ 9.49 12.79%
1990 $ 9.49 $.63 ($ .10) $ .53 $.63 $.63 $ 9.39 5.70%
1991 $ 9.39 $.62 $ .22 $ .84 $.63 $.63 $ 9.60 9.26%
1992 $ 9.60 $.63 $ .30 $ .93 $.63 $.63 $ 9.90 9.98%
1993 $ 9.90 $.62 $ .47 $1.09 $.61 $.61 $10.38 11.34%
1994 $10.38 $.61 ($ .32) $ .29 $.61 $.61 $10.06 2.70%
1995 $10.06 $.60 $ .16 $ .76 $.61 $.61 $10.21 7.90%
1996 $10.21 $.59 ($ .20) $ .39 $.60 $.60 $10.00 3.83%
Class C
-------
(2/2/94)
1994(a) $10.71 $.16 ($ .64) ($ .48) $.17 $.17 $10.06 (13.46%)
1995 $10.06 $.54 $ .16 $ .70 $.55 $.55 $10.21 7.31%
1996 $10.21 $.53 ($ 21) $ .32 $.54 $.54 $ 9.99 3.16%
South Carolina
(7/6/93)
1994(a) $ 9.58 $.42 ($ .38) $ .04 $.39 $.03 $.42 $ 9.20 .15%
1995 $ 9.20 $.50 $ .25 $ .75 $.50 $.50 $ 9.45 8.54%
1996 $ 9.45 $.48 ($ .15) $ .33 $.50 $.50 $ 9.28 3.53%
Tennessee
Class A
-------
(11/2/87)
1988(a) $ 9.58 $.35 $ .09 $ .44 $.37 $.37 $ 9.65 7.50%
1989 $ 9.65 $.68 $ .60 $1.28 $.67 $.67 $10.26 13.89%
1990 $10.26 $.67 ($ .15) $ .52 $.67 $.02 $.69 $10.09 5.53%
1991 $10.09 $.67 $ .26 $ .93 $.67 $.01 $.68 $10.34 9.73%
1992 $10.34 $.65 $ .22 $ .87 $.65 $.65 $10.56 8.66%
1993 $10.56 $.62 $ .68 $1.30 $.63 $.63 $11.23 12.60%
1994 $11.23 $.61 ($ .43) $ .18 $.61 $.02 $.63 $10.78 1.55%
1995 $10.78 $.60 $ .23 $ .83 $.60 $.60 $11.01 8.04%
1996 $11.01 $.59 ($ .18) $ .41 $.59 $.59 $10.83 3.78%
Class C
-------
(10/4/93)
1994(a) $11.61 $.35 ($ .83) ($ .48) $.34 $.01 $.35 $10.78 (5.92%)
1995 $10.78 $.54 $ .22 $ .76 $.54 $.54 $11.00 7.35%
1996 $11.00 $.53 ($ .18) $ .35 $.53 $.53 $10.82 3.22%
Virginia
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.09 ($ .33) ($ .24) $.09 $.09 $ 9.25 (33.49%)
1987 $ 9.25 $.63 ($ .16) $ .47 $.63 $.63 $ 9.09 5.03%
1988 $ 9.09 $.64 $ .19 $ .83 $.63 $.63 $ 9.29 9.73%
1989 $ 9.29 $.64 $ .46 $1.10 $.63 $.63 $ 9.76 12.25%
1990 $ 9.76 $.64 ($ .06) $ .58 $.64 $.64 $ 9.70 6.14%
1991 $ 9.70 $.63 $ .28 $ .91 $.64 $.64 $ 9.97 9.72%
1992 $ 9.97 $.63 $ .27 $ .90 $.63 $.63 $10.24 9.37%
1993 $10.24 $.62 $ .62 $1.24 $.62 $.04 $.66 $10.82 12.41%
1994 $10.82 $.60 ($ .31) $ .29 $.60 $.15 $.75 $10.36 2.62%
1995 $10.36 $.59 $ .20 $ .79 $.59 $.59 $10.56 7.99%
1996 $10.56 $.57 ($ .15) $ .42 $.58 $.58 $10.40 4.03%
Class C
-------
(10/4/93)
1994(a) $11.24 $.34 ($ .78) ($ .44) $.34 $.10 $.44 $10.36 (7.13%)
1995 $10.36 $.53 $ .20 $ .73 $.53 $.53 $10.56 7.40%
1996 $10.56 $.51 ($ .16) $ .35 $.52 $.52 $10.39 3.37%
Wisconsin
(6/1/94)
1995(a) $ 9.58 $.49 $ .21 $ .70 $.49 $.49 $ 9.79 7.36%
1996 $ 9.79 $.50 ($ .18) $ .32 $.50 $.50 $ 9.61 3.35%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania(e)
Class A
-------
(10/29/86)
1987(a) 29,019 0.69% 6.29% 62.75%
1988 33,838 0.72% 7.28% 51.81%
1989 33,476 0.98% 6.84% 22.84%
1990 35,632 0.92% 6.65% 30.42%
1991 35,408 0.91% 6.63% 23.01%
1992 36,917 0.83% 6.47% 41.33%
1993 40,705 0.92% 6.07% 22.69%
1994 42,226 0.91% 5.80% 20.70%
1995 42,600 0.89% 6.08% 49.86%
1996 44,392 .79% 5.76% 64.54%
Class C
-------
(2/2/94)
1994(a) 1,697 1.41% 4.91% 20.70%
1995 3,118 1.39% 5.50% 49.86%
1996 4,442 1.34% 5.19% 64.54%
South Carolina
(7/6/93)
1994(a) 6,284 0.40% 4.82% 87.96%
1995 9,013 0.40% 5.54% 86.81%
1996 10,534 0.71% 4.98% 75.76%
Tennessee
Class A
-------
(11/2/87)
1988(a) 23,725 0.47% 6.35% 22.65%
1989 62,048 0.62% 6.80% 50.44%
1990 73,752 0.78% 6.57% 55.79%
1991 92,431 0.76% 6.60% 29.63%
1992 126,833 0.84% 6.18% 34.57%
1993 191,811 0.88% 5.66% 15.07%
1994 236,230 0.76% 5.42% 16.93%
1995 241,778 0.89% 5.64% 23.38%
1996 250,886 0.88% 5.30% 37.57%
Class C
-------
(10/4/93)
1994(a) 10,652 1.23% 4.80% 16.93%
1995 12,494 1.44% 5.08% 23.38%
1996 15,483 1.43% 4.75% 37.57%
Virginia
Class A
-------
(3/27/86)
1986(a) 12,568 0.70% 5.25% 8.61%
1987 32,698 0.68% 6.54% 74.56%
1988 31,748 0.88% 6.95% 75.07%
1989 37,151 0.97% 6.69% 17.88%
1990 41,596 0.91% 6.54% 35.22%
1991 48,062 0.91% 6.48% 22.02%
1992 64,628 0.75% 6.28% 26.59%
1993 96,105 0.68% 5.82% 30.33%
1994 107,502 0.64% 5.53% 17.37%
1995 112,643 0.79% 5.81% 50.17%
1996 117,677 0.83% 5.41% 17.47%
Class C
-------
(10/4/93)
1994(a) 4,759 1.14% 4.85% 17.37%
1995 6,537 1.34% 5.24% 50.17%
1996 10,978 1.38% 4.84% 17.47%
Wisconsin
(6/1/94)
1995(a) 8,278 0.39% 5.25% 51.74%
1996 12,370 0.64% 5.02% 46.99%
</TABLE>
-- 8 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA(F)
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NATIONAL FUNDS
All-American
Class A
-------
(10/3/88)
1989(a) $ 9.58 $.46 $.23 $ .69 $.46 $.46 $ 9.81 10.66%
1990 $ 9.81 $.71 ($.06) $ .65 $.72 $.01 $.73 $ 9.73 6.92%
1991 $ 9.73 $.72 $.22 $ .94 $.72 $.72 $ 9.95 10.10%
1992 $ 9.95 $.69 $.45 $1.14 $.69 $.69 $10.40 11.94%
1993 $10.40 $.67 $.76 $1.43 $.67 $.09 $.76 $11.07 14.25%
1994 $11.07 $.65 ($.30) $ .35 $.65 $.16 $.81 $10.61 2.99%
1995 $10.61 $.63 $.18 $ .81 $.63 $.63 $10.79 8.01%
1996 $10.79 $.61 ($.12) $ .49 $.61 $.61 $10.67 4.64%
Class C
-------
(6/2/93)
1994(a) $11.09 $.57 ($.32) $ .25 $.57 $.17 $.74 $10.60 2.16%
1995 $10.60 $.57 $.18 $ .75 $.57 $.57 $10.78 7.42%
1996 $10.78 $.55 ($.12) $ .43 $.55 $.55 $10.66 4.07%
Intermediate
Class A
-------
(9/15/92)
1993(a) $ 9.70 $.36 $.64 $1.00 $.35 $.35 $10.35 14.06%
1994 $10.35 $.52 ($.13) $ .39 $.52 $.06 $.58 $10.16 3.72%
1995 $10.16 $.51 $.13 $ .64 $.51 $.51 $10.29 6.63%
1996 $10.29 $.51 ($.02) $ .49 $.51 $.51 $10.27 4.84%
Class C
-------
(12/1/95)
1996 $10.57 $.23 ($.30) ($.07) $.22 $.22 $10.28 (1.78%)
Limited Term
Class A
-------
(10/19/87)
1988(a) $ 9.75 $.36 $.13 $ .49 $.36 $.36 $ 9.88 7.44%
1989 $ 9.88 $.62 $.02 $ .64 $.61 $.61 $ 9.91 6.81%
1990 $ 9.91 $.64 $.01 $ .65 $.64 $.64 $ 9.92 6.83%
1991 $ 9.92 $.63 $.13 $ .76 $.64 $.64 $10.04 8.08%
1992 $10.04 $.60 $.26 $ .86 $.60 $.01 $.61 $10.29 9.04%
1993 $10.29 $.55 $.45 $1.00 $.55 $.55 $10.74 10.02%
1994 $10.74 $.52 ($.13) $ .39 $.52 $.01 $.53 $10.60 3.58%
1995 $10.60 $.51 $.04 $ .55 $.50 $.50 $10.65 5.41%
1996 $10.65 $.51 ($.09) $ .42 $.50 $.50 $10.57 4.03%
Class C
-------
(12/1/95)
1996 $10.76 $.22 ($.19) $ .03 $.23 $.23 $10.56 .46%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NATIONAL FUNDS
All-American
Class A
-------
(10/3/88)
1989(a) 25,644 0.00% 7.27% 56.53%
1990 49,013 0.42% 7.29% 131.58%
1991 79,557 0.42% 7.33% 93.99%
1992 129,525 0.56% 6.81% 85.69%
1993 170,831 0.65% 6.24% 72.49%
1994 159,867 0.62% 5.77% 81.29%
1995 185,495 0.76% 6.02% 70.54%
1996 207,992 0.83% 5.60% 78.75%
Class C
-------
(6/2/93)
1994(a) 39,997 1.09% 5.16% 81.29%
1995 45,242 1.31% 5.47% 70.54%
1996 47,314 1.37% 5.05% 78.75%
Intermediate
Class A
-------
(9/15/92)
1993(a) 18,971 0.39% 4.98% 102.38%
1994 35,891 0.40% 4.93% 69.14%
1995 42,069 0.54% 5.15% 102.06%
1996 46,742 0.62% 4.86% 80.90%
Class C
-------
(12/1/95)
1996 1,187 1.13% 4.28% 80.90%
Limited Term
Class A
-------
(10/19/87)
1988(a) 9,835 0.41% 5.84% 66.91%
1989 13,446 0.56% 6.28% 50.00%
1990 19,018 0.70% 6.48% 38.23%
1991 67,471 0.56% 6.32% 166.77%
1992 284,479 0.47% 5.88% 48.35%
1993 570,518 0.70% 5.10% 19.84%
1994 704,627 0.70% 4.76% 22.16%
1995 569,196 0.74% 4.88% 19.74%
1996 489,157 0.79% 4.77% 38.55%
Class C
-------
(12/1/95)
1996 15,415 1.19% 4.17% 38.55%
</TABLE>
(a) Since commencement of investment operations as stated above.
(b) Annualized.
(c) Annualization is not appropriate.
(d) The total returns shown do not include the effect of front-end or
contingent deferred sales loads and are annualized in first year after
commencement of investment operations.
(e) Financial highlights prior to June 1, 1995 are from Flagship Pennsylvania
Triple Tax Exempt Fund, predecessor to the current Pennsylvania Fund.
(f) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. The expense ratio has been
grossed up to exclude the effect of these credits. Prior period numbers
have not been restated.
THE FUNDS AND THEIR OBJECTIVES
Each Fund is a series of Flagship Tax Exempt Funds Trust and is actively, pro-
fessionally managed, independent of the others. The diversified Funds are
marked with an asterisk in the "Fees and Expenses" chart above. All other
Funds are non-diversified and may invest, subject to certain federal tax re-
quirements, a relatively high percentage of assets in the securities of a lim-
ited number of issuers. The securities of a non-diversified fund may be more
susceptible to any single economic, political or regulatory occurrence than
the securities of a diversified Fund. In this Prospectus, all references to
the "Funds" refer to the Trust and its Funds unless expressly noted otherwise.
The Funds include State, National and Insured tax exempt portfolios. Each of
the Funds will seek high current after tax income free from federal ordinary
income tax consistent with liquidity and preservation of capital, by investing
primarily in portfolios of investment grade municipal
-- 9 --
<PAGE>
obligations. The foregoing is fundamental to each Fund and cannot be changed
without shareholder approval. There can be no assurance that the objective of
the Funds will be achieved. The State Funds seek to pay income that is also
free of the particular state and, in some cases local, income taxes. For the
National and Insured Funds, a portion of dividend income paid from securities
issued by your state of residence or U.S. Territories may be exempt from state
or local income taxes. The Insured Funds pursue the same objectives as the Na-
tional Funds, but will invest only in insured municipal obligations. On aver-
age, no more than 20% of the Funds' assets will be invested in assets subject
to the alternative minimum tax, except the Kentucky Limited Term Municipal
Bond Fund which may invest more than 20% of its assets in assets subject to
the alternative minimum tax.
WHAT THE FUNDS OWN AND THEIR STRATEGIES
FUND HOLDINGS
Each Fund's investments may be long-term (usually called bonds) or short-term
(usually called notes or tax exempt commercial paper). The two primary types
of tax exempt bonds are "general obligation" and "revenue" or "special obliga-
tion" bonds, which include "industrial revenue bonds." General obligation
bonds are secured by the issuer's full faith, credit and taxing power. Revenue
or special obligation bonds are payable only from the revenues derived from a
particular facility or type of facilities or, in some cases, from the proceeds
of a special tax or other identified revenue source. Obligations of territo-
ries and possessions of the United States (such as Puerto Rico, Guam and the
United States Virgin Islands) also qualify for investment by each Fund. From
time to time, each Fund may also invest up to 10% of its assets in tax exempt
funds, including tax exempt money market funds, subject to the requirements of
applicable law. Such investments will result in shareholders paying duplicate
or multiple fees, as such funds incur expenses similar to those of the Flag-
ship Funds. The Manager will only invest in such funds when it believes their
yields are beneficial, even including multiple fees.
It is possible that a single Fund (or all Funds) from time to time will invest
more than 25% of its assets in a particular segment of the municipal bond mar-
ket, such as Hospital Revenue Bonds, Housing Agency Bonds, Industrial Develop-
ment Bonds, Airport Bonds or U.S. Territorial Bonds. In such circumstances,
economic, business, political or other changes affecting one bond might also
affect other bonds in the same segment, thereby potentially increasing market
or credit risk.
Each Fund may invest in municipal leases, which are leases or installment pur-
chases used by state and local governments as a means to acquire property,
equipment or facilities without involving debt issuance limitations. It is
possible that more than 5% of a Fund's net assets will be invested in munici-
pal leases which, under Securities and Exchange Commission ("SEC") guidelines,
have been determined to be liquid securities by the Board of Trustees or by
the Manager under procedures established by the Trustees. See the SAI for more
details and a discussion of the special risks of investing in these securi-
ties.
QUALITY
Each State and National Fund will invest all of its assets in investment-grade
obligations that are rated at the date of purchase:
(1) in the case of long-term obligations, in the four highest ratings of Stan-
dard & Poor's Ratings Group(R) ("S&P") (AAA, AA, A and BBB) or Moody's In-
vestor Service, Inc. ("Moody's") (Aaa, Aa, A and Baa) or Fitch Investors Serv-
ice, Inc. ("Fitch") (AAA, AA, A, and BBB);
(2) in the case of bonds not rated by an agency, each Fund may also invest in
unrated obligations that the Manager believes to be equivalent to at least a
BBB rating;
(3) in the case of short-term notes, SP-1 through SP-2 by S&P or MIG 1 through
MIG 4 by Moody's;
(4) in the case of tax-exempt commercial paper, A-1+ through A-2 by S&P or
Prime-1 through Prime-2 by Moody's; or
(5) in the case of tax-exempt funds, those funds that invest only in compara-
ble quality securities.
For a description of such ratings, see Appendix I to the SAI. According to
these descriptions, securities rated in these categories are regarded as hav-
ing capacity to pay interest and repay principal that varies from "extremely
strong" to "adequate." For example, according to S&P, AAA bonds exhibit ex-
tremely strong capacity, while BBB bonds normally exhibit adequate protection
parameters, although adverse economic conditions or other changes are more
likely to lead to a weakened capacity. Securities rated Baa are regarded by
Moody's as having some speculative characteristics. Securities rated BBB by
Fitch are considered to have adequate capacity, although adverse changes in
economic conditions and circumstances are more likely to have an adverse im-
pact than for higher-rated categories. For a discussion of the quality of the
Insured Funds' holdings, please see "Flagship National Tax Exempt Funds."
MATURITY
Any Flagship Fund with "short term" in its name indicates a dollar-weighted
average maturity of 1 to 3 years; "limited term" as 1 to 7 years; and "inter-
mediate term" as 5 to 10 years. Unless so named, the Fund is a long-term port-
folio whose dollar-weighted average maturity is 15 to 25 years. No Fund has
any restrictions on the maturity of the obligations in its portfolio and may
lengthen or shorten the average dollar weighted maturity in light of market
conditions and the Manager's expectations. Under certain circumstances a Fund
may invest in nominally long-term securities that have many of the features of
shorter-term securities, and the maturities of these securities would be
deemed to be earlier than their ultimate maturity dates by virtue of an exist-
ing demand feature.
-- 10 --
<PAGE>
NAV AND YIELD VARIATIONS
Yields on tax-exempt securities vary depending on a variety of factors, in-
cluding the general condition of the financial markets and of the tax-exempt
securities market in particular, the size of a particular offering, the matu-
rity of the obligation and the creditworthiness of the issue. Generally, tax-
exempt securities of longer maturities, as measured by their duration, produce
higher current yields, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors than are
tax-exempt securities with shorter maturities. Similarly, lower-rated tax-ex-
empt securities generally produce a higher yield than better-rated tax-exempt
securities, due to the perception of a greater degree of risk in the ability
of the issuer to pay principal and interest obligations. The value of a port-
folio of fixed income securities generally fluctuates inversely with changes
in interest rates. When interest rates increase, the value of fixed income se-
curities generally decreases and when interest rates decrease, the value of
fixed income securities generally increases.
HEDGING AND OTHER DEFENSIVE ACTIONS
Hedging is a term used for various methods of seeking to preserve portfolio
capital value by offsetting price changes in one investment by making another
investment whose price should tend to move in the opposite direction. The
Trustees and Manager of the Funds believe it is desirable to partially hedge
portfolios against adverse changes in market value in various market environ-
ments.
No Fund will engage in hedging transactions for speculative purposes. Only in-
dex and financial futures, as well as related "put' and "call' options on
them, will be used to protect portfolio capital values. The Funds will not
purchase exotic derivative securities.
. An index future is a contract to buy or sell units of a particular securi-
ties index at an agreed upon price on a specified future date, and is settled
in cash.
. A financial future is similar to an index future, except the trade is set-
tled with the underlying securities.
. Put features let the holder sell back a security to the issuer or a finan-
cial intermediary in exchange for periodic fees or a lower interest rate. The
put provider can impact the creditworthiness of the put security.
. An option on an index or financial future gives the holder the right to take
over the seller's position in the future's contract at an agreed upon option
price.
The above securities and the risk of transacting them are described more fully
in the SAI.
Each Fund reserves the right, if necessary in the judgment of the Trustees and
the Manager for liquidity or defensive purposes (such as an inadequate market
for municipal securities or an expected substantial decline in value of long-
term obligations), to temporarily invest up to 20% of its assets in obliga-
tions issued or guaranteed by the U.S. Government and its agencies or instru-
mentalities, including up to 5% in related, adequately collateralized repur-
chase agreements.
"WHEN ISSUED" TRANSACTIONS
Each Fund may also purchase and sell municipal securities on a "when issued"
and "delayed delivery" basis. These transactions are subject to market fluctu-
ation; the value at delivery may be more or less than the purchase price.
Since each Fund relies on the buyer or seller to consummate the transaction,
failure by the other party to complete the transaction may result in such Fund
missing the opportunity of obtaining a price or yield considered to be advan-
tageous. When a Fund is the buyer in such a transaction, however, it will
maintain with its custodian cash or segregate high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments un-
til payment is made. If a 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.
NONPUBLIC SECURITIES
Each Fund may invest in securities that are subject to restrictions on dispo-
sition under the Securities Act of 1933 or for which market quotations are not
readily available up to the amounts permitted by applicable law, including up
to 5% in adequately collateralized repurchase agreements of more than seven-
day maturity.
BORROWING
Each Fund reserves the right to borrow from banks up to 10% of the value of
its assets for extraordinary or emergency purposes or to meet unexpectedly
heavy redemption requests and to secure such borrowings to the extent required
by agreement or law.
PORTFOLIO TRANSACTIONS
The Funds will not seek capital gain or appreciation. However, the Funds may
sell securities held in their portfolios and, as a result, realize capital
gain or loss, for the following purposes: to eliminate unsafe investments and
those not consistent with the preservation of the capital or tax status of the
Funds; to honor redemption orders, meet anticipated redemption requirements
and negate gains from discount purchases; to reinvest earnings from portfolio
securities in like securities; or to defray normal administrative expenses.
FLAGSHIP STATE TAX EXEMPT FUNDS
GENERAL FACTORS
Because individual State Funds will generally invest primarily in securities
of issuers within their state, political and economic factors affecting the
particular state could also affect the creditworthiness, and thus the value,
of that Fund's portfolio. Many factors, including national economic, social
and environmental policies and conditions, as well as natu-
-- 11 --
<PAGE>
ral disasters, most of which are outside the control of the state or the is-
suers, could affect or could have an adverse impact on the financial condition
of any or all of the various states or their subdivisions. States may suffer
fiscal problems as a result of cutbacks by the federal government, cost cut-
ting and reduced tax revenues. Flagship is unable to predict whether or to
what extent such factors or future conditions may affect the states, issuers
of bonds acquired for the Funds and the impact on their abilities to meet pay-
ment obligations.
Some state-specific economic factors and bond ratings are provided below as of
July 1, 1995 (unless otherwise noted), as well as national averages for com-
parison purposes. Unless otherwise indicated, shares are exempt from state
property taxes, and there are no other material tax considerations for state
residents except as discussed under "Taxes." See the SAI for further informa-
tion.
NATIONAL AVERAGES
The national average personal income was $22,788 and the unemployment rate was
5.6% in 1995.
ALABAMA - In 1995, Alabama population was 4,253,000, average personal income
was $18,781 and the unemployment rate was 6.3%. Alabama's economy is distrib-
uted relatively evenly between manufacturing, trade, and government. 1995 gen-
eral fund revenues were $756 million against expenditures of $712 million.
General obligation bonds are rated Aa by Moody's, AA by Standard & Poor's and
AA by Fitch.
ARIZONA - In 1995, Arizona population was 4,218,000, average personal income
was $20,421 and the unemployment rate was 5.1%. Arizona's economy is based
primarily on employment in the trade and service sectors. 1995 general fund
revenues were $4.23 billion against expenditures of $4.43 billion. There are
no general obligation ratings, however, outstanding certificates of participa-
tion are rated A by Moody's, and A by Standard & Poor's.
CALIFORNIA - In 1995, California population was 31,589,000, average personal
income was $23,699 and the unemployment rate was 7.8%. California's economy is
based primarily on the service industry. 1995 budgeted general fund revenues
were $42.5 billion against expenditures of $41.7 billion. General obligation
ratings are A1 by Moody's, A by Standard & Poor's and A by Fitch.
Tax Considerations: Distributions attributable to interest on obligations of
California or its political subdivisions, the United States, Puerto Rico, the
U.S. Virgin Islands or Guam are exempt from California income tax, provided
that, at the close of each quarter, at least 50% of Fund assets consist of
such obligations.
COLORADO - In 1995, Colorado population was 3,747,000, average personal income
was $23,499 and the unemployment rate was 4.2%. Colorado's economy is based
primarily on services, trade, and government. 1995 general fund revenues were
$5.96 billion against expenditures of $5.17 billion. There is no outstanding
general obligation debt, but outstanding lease obligations are rated A by
Moody's and AAA by Standard & Poor's.
CONNECTICUT - In 1995, Connecticut population was 3,275,000, average personal
income was $30,303 and the unemployment rate was 5.5%. Connecticut's economy
is based primarily on the service sector. 1995 general fund revenues were
$8.480 billion against expenditures of $8.399 billion. General obligation
ratings are Aa by Moody's, AA- by Standard & Poor's and AA by Fitch.
Tax Considerations: Distributions attributable to interest on obligations with
respect to which taxation is prohibited by federal law are exempt from Con-
necticut income tax, provided that, at the close of each quarter, at least 50%
of Fund assets consist of such obligations. Interest attributable to obliga-
tions of Connecticut or its political subdivisions are not subject to Connect-
icut tax.
FLORIDA - In 1995, Florida population was 14,166,000 average personal income
was $22,916 and the unemployment rate was 5.5%. Florida's economy is based
primarily on the service sector, which includes tourism. 1995 general fund
revenues were $13.892 billion against expenditures of $11.865 billion. General
obligation ratings are Aa by Moody's, AA by Standard & Poor's and AA by Fitch.
Tax Considerations: There is no Florida individual income tax. Shares are ex-
empt from the Florida intangibles tax with respect to any calendar year, pro-
vided that, at the close of the preceding calendar year, all Fund assets con-
sist of obligations of Florida or its political subdivisions, the United
States, Puerto Rico, the U.S. Virgin Islands or Guam.
GEORGIA - In 1995, Georgia population was 7,201,000, average personal income
was $21,278 and the unemployment rate was 4.9%. Georgia's economy is based
heavily on trade, which is due primarily to its central location in the South-
east. 1995 general fund revenues were $11.324 billion against expenditures of
$11.324 billion. General obligation ratings are Aaa by Moody's, AA+ by Stan-
dard & Poor's and AAA by Fitch.
KANSAS - In 1995, Kansas population was 2,565,000, average personal income was
$21,012 and the unemployment rate was 4.4%. Kansas' economy is based primarily
on agriculture. 1995 budgeted general fund revenues were $3.247 billion
against expenditures of $3.342 billion. There is no long-term debt and thus
are no ratings to report.
Tax Considerations: Distributions attributable to interest on (1) obligations
of Kansas or its political subdivisions issued prior to January 1, 1988 and
specifically exempt under the Kansas tax code, (2) any obligations of Kansas
or its political subdivisions issued after December 31, 1987, and (3) any ob-
ligations of the United States, Puerto Rico, the U.S. Virgin Islands or Guam
are exempt from Kansas income tax. Shares are subject to the Kansas property
tax but are exempt from the local intangibles taxes levied by counties, cities
and townships.
-- 12 --
<PAGE>
KENTUCKY - In 1995, Kentucky population was 3,860,000, average personal income
was $18,612 and the unemployment rate was 5.4%. Kentucky's economy is based
primarily on manufacturing and services. 1995 general fund revenues were
$5.023 billion against expenditures of $3.997 billion. General obligation rat-
ings are Aa by Moody's and AA by Standard & Poor's.
Tax Considerations: Shares are exempt from the Kentucky intangibles tax to the
extent that they consist of obligations of Kentucky or its political subdivi-
sions, the United States, Puerto Rico, the U.S. Virgin Islands or Guam.
LOUISIANA - In 1995, Louisiana population was 4,342,000, average personal in-
come was $18,827 and the unemployment rate was 6.9%. Louisiana's economy is
based primarily on services. 1995 unaudited general fund revenues were $10.6
billion against expenditures of $9.9 billion. General obligation ratings are
Baa1 by Moody's and A by Standard & Poor's.
MICHIGAN - In 1995, Michigan population was 9,549,000, average personal income
was $23,551 and the unemployment rate was 5.3%. Michigan's economy is based
primarily on manufacturing and services. Projected 1995 general fund revenues
were $16.93 billion against expenditures of $16.1 billion. General obligation
ratings are A1 by Moody's, AA by Standard & Poor's and AA by Fitch.
Tax Considerations: Shares acquired through purchases or reinvestment of divi-
dends are not subject to Michigan intangible personal property tax to the ex-
tent that the Fund invests in obligations of Michigan or its political subdi-
visions, the United States, Puerto Rico, the U.S. Virgin Islands or Guam.
MISSOURI - In 1995, Missouri population was 5,324,000, average personal income
was $21,627 and the unemployment rate was 4.8%. Missouri's economy is based
primarily on services. 1995 general fund revenues were $8.5 billion against
expenditures of $6.1 billion. General obligation ratings are Aaa by Moody's,
AAA by Standard & Poor's and AAA by Fitch.
NEW JERSEY - In 1995, New Jersey population was 7,945,000, average personal
income was $28,858 and the unemployment rate was 6.4%. New Jersey's economy is
based primarily on retail trade and services. Projected 1995 general fund rev-
enues were $16.60 billion against expenditures of $15.47 billion. General ob-
ligation ratings are Aa1 by Moody's, AA+ by Standard & Poor's and AA+ by
Fitch.
Tax Considerations: Distributions attributable to interest or gain from obli-
gations of New Jersey or its political subdivisions, the United States, Puerto
Rico, the U.S. Virgin Islands, or Guam are exempt from New Jersey income tax
if at least 80 percent of the aggregate principal amount of obligations held
by the New Jersey Fund consists of such obligations.
NEW MEXICO - In 1995, New Mexico population was 1,685,000, average personal
income was $18,055 and the unemployment rate was 6.3%. New Mexico's economy is
based primarily on services. 1995 unaudited general fund revenues were $2.745
billion against expenditures of $2.781 billion. General obligation ratings are
Aa by Moody's and AA+ by Standard & Poor's.
NEW YORK - In 1995, New York population was 18,136,000, average personal in-
come was $26,782 and the unemployment rate was 6.3%. New York's economy is
based primarily on services. 1995 general fund revenues were $31.5 billion
against expenditures of $33.1 billion. General obligation ratings are A by
Moody's and A- by Standard & Poor's.
NORTH CAROLINA - In 1995, North Carolina population was 7,195,000, average
personal income was $20,624 and the unemployment rate was 4.3%. North Caroli-
na's economy is based primarily on manufacturing and service. 1995 general
fund revenues were $14.18 billion against expenditures of $11.98 billion Gen-
eral obligation ratings are Aaa by Moody's, AAA by Standard & Poor's and AAA
by Fitch.
Tax Considerations: Capital gains distributions exempt from North Carolina in-
come tax to the extent that they are attributable to gain from the sale or ex-
change of certain obligations of North Carolina or its political subdivisions,
agencies or instrumentalities.
OHIO - In 1995, Ohio population was 11,151,000, average personal income was
$22,021 and the unemployment rate was 4.8%. Ohio's non-farming economy is
based primarily on services. 1995 general fund revenues were $15.78 billion
against total expenditures of $13.2 billion. General obligation ratings are Aa
by Moody's and AA by Standard & Poor's.
Tax Considerations: Distributions attributable to gains on the disposition of
obligations of Ohio or its political subdivisions, Puerto Rico, the Virgin Is-
lands and Guam exempt from Ohio personal income tax.
PENNSYLVANIA - In 1995, Pennsylvania population was 12,072,000, average per-
sonal income was $23,279 and the unemployment rate was 5.9%. Pennsylvania's
economy is based primarily on services. Projected 1995 general fund revenues
were $15.8 billion against total expenditures of $15.6 billion. General obli-
gation ratings are A1 by Moody's, AA- by Standard & Poor's and AA- by Fitch.
Tax Considerations: Individual shareholders not subject to (i) the Pennsylva-
nia personal income tax on distributions to the extent that such distributions
are attributable to gains on the disposition of obligations of Pennsylvania
and its political subdivisions, the United States, Puerto Rico, the U.S. Vir-
gin Islands or Guam; and (ii) the Pennsylvania personal property tax on shares
to the extent that the Fund's portfolio consists of such obligations.
SOUTH CAROLINA - In 1995, South Carolina population was 3,673,000, average
personal income was $18,788 and the unemployment rate was 5.1%. South Caroli-
na's economy includes a very diversified economic base of services and trade.
Continued growth is expected in the service industries, particularly tourism
and manufacturing. 1995
-- 13 --
<PAGE>
general fund revenues were $4.45 billion against expenditures of $3.61 bil-
lion. General obligation ratings are Aaa by Moody's, AAA by Standard & Poor's
and AAA by Fitch.
TENNESSEE - In 1995, Tennessee population was 5,256,000, average personal in-
come was $20,376 and the unemployment rate was 5.2%. Tennessee's economic base
is reasonably well diversified, with services the largest employment sector.
1995 general fund revenues were $6.60 billion against expenditures of $6.30
billion. General obligation ratings are Aaa by Moody's, AA+ by Standard &
Poor's and AAA by Fitch.
Tax Considerations: No state personal income tax. Qualified exempt-interest
dividends exempt from the Hall Tax on interest and dividends.
VIRGINIA - In 1995, Virginia population was 6,618,000, average personal income
was $17,915 and the unemployment rate was 4.5%. Virginia's economy remains
strong and diversified. Budgeted 1995 general fund revenues were $6.831 bil-
lion against expenditures of $6.319 billion. General obligation ratings are
Aaa by Moody's, AAA by Standard & Poor's and AAA by Fitch.
WISCONSIN - In 1995, Wisconsin population was 5,123,000, average personal in-
come was $21,839 and the unemployment rate was 3.7%. Wisconsin's economy is
based largely on services. 1995 general fund revenues were $13.3 billion
against expenditures of $13.1 billion. General obligation ratings are Aa by
Moody's, AA by Standard & Poor's and AA+ by Fitch.
Tax Considerations: Distributions attributable to certain obligations of Wis-
consin or its political subdivisions, and certain obligations of the United
States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands or Guam
are exempt from the Wisconsin income tax. The Wisconsin Fund intends to invest
in obligations that will permit interest to be free from Wisconsin income tax.
FLAGSHIP NATIONAL TAX EXEMPT FUNDS
NATIONAL FUNDS
Flagship Short Term Tax Exempt Fund
Flagship Limited Term Tax Exempt Fund
Flagship Intermediate Tax Exempt Fund
Flagship All-American Tax Exempt Fund
Flagship U.S. Territories Tax Exempt Fund
Flagship High Yield Municipal Bond Fund
Flagship's National Tax Exempt Funds are designed for investors who want in-
come free of federal income tax. A portion of dividend income paid from secu-
rities issued by your state of residence or U.S. Territories may be exempt
from state income, personal property or intangibles tax. Please consult your
tax adviser about the specific tax laws in your state.
These Funds are investment quality or better (except for the High Yield Fund),
nationally diversified portfolios of municipal securities, listed in order of
increasing dollar weighted average maturity and increasing potential for price
fluctuations.
Flagship U.S. Territories Tax Exempt Fund is a non-diversified portfolio in-
vesting in the long-term securities of Puerto Rico, Guam and the U. S. Virgin
Islands.
Each National Fund pays income dividends that will vary with market condi-
tions. The Short Term Tax Exempt Fund seeks to provide incrementally higher
yields than tax-free money market funds, but lower than the Limited Term Tax
Exempt Fund. The Intermediate Tax Exempt Fund seeks a higher yield than the
Limited Term Fund, but less that the longer-term All-American Tax Exempt, U.S.
Territories and High Yield Funds, all of which seek high current income. The
All-American Fund may be more actively managed among moderate-quality, value-
added securities. The High Yield Fund is actively monitored investing in risk-
ier medium and lower grade municipal securities. Additional information con-
cerning the High Yield Fund is contained in a separate Prospectus.
INSURED FUNDS
Flagship Insured Limited Term Tax Exempt Fund
Flagship Insured Intermediate Tax Exempt Fund
Flagship Insured Tax Exempt Fund
Flagship's Insured Tax Exempt Funds are nationally diversified portfolios
which seek to minimize the credit risk of their holdings by investing only in
municipal securities that are insured as to the payment of principal and in-
terest by either a mutual fund portfolio insurance policy or an insurance pol-
icy applicable to a specific security. Neither a Fund's value nor any of its
securities is insured by the Federal Deposit Insurance Corporation. A Fund may
also own municipal securities where such payments are guaranteed by an agency
or instrumentality of the U.S. Government; or where such payments are secured
by an escrow account consisting of obligations of the U.S. Government and
which have an AAA or Aaa rating from either S&P or Moody's. In addition, a
Fund may also invest in short-term securities that are rated within the high-
est grade by Moody's or S&P. The yield of an Insured Fund will generally be
lower than the Flagship National Tax Exempt Fund investing in non-insured se-
curities of corresponding maturities. Please consult your tax adviser about
the specific tax laws in your state.
HOW THE FUNDS ARE MANAGED
The Funds' activities are managed under the direction of the Trustees. The
Manager to each Fund is Flagship Financial Inc., whose principal business ad-
dress is One Dayton Centre, One South Main Street, Dayton, Ohio 45402-2030.
The Manager is a wholly-owned subsidiary of Flagship Resources Inc., which is
owned and/or controlled by Bruce P. Bedford
-- 14 --
<PAGE>
and Richard P. Davis and members of their immediate families. Messrs. Bedford
and Davis are each a Trustee and officer of the Funds and an officer and Di-
rector of the Manager and the Distributor. In accordance with the terms of
separate Investment Advisory Agreements with each Fund (the "Advisory Agree-
ments"), the Manager renders investment supervisory and corporate administra-
tive services to the Funds, subject to the general supervision of the Trustees
and in conformity with the stated policies of the Funds. It is the responsi-
bility of the Manager to make investment decisions and to place the purchase
and sale orders for the portfolio transactions for each Fund.
The Funds have adopted a Code of Ethics regarding restrictions on the invest-
ment activity of specified "Investment Personnel." These include restrictions
on personal investing, pre-clearance of trades, sanctions and disgorgement of
certain profits, as well as prohibitions on short swing profits, investments
in initial public offerings and holding public directorships.
The Manager's Investment Policy Committee, composed of all of the portfolio
managers and principal executive officers, meets monthly to review the domes-
tic economic outlook and the status of financial markets and to set the policy
guidelines for the management of each Fund. All securities purchased must pass
certain screening criteria by the portfolio managers and are continuously
monitored to various degrees by Credit Research Department analysts. Implemen-
tation, trading, and temporary modification of a Fund's strategy is the func-
tion of a small team of portfolio managers who support each other. Each team
is led by a designated portfolio manager primarily responsible for the day-to-
day operations and performance of the Funds. The designated team leaders and
their Funds are listed below. Richard Huber has been employed by the Manager
since 1987. Prior to September, 1991, Michael Davern was Assistant Vice Presi-
dent, Van Kampen Merritt Inc. (Chicago, IL). Prior to January, 1991, Jan
Terbreuggen was Vice President, Todd Investment Advisers (Louisville, KY).
Walter Parker has been employed by the Manager since July, 1994. Prior to Oc-
tober, 1993, he was Senior Vice President, PNC Bank (Cincinnati, OH). Paul
Brennan has been employed by the Manager since July, 1991. Prior to April,
1991, he was Audit Assistant at Deloitte & Touche LLP (Dayton, OH). At any
time during which a portfolio manager is on vacation or is otherwise unavaila-
ble for day-to-day management, the responsibility for the management of his
designated funds will shift to one or more of the other named portfolio manag-
ers.
<TABLE>
<CAPTION>
Jan Terbrueggen, CFA Michael Davern, CFA Richard Huber Walter Parker, CFA Paul Brennan, CFA
Vice President Vice President Vice President Vice President Portfolio Manager
- -------------------- ---------------------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Arizona Alabama Insured Limited* All-American North Carolina Florida
California* California Kansas Connecticut Ohio Intermediate
Colorado Intermediate* Michigan Kentucky Ohio Intermediate
Louisiana Florida Michigan Kentucky Limited Intermediate*
New Mexico Florida Limited* Intermediate* Limited Term Ohio Limited*
Georgia Michigan Limited* New Jersey South Carolina
Insured* Missouri New Jersey Tennessee
Insured U.S. Territories* Intermediate
Intermediate* Wisconsin New Jersey Limited*
New York
New York
Intermediate*
New York Limited*
Pennsylvania
Short Term*
Virginia
</TABLE>
*Funds are scheduled to commence operations 1996 to 1997.
In addition, the Manager performs or supervises the administrative services
for the Funds, including: (i) assisting in supervising all aspects of their
operations; (ii) providing the Funds, at the Manager's expense, with persons
competent to perform necessary, effective corporate administrative and cleri-
cal functions; and (iii) providing the Funds, at the Manager's expense, with
adequate office space and related services. Accounting records are maintained,
at the Funds' expense, by its Custodian, State Street Bank and Trust Company.
-- 15 --
<PAGE>
As compensation for the services rendered by the Manager under the Advisory
Agreements, the Manager is paid a fee, computed daily and payable monthly with
respect to each Fund on a separate basis, at an annual rate of 0.50% of the
average daily net assets of such Funds, except for any Limited Term Fund,
which pays a fee, computed daily and payable monthly with respect to each Fund
on a separate basis, at an annual rate of 0.30% of the average daily net as-
sets of $500 million or less, plus 0.25% of the average daily net assets in
excess of $500 million. For the fiscal year ended May 31, 1996, the fee paid
to the Manager by each Fund is shown below. Please see "Fees and Expenses" for
the total expenses for each Fund (or class of shares if applicable), expressed
as a percentage of average net assets.
<TABLE>
<CAPTION>
Fund Fee Paid to Manager Fund Fee Paid to Manager Fund Fee Paid to Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama .00% Kentucky Ltd. .06% Ohio .39%
Arizona .17% Louisiana .20% Pennsylvania .17%
Colorado .00% Michigan .30% South Carolina .00%
Connecticut .20% Missouri .23% Tennessee .35%
Florida .30% New Jersey .00% Virginia .25%
Florida Int. .00% New Jersey Int. .00% Wisconsin .00%
Georgia .20% New Mexico .06% All-American .26%
Kansas .04% New York .01% Intermediate .00%
Kentucky .19% North Carolina .34% Limited Term .24%
</TABLE>
The Manager, which has been a registered investment adviser since 1978, also
renders investment advisory and management services to others. The Manager
manages approximately $4.6 billion in assets, primarily of mutual funds, cor-
porations, insurance companies, employee benefit plans and individuals. The
Manager is investment adviser to the Trust, with assets of approximately $4.0
billion and to Flagship Admiral Funds Inc., an investment company with assets
of approximately $225 million. All assets are as of June 30, 1996.
HOW TO CONTACT FLAGSHIP
--------------------------------
FOR GENERAL INFORMATION:
Call toll free from anywhere in
the U.S.
8:00 a.m. to 6:00 p.m. Eastern
time
1-800-414-7447
FOR REDEMPTIONS AND OTHER
TRANSACTIONS:
Call toll free from anywhere in
the U.S.
9:00 a.m. to 5:00 p.m. Eastern
time
1-800-225-8530
(TDD) 1-800-360-4521
SEND YOUR INVESTMENTS AND ALL
REQUESTS TO:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
HOW TO BUY SHARES
PURCHASE PRICE
Shares of each Fund are offered continuously at a public offering price that
is equal to the net asset value per share plus any applicable sales charge.
You pay the sales charge (1) at the time of purchase (Class A Shares) or (2)
on a contingent deferred basis (Class B and Class C Shares). The Class R
Shares are designed for institutional investors, with a minimum initial in-
vestment of $1,000,000. The R Shares are sold at net asset value with no
front-end sales load, no contingent deferred sales charge and no Rule 12(b)-1
charge. When placing purchase orders, you must specify whether the order is
for Class A, Class B, Class C or Class R Shares. All unspecified purchase or-
ders will automatically be invested in Class A shares. Any order in an amount
of $1,000,000 or more must be for Class A or Class R Shares.
The minimum purchase required to open an account in any Fund is $3,000. Addi-
tional purchases of $50 or more may be made through your financial consultant
or by mail at any time.
CLASSES OF SHARES
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares, are authorized for all Funds. They are described fully in the
SAI. The following table shows the total sales charges or underwriting dis-
counts and dealer concessions for each breakpoint in sales.
-- 16 --
<PAGE>
CLASS A SHARES--OFFERED BY ALL FUNDS
<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>
All Series Except Those Listed Below
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 -- -- --*
Intermediate Series
Less than $50,000 3.00% 3.09% 2.50%
$50,000 to $100,000 2.50 2.58 2.00
$100,000 to $250,000 2.00 2.06 1.50
$250,000 to $500,000 1.50 1.55 1.25
$500,000 to $1,000,000 1.25 1.29 1.00
$1,000,000 and over -- -- --*
Limited and Short Term Series
Less than $50,000 2.50% 2.56% 2.00%
$50,000 to $100,000 2.00 2.05 1.60
$100,000 to $250,000 1.50 1.54 1.20
$250,000 to $500,000 1.25 1.28 1.00
$500,000 to $1,000,000 .75 .77 .60
$1,000,000 and over -- -- --*
</TABLE>
*A CDSC may be imposed as described below.
CLASS A CONTINGENT DEFERRED SALES CHARGE. There is no initial sales charge on
purchases of Class A Shares of any one or more of the Tax Exempt Funds for
purchases aggregating $1 million or more. Shares of any of the Funds that of-
fer only one class of shares that have no designation are considered "Class A"
shares for this purpose. 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 mil-
lion, 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 either (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 (0.70% for short
term or limited term maturity funds). Class B Shares are subject to a declin-
ing contingent deferred sales charge ("CDSC") if you redeem your shares within
six years from the purchase date. This CDSC charge for long maturity funds is
5%, 4%, 4%, 3%, 2% and 1% for years one through six. For intermediate and
short term maturity funds, the declining CDSC is 3%, 3%, 2% and 1% for years
one through four. Class B Shares automatically convert to Class A Shares at
the end of eight years for long maturity funds and at the end of five years
for intermediate and short term maturity funds. The conversion is based on the
relative net asset value of the two classes, and no sales load or other charge
is imposed.
The Distributor pays a 0.20% service fee to dealers in advance for the first
year upon the sale of Class B Shares. After the shares have been held for a
year, the Distributor pays the fee monthly. In addition, the Distributor pays
sales commission of 3.80% (2.30%-intermediate; 1.80%-limited term) of the pur-
chase price to dealers from its own resources at the time of sale.
CLASS C SHARES
Class C Shares are offered at net asset value, without an initial sales
charge, subject to a continuing 0.95% annual distribution fee for any fund
with other than a short term or limited term maturity (of which 0.75% is an
asset based sales charge and 0.20% is a service fee) or a continuing 0.70% an-
nual distribution fee for any fund with a short term or limited term maturity
(of which 0.50% is an asset based sales charge and 0.20% is a service fee).
Class C Shares are subject to a contingent deferred sales charge ("CDSC") of
1% if redeemed within one year of the purchase date. The first year, the an-
nual distribution fee is paid to the Distributor. In subsequent years, the
service fee is paid to the Distributor and the remainder is paid to the Deal-
er. Class C Shares are authorized for all Funds, but are not currently offered
by all Funds.
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
-- 17 --
<PAGE>
also eligible to purchase Class A Shares at net asset value without an up-
front sales charge: officers, current and former trustees of the Fund, bona
fide, full-time and retired employees of Flagship, and subsidiaries thereof,
or their immediate family members; any person who, for at least 90 days, has
been an officer, director or bona fide employee of any Authorized Dealer, or
their immediate family members; officers and directors of bank holding compa-
nies 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, fi-
nancial planners or other financial intermediaries that charge periodic or as-
set-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares with-
out a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Flagship Funds Inc. (the "Distributor") for
distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and, conse-
quently, holders of Class R Shares may not receive the same types or levels of
services from Authorized Dealers. In choosing between Class A Shares and Class
R Shares, you should weigh the benefits of the services to be provided by Au-
thorized Dealers against the annual service fee imposed upon the Class A
Shares.
BUYING THROUGH YOUR FINANCIAL CONSULTANT
To purchase shares through your financial consultant, you should request that
the firm transmit your order for the appropriate dollar amount or number of
shares with your check or wire.
BUYING BY MAIL
To open a new account, please complete the enclosed Flagship Application and
mail it with your check to the address shown.
Make your check payable to (Name of Fund). Your order will be executed on the
day your check is received, processed at the public offering price based on
the net asset value per share plus the applicable sales charge next deter-
mined.
All purchases made by check should be in US dollars. Third-Party checks will
not be accepted.
The Fund executes purchase orders received in good order immediately prior to
declaration of the daily dividend as of the close of business on the day the
order is received. Payments by wire will begin to earn dividends on the busi-
ness 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 Sell Shares" and "Distributions and
Yield." Because dividends do not begin until payment is received, you should
request your financial consultant to forward payment promptly. To the extent
your securities account or bank account is charged for your purchase before
the Fund receives funds, your financial consultant or bank may be earning in-
terest on your funds. The Fund reserves the right to reject any order for
shares. The Fund may, in its sole discretion, accept in-kind payments.
AUTOMATIC INVESTMENT PLAN
The Fund offers shareholders who receive a quarterly statement from Flagship
the convenience of automatic monthly investing. On any regular business day
between the fifth and twenty-eighth of each month, the amount you specify ($50
minimum) will be transferred from your bank account to the Fund. To initiate
your automatic investment plan, complete the Flagship Application and attach a
voided check. The Fund pays the cost associated with these transfers, but re-
serves the right, upon 90 days written notice, to make reasonable charges for
this service. Your bank may charge for debiting your account. Shareholders may
change the amount or discontinue their participation in the plan by written
notice to Boston Financial 30 days prior to fund transfer date. Because a
sales charge is applied on new Class A Shares purchased, it would be disadvan-
tageous to purchase Class A Shares while also making systematic withdrawals.
REDUCED SALES CHARGES
The Funds' Distributor offers several reduced sales charge programs through:
. rights of accumulation and combinations
. letter of intent
. group purchases
. redemptions from unrelated funds
Letter of intent is explained below. Please see the SAI for additional infor-
mation.
LETTER OF INTENT (CLASS A SHARES ONLY)
A shareholder may qualify for reduced sales charges on Class A shares by com-
pleting the Letter of Intent section on the application form. All investments
in Class A shares of any Flagship fund count toward the indicated goal. It is
understood that 5% of the dollar amount checked on this 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 shareholder's ac-
count in shares. If the total purchases, less redemptions by the shareholder,
his or her spouse, children and parents, equal the amount specified under this
Letter, the shares held in escrow will be deposited to the shareholder's open
account or delivered to the shareholder or to his order. If the total pur-
chases, less redemptions, exceed the amount specified under this Letter and an
amount which would qualify for a further discount, a retroactive price adjust-
ment will be made by Flagship Funds Inc. and the dealer through whom purchases
were made pursuant to this Letter of Intent (to reflect
-- 18 --
<PAGE>
such further quantity discount). The resulting difference in offering price
will be applied to the purchase of additional shares at the offering price ap-
plicable to a single purchase of the dollar amount of the total purchase. If
the total purchases less redemptions are less than the amount specified under
this Letter, the shareholder will remit to Flagship Funds Inc. an amount equal
to the difference in the dollar amount of sales charge actually paid and the
amount of sales charge which would have applied to the aggregate purchases if
the total of such purchases had been made at a single time. Upon such remit-
tance, the shares held for the shareholder's account will be deposited to his
account or delivered to him or to his order. If within 20 days after written
request by Flagship such difference in sales charge is not paid, Flagship is
hereby authorized to redeem an appropriate number of shares to realize such
difference. Flagship Funds Inc. is hereby irrevocably constituted under this
Letter of Intent to effect such redemption as agent of the shareholder. The
shareholder or the shareholder's dealer will inform Boston Financial that this
Letter is in effect each time a purchase is made.
HOW TO SELL SHARES
You can arrange to take money out of your Flagship account by redeeming (sell-
ing) some or all of your shares on any day the New York Stock Exchange is
open, either through your financial consultant or directly.
Upon receipt of your request in good order by Boston Financial through one of
the methods discussed below, the Fund will redeem shares at their next deter-
mined net asset value. See "How Fund Shares are Priced". Proceeds of redemp-
tions of recently purchased shares may be delayed for 15 days or more, pending
collection of funds for the initial purchase. If you sell all shares owned,
the dividends declared during the month through the time of redemption will be
included in the remittance.
The sale of shares is a taxable transaction for federal and state income tax
purposes. Please see the SAI.
SELLING SHARES THROUGH FINANCIAL CONSULTANTS
You may sell shares through any financial consultant who has a Selling Agree-
ment with the Distributor. Your financial consultant must receive your request
before 4:00 p.m. Eastern time to receive that day's price. Your financial con-
sultant is responsible for furnishing all necessary documentation to Flagship
and may charge you for this service.
SELLING SHARES DIRECTLY
BY TELEPHONE. If you authorized the Telephone Redemption Service on your Ap-
plication, you may sell shares by calling toll-free 1-800-225-8530, OR FOR
TDD, 1-800- 360-4521.
For funds to be wired (minimum $5,000, maximum $50,000), your completed bank
account information from the Application must already be on file with Flag-
ship.
The Fund's purchase Application relieves the Fund and the Transfer Agent (Bos-
ton Financial) of any liability for loss, costs or expenses arising out of
telephone redemptions that are believed to be valid. The shareholder will uni-
laterally bear the risk of such transactions. 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 unau-
thorized instructions. The procedures include requiring a form of personal
identification prior to acting on telephone instructions, recording such in-
structions and providing written confirmation of such transactions.
BY MAIL. Write a letter of instruction with the following information: your
name, account number, dollar or share amount to be sold and Fund name. Send
it, along with any certificates for shares to be sold, to the address shown on
page 16.
Payment will be made by check to you at the address on your most recent Appli-
cation. Checks will normally be sent out within one business day, but in no
event more than seven days after the receipt of your redemption request in
good order. For requests over $50,000, or if the registration on your account
has been changed within the past 60 days, or if the redemption proceeds are to
go to an address other than the address of record, the Fund must receive a
letter of instruction signed by all persons authorized to sign for the account
exactly as it is registered. All signatures must be guaranteed.
SIGNATURE GUARANTEE
Boston Financial may require a signature guarantee on certain written transac-
tion requests. A signature guarantee may be executed by any eligible guaran-
tor. Eligible guarantors include member firms of a domestic stock exchange,
commercial banks, trust companies, savings associations and credit unions as
defined by the Federal Deposit Insurance Act. You should verify with the in-
stitution that it is an eligible guarantor prior to signing your request.
HOW TO EXCHANGE SHARES
You may exchange shares of one Flagship Fund for shares of another within the
same Class, except for any money market fund available through Flagship, at
any time in any state where the exchange may legally be made. The Fund ac-
counts exchanged must be registered exactly the same, and you must have owned
the Fund shares you are exchanging from for at least 15 calendar days. Class A
Shares are sold and simultaneously purchased at net asset value ("NAV"). No
contingent deferred sales charge ("CDSC") is assessed on Class B or Class C
shares at the time of the exchange. The period of time you held Class B or
Class C Shares of the Fund exchanged from will be counted toward any future
CDSC when shares are redeemed.
Shareholders 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 ex-
-- 19 --
<PAGE>
change plan. Please refer to the account application to establish this plan.
This is a free service, although the Fund may at any time impose a fee, change
or terminate the exchange privilege or limit the number of exchanges you may
make.
An exchange is a sale and subsequent purchase for tax purposes. See the SAI
for more information about federal tax treatment of capital losses. Be sure to
read the Prospectus for the Fund you are exchanging into before you invest.
SHAREHOLDER SERVICES
FREE RE-ENTRY
If you have sold Class A shares of any Fund within one year and wish to rein-
vest your proceeds without incurring another initial sales charge, send a
written request to Flagship at the address shown in "How to Buy Shares." If
reopening an account by this re-entry privilege, be sure to meet the Fund's
investment minimums. There is no charge by the Fund for this service, although
your financial consultant may apply a fee.
Be sure to observe the "wash sale" rules for redemptions and exchanges from
Funds within 30 days of purchase. Consult your tax adviser.
SYSTEMATIC WITHDRAWAL PLAN
If your Fund account is valued at $10,000 or more, you may have $50 or more
sent to you, or anyone you designate, every month or calendar quarter. These
"SWP" payments are drawn from redemption proceeds from your account and may
include shares added to your account through dividend reinvestments or from
the principal value. To the extent that redemptions for such periodic with-
drawals exceed dividend income reinvested in the account, such redemptions
will reduce and may ultimately exhaust the number of shares in the account.
You should not consider a SWP if you intend to add to your SWP account concur-
rently because new purchases of Class A shares will incur a sales charge and
new Class B or Class C Shares, other than through reinvestment, will be sub-
ject to the contingent deferred sales load schedule. (Boston Financial redeems
first the principal shares purchased earliest). Similarly, use of the SWP for
Class B and Class C Shares and held for less than the contingent deferred
sales load period will result in imposition of the CDSC. To terminate your
SWP, to change the amount or frequency or to designate a new payee of your
payments, contact Flagship in writing. Boston Financial may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. Boston Financial does not
currently charge a fee against your account for this service, but could do so
upon 60 days written notice to shareholders.
DIRECT DEPOSITS
You may have dividend distributions or proceeds from your Systematic With-
drawal Plan deposited electronically into your bank account. Under normal cir-
cumstances direct deposits are credited to your account on the second business
day of the month following normal payment. In order to utilize this option,
your bank must be a member of Automated Clearing House ("ACH"). To elect di-
rect deposit, just fill out the appropriate section of the Flagship Applica-
tion inserted in this Prospectus and include a voided check from the bank ac-
count into which redemptions are to be deposited. You may terminate direct de-
posits at any time by writing to Flagship at the address shown in "How to Buy
Shares."
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value ("NAV")
of each Fund and of each class of shares of the Fund is determined as of the
close of the regular trading session on each day that the New York Stock Ex-
change is open. NAV also will be computed as of 4:00 p.m., Eastern time, on
any other day in which purchase or redemption orders are received and there is
sufficient trading in the portfolio securities of the Fund such that a Fund's
NAV might be affected. NAV per share of each Fund is calculated to the nearest
cent by adding the value of all securities and other assets of such Funds,
subtracting all of the liabilities and dividing the remainder by the number of
shares outstanding at the time of determination.
Assets of each Fund for which market quotations are readily available are val-
ued at market price. 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 Trustees.
TAXES
The Funds intend that each qualify for taxation as a separate "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and satisfy certain other requirements, so that each Fund will not be
subject to federal income tax to the extent that it distributes its income to
its shareholders. The following discussion is for general information only.
Prospective investors should consult their own tax advisers regarding tax con-
sequences of any Fund investment.
From time to time proposals have been discussed or introduced before Congress
that could, if enacted, limit the types of securities eligible to pay tax-ex-
empt interest. If the tax-exempt status of municipal obligations changes at
some future date, the Trustees may recommend changes in the fundamental objec-
tives, which would have to be approved by shareholder vote.
FEDERAL TAXATION OF DISTRIBUTIONS
If, at the close of each quarter of the taxable year of a Fund, 50% or more of
the total value of its assets consists of obligations, the interest on which
is exempt from federal income
-- 20 --
<PAGE>
tax, such Funds will be able to designate and pay "exempt-interest dividends"
to the extent of its tax-exempt interest income (less any allocable expenses).
Such dividends will be treated as interest excludable from gross income for
federal income tax purposes in the hands of the shareholders of such Funds.
Exempt-interest dividends are, however, included in determining what portion,
if any, of a person's social security benefits will be includable in gross in-
come subject to federal income tax. Interest with respect to indebtedness in-
curred or continued by a shareholder to purchase or carry shares of a Fund is
not deductible to the extent that, under regulations, it relates to exempt-in-
terest dividends of the Fund. Similarly, investment and other shareholder ex-
penses allocable to such exempt-interest dividends generally are not deduct-
ible. Any dividends paid by a Fund that are attributable to its taxable ordi-
nary income (e.g., interest on U.S. Treasury securities and net short-term
capital gain) will be taxable to the shareholders of such Funds as ordinary
income. Capital gain distributions, which are designated as distributions of a
Fund's net capital gain (i.e., the excess of net long-term capital gain over
net short-term capital loss), are treated as a long-term capital gain regard-
less of the length of time you have owned shares.
To the extent that a Fund invests in certain tax exempt "private activity" ob-
ligations issued after August 7, 1986, shareholders may be subject to the fed-
eral alternative minimum tax on the portion of exempt-interest dividends de-
rived from such obligations. Each Fund will provide information concerning the
tax status of its distributions, including the amount of its dividends desig-
nated as exempt-interest dividends and as capital gain dividends, and any ap-
plicable state tax information.
STATE TAXATION OF DISTRIBUTIONS
Except as otherwise stated earlier, shareholders in each Fund who otherwise
are subject to individual income taxes of the state named in a Fund will not
be subject to such taxes on distributions with respect to their shares to the
extent that such distributions are attributable to interest on obligations of
the state and, generally, its political subdivisions or on obligations of the
United States, Puerto Rico, the U.S. Virgin Islands or Guam. Except as other-
wise indicated, shareholders will be required to include the entire amount of
capital gain distributions in income to the same extent for state income tax
purposes as for federal income tax purposes. Shareholders are urged to consult
their own tax advisers with respect to the alternative minimum tax imposed by
certain states.
Corporations should note that ownership of shares of certain Funds may have
tax consequences not discussed herein. Accordingly, corporate shareholders are
particularly urged to consult their own tax advisers with respect to the state
and local tax consequences of investment in the shares of any Fund.
REDEMPTIONS
Redemptions of shares of each Fund will be taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between the shareholder's basis in his/her shares and
the amount received. Assuming that such shares are held as a capital asset,
such gain or loss will be a capital gain or loss and will be a long-term capi-
tal gain or loss if the shareholder has held his/her shares for a period of
more than one year. If a shareholder redeems shares of any Fund at a loss and
makes an additional investment in the same series 30 days before or after such
redemption, the loss may be disallowed under the wash sale rules.
DISTRIBUTIONS AND YIELD
DISTRIBUTIONS
Each Fund will seek to distribute all of its income each year. Each 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 shareholders 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. To have your dividend payments deposited electronically into your
bank account, see "Shareholder Services--Direct Deposits."
YIELD AND TOTAL RETURN CALCULATION
Flagship uses standardized SEC formulas to calculate the current yield and to-
tal returns of each Fund. These calculations help investors compare past per-
formance of funds they are considering for investment, while giving them con-
fidence that any particular fund's performance results are based on the same
type of data as those of another fund.
At any given time, the yields and total returns of each Flagship Fund will
vary, depending on operating expenses, the underlying securities in a Fund's
portfolio and general market conditions during the time period calculated.
Yields and total returns are always based on historic performance and do not
indicate future results. Your actual performance will vary, and your shares
may be worth less than their original cost when redeemed.
CURRENT YIELD refers to the income from an investment in a Fund over a stated
time period. It is expressed as an annual percentage rate, based on the actual
dividends paid to a shareholder as a percentage of the maximum offering price
of a share on the day that ends the performance period. The SEC yield is al-
ways a 30-day yield, net of fund expenses and adjustments (such as accretion
of original issue discounts and amortization of market premiums). When
annualized, it assumes semi-annual compounding of interest at an average daily
dividend rate over the period.
The current yields of tax-exempt income funds are often expressed in terms of
the yield an investor would have to earn in a taxable income fund to equal the
same after-tax yield once federal income taxes, and in some cases state
-- 21 --
<PAGE>
and/or local taxes, have been paid. This TAX-EQUIVALENT YIELD is calculated
within SEC guidelines and may be used in advertisements or information fur-
nished to shareholders or prospective investors, which will disclose the ac-
tual federal tax bracket and state/local income tax, property tax or intangi-
bles tax rates applied in determining the tax-equivalent yield.
AVERAGE ANNUAL TOTAL RETURN shows how much a Fund account would have grown
each year, on average, over a particular time period. Using the SEC formula,
the Fund calculates the growth of an original hypothetical investment and as-
sumes that all dividends and any capital gains distribution were used to pur-
chase more shares in an account in that Fund at net asset value (NAV). At the
end of the period, the total number of shares accrued are assumed to be sold
at NAV, less any contingent deferred sales charge. The change in the value
from the beginning to the end of the period is expressed as an average annual
rate of return. Return is always less when calculating the effects of sales
charges.
The CUMULATIVE TOTAL RETURN is the actual change in the value of an account
from the beginning to the end of an investment period, less expenses. This
performance can be expressed with or without the effects of sales charges.
ABOUT THE DISTRIBUTOR
Each Fund has entered into separate Distribution Agreements (the "Distribution
Agreements") with Flagship Funds Inc. (the "Distributor"), which has the same
address as the Manager. Accordingly, the Distributor serves as the exclusive
selling agent and distributor of each Fund's shares, and in that capacity will
make a continuous offering of the shares of the Funds and will be responsible
for all sales and promotion efforts.
The Funds have adopted a plan (the "Plan") following Rule 12b-1 under the In-
vestment Company Act of 1940 (the "Act") with respect to the Class A, Class B
and Class C Shares, which permits each Fund to pay for certain distribution
and promotion expenses related to marketing its shares. The Funds' Plan con-
forms to the requirements of the rules of the National Association of Securi-
ties Dealers, Inc. with regard to Rule 12b-1 plans.
The Plan authorizes each Fund to expend its monies in an amount equal to the
aggregate for all such expenditures to such percentage of each Fund's daily
net asset values attributable to each class of shares 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 Trustees. The scope of these activi-
ties shall be interpreted by the Trustees, whose decision shall be conclusive
except to the extent it contravenes established legal authority.
The maximum amount payable annually by any Fund under the Plan and related
agreements is 0.95% (Class A 0.40%) of such series' average daily net assets
for the year. Of this amount, 0.75% is an asset based sales charge and up to
0.20% is a service fee. In the case of broker-dealers who have selling agree-
ments with the Distributor and others, such as banks, who have service agree-
ments or bank clearing agreements with any Fund, the maximum amount payable to
any recipient is 0.00260% per day (0.95% on an annualized basis) of the pro-
portion of average daily net assets of such Fund represented by such person's
customers. A salesperson and any other person entitled to receive compensation
for selling Fund shares may receive different compensation for selling one
particular class of shares over another. The Trustees may reduce these amounts
at any time. Amounts payable by a Fund or class of shares may be lower than
the maximum and have been described previously. Expenditures related to the
Plan and agreements may reduce current yield after expenses.
Flagship Funds periodically undertakes sales promotion programs with broker-
dealers with whom it has Distribution Agreements, in which it will grant a
partial or full reallowance of its retained underwriting commission for fund
sales as permitted by applicable rules. In addition, it will support those
firms' efforts in sales training seminars, management meetings, and broker
roundtables where it has the opportunity to present Flagship's products and
services. Flagship Funds also provides recognition for outstanding sales
achievements during a year through membership in its Admiral, Captain or Yacht
Clubs which includes a membership plaque and a recognition memento. In addi-
tion, the distributor provides recognition through the awarding of imprinted
nominal promotional items; client leads; as well as "thank you" dinners and
entertainment. Its agents also typically provide food for office meetings. Un-
der appropriate terms it will share with broker-dealers a portion of the cost
of prospecting seminars and shareholder gatherings. In those situations where
there is no retained underwriting commission, i.e., on the sale of Class B,
Class C or Class R Shares, Flagship Funds 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 Funds' shares. In
the unlikely event that a court were to find that these laws also prohibit
such banks from providing services of the type contemplated by each series of
the Funds' service agreements, the Fund would seek alternative providers of
such services and expects that shareholders would not experience any disadvan-
tage. In addition, under the securities laws in some states, banks and finan-
cial institutions may be required to register as dealers following state law.
The Fund does not offer its securities in conjunction with any qualified re-
tirement plan.
Please see the SAI for more details about the distribution payment and dealer
reallowances.
-- 22 --
<PAGE>
ABOUT THE TRUST
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 8,
1985 and as amended as of September 3, 1992 and April 21, 1995. The Trust's
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares in separate Funds, each of which is deemed to be a sepa-
rate sub-trust.
Each share of each class represents an equal proportionate interest in the as-
sets of its Fund with each other share in its Fund and no interest in any
other Fund. No Fund is subject to the liabilities of any other Fund. The Dec-
laration of Trust provides that shareholders are not liable for any liabili-
ties of the Funds, requires inclusion of a clause to that effect in every
agreement entered into by the Funds, and indemnifies shareholders against any
such liability. Although shareholders of an unincorporated business trust es-
tablished under Massachusetts law may, under certain limited circumstances, be
held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of such personal lia-
bility remote.
Shares entitle their holders to one vote per share; however, separate votes
are taken by each Fund on matters affecting an individual Fund. For example, a
change in investment policy for a Fund would be voted upon by shareholders of
only the Fund involved. Shares do not have cumulative voting rights, preemp-
tive rights or any conversion or exchange rights (other than as discussed
above). Shareholders of the Trust have certain rights, as set forth in the
Declaration of Trust, including the right to call a meeting of shareholders
for the purpose of electing Trustees or voting on the removal of one or more
Trustees. Such removal can be effected upon the action of two-thirds of the
outstanding shares of beneficial interest of the Trust.
The Trustees may amend the Declaration of Trust (including with respect to any
Fund) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
Fund without approval by a majority of the shares of each affected Fund pres-
ent at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot
amend the Declaration of Trust to impose any liability on shareholders, make
any assessment on shares or impose liabilities on the Trustees without ap-
proval from each affected shareholder or Trustee, as the case may be.
ADDITIONAL INFORMATION
Please direct your inquiries to a Flagship representative:
1-800-414-7447, OR FOR TDD, 1-800-360-4521.
The Funds will issue semiannual reports containing unaudited financial state-
ments and annual reports containing audited financial statements approved an-
nually by the Board of Trustees.
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 according 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 statement being qualified in all respects by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY THE FUNDS
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.
INVESTMENT ADVISER DISTRIBUTOR
Flagship Financial Inc.
Flagship Funds Inc.
One Dayton Centre One Dayton Centre
One South Main Street
One South Main Street
Dayton, OH 45402-2030
Dayton, OH 45402-2030
CUSTODIAN, SHAREHOLDER SERVICES AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02106
COUNSEL AUDITORS
Skadden, Arps, Slate,
Deloitte & Touche LLP
Meagher & Flom
The symbolsm indicates a service mark of Flagship Tax Exempt Funds Trust owned
by Flagship Financial Inc.
(C)1996, Flagship Funds Inc. TE-A-3000 (9-26-96)
-- 23 --
<PAGE>
FLAGSHIP TAX EXEMPT FUNDS APPLICATION
PLEASE PRINT OR TYPE ALL INFORMATION
PLEASE MAIL THIS APPLICATION AND
YOUR CHECK TO:
Flagship Funds
NOTE: You must complete Sections 1, c/o Boston Financial
2, 3, 4, 5 and sign the signature P.O. Box 8509
line. Your signature is required Boston, MA 02266-8509
for processing. Complete sections
7, 8, 9, 10, 11, 12 and 13 for op-
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
[_] Corporation, Partnership, Trust or 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 Tax Exempt Fund.
Please indicate class of shares.
<TABLE>
<CAPTION>
Class of Shares
Name of Fund Amount* A** C***
<S> <C> <C> <C>
$ [_] [_]
--------------- ------------
$ [_] [_]
--------------- ------------
$ [_] [_]
--------------- ------------
</TABLE>
*Minimum of $3,000. **Front end sales charge. ***Level load. Class C Shares
are not available for all Funds. Check prospectus for availability. 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 (Contact your Dealer or Flagship Funds)
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 the Fund
------------------------------------------------------------------------------
Existing Fund Account Number
[_] Deposit dividends directly into the bank account indicated on the
attached VOIDED check (subject to terms and conditions in the prospectus).
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
------------------------------------------------------------------------------
Investment Firm
------------------------------------------------------------------------------
Financial Consultant's Name
Rep Number
------------------------------------------------------------------------------
Branch Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
()-
------------------------------------------------------------------------------
Financial Consultant's Phone Number
X
------------------------------------------------------------------------------
Signature of Financial Consultant
7. LETTER OF INTENT (Class A Shares only)
Please see information on back page.
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
-- 24 --
<PAGE>
9. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we authorize
the automatic monthly transfer of funds from my/our bank account for
investment in the above Flagship Fund. Attached is a VOIDED check from that
account.
Date for Investment (Between 5th and 28th Only)
---
$
----------------- Month to Begin Plan_______________________________________
Amount ($50 Minimum)
------------------------------------------------------------------------------
Name of Bank
------------------------------------------------------------------------------
Bank Account Number
------------------------------------------------------------------------------
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 Number
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
13. INTERESTED PARTY MAIL/DIVIDEND MAIL
[_] Send my distributions to the address listed below.
[_] Send duplicate confirmation statements to the interested party listed be-
low.
------------------------------------------------------------------------------
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 Flagship Fund(s). You will receive a con-
firmation statement shortly.
-- 25 --
<PAGE>
Prospectus dated September 26, 1996
FLAGSHIP HIGH YIELD MUNICIPAL BOND FUNDSM
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.
INVESTING IN MUTUAL FUNDS
Flagship and your financial consultant want you to understand both the bene-
fits and risks of mutual fund investing.
Mutual funds sell their shares to investors and invest the proceeds in a port-
folio of securities. A mutual fund allows you to pool your money with that of
other investors in order to obtain professional investment management which
generally enables you to obtain greater diversification of your investments
and to simplify your recordkeeping.
While mutual funds offer significant opportunities, they also carry risk, in-
cluding possible loss of principal due to interest rate risk and credit risk.
Unlike savings accounts and certificates of deposit, mutual funds are not in-
sured or guaranteed by any financial institution or government agency.
Your financial consultant can help you determine how investing in one of these
mutual funds may suit your unique needs, time horizon and risk tolerance.
TABLE OF CONTENTS PAGE
ABOUT THE FUND
<TABLE>
<S> <C>
Fees and Expenses......................................................... 2
The Fund and Its Objective................................................ 2
What the Fund Owns and Its Strategy....................................... 2
Special Considerations and Risk Factors Regarding Medium and Lower Grade
Municipal Securities..................................................... 4
How the Fund is Managed................................................... 5
ABOUT YOUR INVESTMENT
How to Buy Shares......................................................... 7
How to Sell Shares........................................................ 9
How to Exchange Shares.................................................... 9
Shareholder Services...................................................... 10
How Fund Shares are Priced................................................ 10
Taxes..................................................................... 10
Distributions and Yield................................................... 11
About the Distributor..................................................... 12
About the Trust........................................................... 13
Additional Information.................................................... 13
Flagship Application...................................................... 14
</TABLE>
ABOUT FLAGSHIP HIGH YIELD MUNICIPAL BOND FUND
Flagship Tax Exempt Funds Trustsm (the "Flagship Funds") is an open-end man-
agement investment company composed of separate series which include State,
National and Insured portfolios. This Prospectus relates to Flagship High
Yield Municipal Bond Fund (the "Fund"), a diversified series of the Flagship
Funds and one of its National Fund portfolios. The other National Fund portfo-
lios, as well as the State and Insured Fund portfolios, are described in a
separate prospectus dated September 26, 1996, available by telephoning toll-
free: 1-800-414-7447 or, for TDD, 1-800-360-4521. The investment adviser
("Manager") for the Fund is Flagship Financial Inc., a registered investment
adviser since 1978.
On July 16, 1996, Flagship Resources Inc. ("Flagship"), parent of the Manager
for the Fund, signed an Agreement and Plan of Merger with The John Nuveen Com-
pany, pursuant to which Flagship shall be merged with and into The John Nuveen
Company. The transaction is expected to close on or about November 30, 1996.
The Fund's board of trustees has approved the transaction, which is contingent
upon shareholder approval of new advisory agreements. It is anticipated that
after the transaction the same management team will continue to manage the
Fund, and there will be no material changes in portfolio investment objectives
or policies.
The Fund seeks high current after tax income exempt from federal income taxes
consistent with liquidity and preservation of capital. The Fund invests pri-
marily in medium and lower grade municipal securities rated between BBB and B-
(inclusive) by Standard & Poor's Ratings Group, Baa and B3 (inclusive) by
Moody's Investors Service, Inc., comparably rated short-term municipal obliga-
tions and municipal securities determined by the Fund's Manager to be of com-
parable quality. These are commonly referred to as "junk bonds".
INVESTMENT IN MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES INVOLVES SPECIAL
RISKS AS COMPARED WITH INVESTMENT IN HIGHER GRADE MUNICIPAL SECURITIES, IN-
CLUDING POTENTIALLY GREATER SENSITIVITY TO A GENERAL ECONOMIC DOWNTURN,
GREATER MARKET PRICE VOLATILITY AND LESS LIQUID SECONDARY MARKET TRADING. IN-
VESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
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 ("SAI") dated September 26, 1996, con-
taining more detailed information about the Flagship Funds (including the
Fund), has been filed with the Securities and Exchange Commission and is in-
corporated herein by reference, making it a part of this Prospectus. A copy of
the SAI can be obtained without charge by telephoning the Flagship Funds at
the above-referenced phone numbers.
-- 1 --
<PAGE>
FEES AND EXPENSES
Various costs and expenses may be incurred directly or indirectly when invest-
ing in the Fund. Your future expenses could be more or less than those in the
table below. Data reflects the declining sales charge Flagship utilizes for
Class A Shares, a contingent deferred sales charge (CDSC) for Class B and
Class C Shares and a non-fee, no-load structure for institutional investors
for Class R Shares. The amounts are based on estimates and assume management
fee waiver. In addition, the Manager has agreed to reimburse the Fund for any
initial
period's total fund operating expenses in excess of the amounts set forth in
the table. No reimbursement is currently indicated. Class R Shares are subject
to a minimum purchase requirement of $1,000,000. If investing for the long
term, shareholders of Class B and Class C Shares could ultimately pay more
fees than if they had invested at the maximum sales charge in Class A Shares.
Class B Shares automatically convert to Class A Shares after eight years. The
Fund's 12b-1 plan and management fee are more fully described under "How The
Fund is Managed", and "About the Distributor" respectively.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS AFTER
TRANSACTION EXPENSE FEE WAIVERS & REIMBURSEMENT ARRANGEMENTS
---------------------- -----------------------------------------
MAXIMUM TOTAL FUND
FRONT END OPERATING
SALES MAXIMUM EXPENSES
CHARGE CDSC TOTAL FUND WITHOUT
IMPOSED ON IMPOSED ON MANAGEMENT OTHER OPERATING WAIVER OR
CLASS PURCHASES REDEMPTIONS FEE 12B-1 FEE EXPENSES EXPENSES REIMBURSEMENT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 4.2% N/A% 0.40% 0.40% 0.15% 0.95% 1.05%
B N/A 5.0(c) 0.40 0.95(b) 0.15 1.50 1.60
C(a) N/A 1.0 0.40 0.95(b) 0.15 1.50 1.60
R N/A N/A 0.40 N/A 0.15 0.55 .65
</TABLE>
(a) No initial sales load; 1% contingent deferred sales charge if redeemed
within 1 year of purchase. Example of expenses would be $10 less in year
1 if no redemption occurs.
(b) Of this amount, 0.75% is an asset based sales charge and 0.20% is a
service fee.
(c) No initial sales load; contingent deferred sales charge of 5% declining to
1% in the 6th year if redeemed. Class B expenses in years 9 through 10 are
based on Class A expenses, because the shares automatically convert to
Class A after 8 years. If you did not redeem, the example of expenses
would be $52, $44, and $24 less in years 1, 3 and 5 respectively.
<TABLE>
Example <CAPTION>
CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----- ------ ------- ------- --------
<S> <C> <C> <C> <C>
A $51 $71 $ 92 $154
B 67 93 108 168
C 25 48 82 180
R 6 18 30 68
</TABLE>[/R]
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.
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses that an investor will bear directly or indirectly.
These expenses should not be considered a representation of actual future
expenses as future actual expenses may be greater or less than those shown.
THE FUND AND ITS OBJECTIVE
The Fund is a diversified series of the Flagship Funds and is actively, pro-
fessionally managed, independent of the other funds within the Flagship Funds
family.
The Fund will seek high current after tax income free from federal ordinary
income tax consistent with liquidity and preservation of capital by investing
in a nationally diversified portfolio of primarily medium and lower grade mu-
nicipal obligations. The foregoing is fundamental to the Fund and cannot be
changed without shareholder approval. There is no assurance that the Fund will
achieve its investment objective. An investment in the Fund may not be appro-
priate for all investors. The Fund is not intended to be a complete investment
program, and investors should consider their long-term investment goals and
financial needs when making an investment decision with respect to the Fund.
An investment in the Fund is not intended to be used as a trading vehicle.
A portion of dividend income paid from securities issued by your state of res-
idence or U.S. Territories may be exempt from state or local income taxes. As
a municipal bond fund, there is no limitation on the amount of assets invested
whose interest may be subject to the federal alternative minimum tax.
WHAT THE FUND OWNS AND ITS STRATEGY
FUND HOLDINGS
The Fund may purchase B-/B3 or better and equivalent non rated securities. De-
faulted securities that do not meet above mentioned quality criteria will not
be considered for purchase. Securities within the stated quality parameters
which are currently or have previously been in default may be acquired. These
securities are considered more speculative and as such are riskier. The two
primary types of tax exempt bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's full faith, credit and taxing
power. Revenue or special obligation bonds are payable only from the revenues
derived from a particular facility or type of facilities or, in some cases,
from the proceeds of a special tax or other identified revenue source. Obliga-
tions of territories and possessions of the United States (such as Puerto Ri-
co, Guam and the United States Virgin Islands) also qualify for investment by
the Fund. From time to time, the Fund may also invest up to 10% of its assets
in tax exempt funds, including tax exempt money market funds, subject to the
requirements of applicable law. Such investments will result in shareholders
paying duplicate or multiple fees, as such funds incur expenses similar to
those of the Fund. The Manager will only
-- 2 --
<PAGE>
invest in such funds when it believes their yields are beneficial, even in-
cluding multiple fees.
It is possible that from time to time the Fund will invest more than 25% of
its assets in a particular segment of the municipal bond market, such as Hos-
pital Revenue Bonds, Housing Agency Bonds, Industrial Development Bonds, Air-
port Bonds or U.S. Territorial Bonds. In such circumstances, economic, busi-
ness, political or other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market or credit
risk.
The Fund may invest in municipal leases, which are leases or installment pur-
chases used by state and local governments as a means to acquire property,
equipment or facilities without involving debt issuance limitations. It is
possible that more than 5% of the Fund's net assets will be invested in munic-
ipal leases which, under Securities and Exchange Commission ("SEC") guide-
lines, have been determined to be liquid securities by the Board of Trustees
of the Flagship Funds or by the Manager under procedures established by the
Trustees. See the SAI for more details and a discussion of the special risks
of investing in these securities.
QUALITY
The Fund may invest in medium and lower grade municipal securities rated, at
the time of investment, between BBB and B- (inclusive) by Standard & Poor's
Ratings Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service,
Inc. ("Moody's"), comparably rated short-term municipal obligations and munic-
ipal securities determined by the Manager to be of comparable quality.
Medium grade municipal securities are those rated BBB by S&P or Baa by
Moody's, in comparably rated short-term municipal obligations and in municipal
securities determined by the Manager to be of comparable quality. Municipal
securities rated BBB by S&P generally are regarded by S&P as having an ade-
quate capacity to pay interest and repay principal; adverse economic condi-
tions or changing circumstances are, however, more likely in S&P's view to
lead to a weakened capacity to pay interest and repay principal as compared
with higher rated municipal securities. Municipal securities rated Baa by
Moody's generally are considered by Moody's as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. In Moody's view, inter-
est payments and principal security appear adequate for the present but cer-
tain protective elements may be lacking or may be characteristically unrelia-
ble over any great length of time. In Moody's view, such securities lack out-
standing investment characteristics and have speculative characteristics as
well.
The Fund may invest in lower grade municipal securities rated, at the time of
investment, either not lower than B- by S&P or not lower than B3 by Moody's,
in comparably rated short-term municipal obligations and in municipal securi-
ties determined by the Manager to be of comparable quality. Municipal securi-
ties rated B by S&P generally are regarded by S&P, on balance, as predomi-
nantly speculative with respect to capacity to pay interest or repay principal
in accordance with the terms of the obligation. While such securities will
likely have some quality and protective characteristics, in S&P's view these
are outweighed by large uncertainties or major risk exposure to adverse condi-
tions. Securities rated B by Moody's are viewed by Moody's as generally lack-
ing characteristics of the desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the con-
tract over any long period of time may be small.
The Fund will not make initial investments in municipal securities rated, at
the time of investment, below B- by S&P and below B3 by Moody's, in comparably
rated short-term municipal obligations or in municipal securities determined
by the Manager to be of comparable quality. The Fund may retain municipal se-
curities which are downgraded after investment. There is no minimum rating
with respect to municipal securities which may be retained in the Fund's port-
folio, and the Fund may thus hold securities that are in default, or with re-
spect to which payment of interest and/or repayment of principal is in ar-
rears.
For a description of such ratings, see Appendix I to the SAI.
MATURITY
The Fund is a long-term portfolio whose dollar-weighted average maturity is 15
to 25 years. The Fund does not have any restrictions on the maturity of the
obligations in its portfolio and may lengthen or shorten the average dollar
weighted maturity in light of market conditions and the Manager's expecta-
tions. Under certain circumstances the Fund may invest in nominally long-term
securities that have many of the features of shorter-term securities, and the
maturities of these securities would be deemed to be earlier than their ulti-
mate maturity dates by virtue of an existing demand feature.
NAV AND YIELD VARIATIONS
Yields on tax-exempt securities vary depending on a variety of factors, in-
cluding the general condition of the financial markets and of the tax-exempt
securities market in particular, the size of a particular offering, the matu-
rity of the obligation and the creditworthiness of the issue. Generally, tax-
exempt securities of longer maturities, as measured by their duration, produce
higher current yields, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors than are
tax-exempt securities with shorter maturities. Similarly, lower-rated tax-ex-
empt securities generally produce a higher yield than better-rated tax-exempt
securities, due to the perception of a greater degree of risk in the ability
of the issuer to pay principal and interest obligations. The value of a port-
folio of fixed income securities generally fluctuates inversely with changes
in interest rates. When interest rates increase, the value of fixed income se-
curities generally decreases and when interest rates decrease, the value of
fixed income securities generally increases.
-- 3 --
<PAGE>
HEDGING AND OTHER DEFENSIVE ACTIONS
Hedging is a term used for various methods of seeking to preserve portfolio
capital value by offsetting price changes in one investment by making another
investment whose price should tend to move in the opposite direction. The
Trustees and Manager believe it is desirable to partially hedge the Fund's
portfolio against adverse changes in market value in various market environ-
ments.
The Fund will not engage in hedging transactions for speculative purposes.
Only index and financial futures, as well as related "put' and "call' options
on them, will be used to protect portfolio capital values. The Fund will not
purchase exotic derivative securities.
. An index future is a contract to buy or sell units of a particular securi-
ties index at an agreed upon price on a specified future date, and is settled
in cash.
. A financial future is similar to an index future, except the trade is set-
tled with the underlying securities.
. Put features let the holder sell back a security to the issuer or a finan-
cial intermediary in exchange for periodic fees or a lower interest rate. The
put provider can impact the creditworthiness of the put security.
. An option on an index or financial future gives the holder the right to take
over the seller's position in the future's contract at an agreed upon option
price.
The above securities and the risk of transacting them are described more fully
in the SAI.
The Fund reserves the right, if necessary in the judgment of the Trustees and
the Manager for liquidity or defensive purposes (such as an inadequate market
for municipal securities or an expected substantial decline in value of long-
term obligations), to temporarily invest up to 20% of its assets in obliga-
tions issued or guaranteed by the U.S. Government and its agencies or instru-
mentalities, including up to 5% in related, adequately collateralized repur-
chase agreements. Such investments may result in lower current income than if
the Fund were fully invested in medium and lower grade securities.
"WHEN ISSUED" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when issued"
and "delayed delivery" basis. These transactions are subject to market fluctu-
ation; the value at delivery may be more or less than the purchase price.
Since the Fund relies on the buyer or seller to consummate the transaction,
failure by the other party to complete the transaction may result in the Fund
missing the opportunity of obtaining a price or yield considered to be advan-
tageous. When the Fund is the buyer in such a transaction, however, it will
maintain with its custodian cash or segregate high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments un-
til payment is made. If the Fund engages in "when issued" and "delayed deliv-
ery" 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.
NONPUBLIC SECURITIES
The Fund may invest in securities that are subject to restrictions on disposi-
tion under the Securities Act of 1933 or for which market quotations are not
readily available up to the amounts permitted by applicable law, including up
to 5% in adequately collateralized repurchase agreements of more than seven-
day maturity.
BORROWING
The Fund reserves the right to borrow from banks up to 10% of the value of its
assets for extraordinary or emergency purposes or to meet unexpectedly heavy
redemption requests and to secure such borrowings to the extent required by
agreement or law.
PORTFOLIO TRANSACTIONS
The Fund will not seek capital gain or appreciation. However, the Fund may
sell securities held in its portfolio and, as a result, realize capital gain
or loss, for the following purposes: to eliminate unsafe investments and those
not consistent with the preservation of the capital or tax status of the Fund;
to honor redemption orders, meet anticipated redemption requirements and ne-
gate gains from discount purchases; to reinvest earnings from portfolio secu-
rities in like securities; or to defray normal administrative expenses.
SPECIAL CONSIDERATIONS AND RISK FACTORS REGARDING MEDIUM AND LOWER GRADE
MUNICIPAL SECURITIES
Municipal securities which are in the medium and lower grade categories gener-
ally offer a higher current yield than is offered by higher grade municipal
securities, but they also generally involve greater price volatility and
greater credit and market risk. Credit risk relates to the issuer's ability to
make timely payment of interest and principal when due. Market risk relates to
the changes in market value that occur as a result of variation in the level
of prevailing interest rates and yield relationships in the municipal securi-
ties market. Debt securities rated BB or below by S&P and Ba or below by
Moody's are commonly referred to as "junk bonds".
The value of the Fund's portfolio securities can be expected to fluctuate over
time. When interest rates decline, the value of a portfolio invested in fixed
income securities generally can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in fixed income securities gen-
erally can be expected to decline. However, the secondary market prices of me-
dium and lower grade municipal securities are less sensitive to changes in in-
terest rates and are more sensitive to adverse economic changes or individual
issuer developments than are the secondary market prices of higher grade debt
securities. A significant increase in interest rates or a general economic
downturn could severely disrupt the market for medium and lower
-- 4 --
<PAGE>
grade municipal securities and adversely affect the market value of such secu-
rities. Such events also could lead to a higher incidence of defaults by is-
suers of medium and lower grade municipal securities as compared with histori-
cal default rates. In addition, changes in interest rates and periods of eco-
nomic uncertainty can be expected to result in increased volatility in the
market price of the municipal securities in the Fund's portfolio and thus in
the net asset value of the Fund. Moreover, adverse publicity and investor per-
ceptions, whether or not based on rational analysis, may affect the value and
liquidity of medium and lower grade municipal securities. The secondary market
value of municipal securities structured as zero coupon securities may be more
volatile in response to changes in interest rates than debt securities which
pay interest periodically in cash.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium and lower grade municipal securities to pay
interest and to repay principal, to meet projected financial goals and to ob-
tain additional financing. In the event that an issuer of securities held by
the Fund experiences difficulties in the timely payments of principal or in-
terest and such issuer seeks to restructure the terms of its borrowings, the
Fund may incur additional expenses and may determine to invest additional as-
sets with respect to such issuer or the project or projects to which the
Fund's portfolio securities relate. Further, the Fund may incur additional ex-
penses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio hold-
ings, and the Fund may be unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the me-
dium or lower grade municipal securities in which the Fund may invest, trading
in such securities may be relatively inactive. The Manager is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees. During periods of reduced market liquidity and in the ab-
sence of readily available market quotations for medium and lower grade munic-
ipal securities held in the Fund's portfolio, the ability of the Manager to
value the Fund's securities becomes more difficult and the Manager's use of
judgment may play a greater role in the valuation of the Fund's securities due
to the reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on se-
curities for which such a market does exist. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated
value than would be the case for securities for which an established retail
market does exist.
The Manager seeks to minimize the risks involved in investing in medium and
lower grade municipal securities through portfolio diversification, careful
investment analysis, and attention to current developments and trends in the
economy and financial and credit markets. The Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an is-
sue. In its analysis, the Manager will take into consideration the factors it
considers pertinent, which may include, among other things, the issuer's fi-
nancial resources, its sensitivity to economic conditions and trends, its op-
erating history, the quality of the issuer's management and regulatory mat-
ters. The Manager may consider the credit ratings of Moody's and S&P in evalu-
ating municipal securities, although it does not rely primarily on these rat-
ings. Such ratings evaluate only the safety of principal and interest pay-
ments, not market value risk. Additionally, because the creditworthiness of an
issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, the Manager continuously monitors the issuers of municipal
securities held in the Fund's portfolio.
Municipal securities generally are not listed for trading on any national se-
curities exchange, and many issuers of medium and lower grade municipal secu-
rities choose not to have a rating assigned to their obligations by any na-
tionally recognized statistical rating organization. The amount of information
available about the financial condition of an issuer of unlisted or unrated
securities generally is not as extensive as that which is available with re-
spect to issuers of listed or rated securities. Because of the nature of me-
dium and lower rated municipal securities, achievement by the Fund of its in-
vestment objective may be more dependent on the credit analysis of the Manager
than is the case for an investment company which invests primarily in exchange
listed, higher grade securities.
HOW THE FUND IS MANAGED
The Fund's activities are managed under the direction of the Trustees. The
Manager is Flagship Financial Inc., whose principal business address is One
Dayton Centre, One South Main Street, Dayton, Ohio 45402-2030. The Manager is
a wholly-owned subsidiary of Flagship Resources Inc., which is owned and/or
controlled by Bruce P. Bedford and Richard P. Davis and members of their imme-
diate families. Each of Messrs. Bedford and Davis is a Trustee and officer of
the Flagship Funds (which includes the Fund) and an officer and Director of
the Manager and the Distributor. In accordance with the terms of the Invest-
ment Advisory Agreement with the Fund (the "Advisory Agreement"), the Manager
renders investment supervisory and corporate administrative services to the
Fund, subject to the general supervision of the Trustees and in conformity
with the stated policies of the Fund. It is the responsibility of the Manager
to make investment decisions and to place the purchase and sale orders for the
portfolio transactions for the Fund.
The Flagship Funds have adopted a Code of Ethics regarding restrictions on the
investment activity of specified "Investment Personnel." These include re-
strictions on personal investing, pre-clearance of trades, sanctions and
disgorgement of certain profits, as well as prohibitions on short-swing prof-
its, investments in initial public offerings and holding public directorships.
The Manager's Investment Policy Committee, composed of all of the portfolio
managers and principal executive officers,
-- 5 --
<PAGE>
meets monthly to review the domestic economic outlook and the status of finan-
cial markets and to set the policy guidelines for the management of the Flag-
ship Funds (which includes the Fund). All investment grade securities pur-
chased must pass certain screening criteria by the portfolio managers and are
continuously monitored to various degrees by the Credit Research Department
analysts. Before any non-investment grade security may be considered for pur-
chase, it must pass the scrutiny and receive the approval of Credit Research
Department analysts. Implementation, trading, and temporary modification of
each Fund's strategy is the function of a small team of portfolio managers.
Because of the special risk considerations of the Fund, it will be managed by
a team composed of two senior Credit Research Department employees and one se-
nior portfolio manager. The team is composed of Terry Trim, Vice President and
Director of Credit Research, Brian Ehlers, Vice President and Senior Credit
Analyst, and Vice President and Portfolio Manager Michael Davern. Prior to Oc-
tober, 1992, Terry Trim was 1st Vice President and Vice President, Research
for Van Kampen Merritt Investment Advisory Corp. (Chicago, IL). Brian Ehlers
has been employed by the Manager since August, 1987. Prior to September, 1991,
Michael Davern was Assistant Vice President, Van Kampen Merritt Inc. (Chicago,
IL).
In addition, the Manager performs or supervises the administrative services
for the Fund, including: (i) assisting in supervising all aspects of its oper-
ations; (ii) providing the Fund, at the Manager's expense, with persons compe-
tent to perform necessary, effective corporate administrative and clerical
functions; and (iii) providing the Fund, at the Manager's expense, with ade-
quate office space and related services. Accounting records are maintained, at
the Fund's expense, by its Custodian, State Street Bank and Trust Company.
As compensation for the services rendered by the Manager under the Advisory
Agreement, the Manager is paid a fee, computed daily and payable monthly with
respect to the Fund, at an annual rate of 0.70% of the average daily net as-
sets of the Fund. Please see "Fees and Expenses" for the total expenses for
the Fund (or class of shares if applicable), expressed as a percentage of av-
erage net assets.
The Manager, which has been a registered investment adviser since 1978, also
renders investment advisory and management services to others. The Manager
manages approximately $4.6 billion in assets, primarily of mutual funds, cor-
porations, insurance companies, employee benefit plans and individuals. The
Manager is investment adviser to Flagship Funds, with assets of approximately
$4.0 billion and to Flagship Admiral Funds Inc., an investment company with
assets of approximately $225 million. All assets are as of June 30, 1996.
HOW TO CONTACT FLAGSHIP
----------------------------------
FOR GENERAL INFORMATION:
Call toll free from anywhere in
the U.S.
8:00 a.m. to 6:00 p.m. Eastern
time
1-800-414-7447
FOR REDEMPTIONS AND OTHER
TRANSACTIONS:
Call toll free from anywhere in
the U.S.
9:00 a.m. to 5:00 p.m. Eastern
time
1-800-225-8530
(TDD) 1-800-360-4521
SEND YOUR INVESTMENTS AND ALL
REQUESTS TO:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
-- 6 --
<PAGE>
HOW TO BUY SHARES
PURCHASE PRICE
Shares of the Fund are offered continuously at a public offering price that is
equal to the net asset value per share plus any applicable sales charge. You
pay the sales charge (1) at the time of purchase (Class A Shares) or (2) on a
contingent deferred basis (Class B and Class C Shares). The Class R Shares are
designed for institutional investors, with a minimum initial investment of
$1,000,000. The R Shares are sold at net asset value with no front-end sales
load, no contingent deferred sales charge and no Rule 12(b)-1 charge. When
placing purchase orders, you must specify whether the order is for Class A,
Class B, Class C or Class R Shares. All unspecified purchase orders will auto-
matically be invested in Class A Shares. Any order in an amount of $1,000,000
or more must be for Class A Shares (except for Class R Shares).
The minimum purchase required to open an account in the Fund is $3,000. Addi-
tional purchases of $50 or more may be
made through your financial consultant or by mail at any time.
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 breakpoint in sales.
<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.
CLASS A SHARES
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
for long maturity funds is 5%, 4%, 4%, 3%, 2% and 1% for years one through
six. Class B Shares automatically convert to Class A Shares at the end of
eight years. The conversion is based on the relative net asset value of the
two classes, and no sales load or other charge is imposed.
In addition to the sales charge of .75%, 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 a sales commission of 3.80% of the
purchase price to dealers from its own resources at the time of sale.
CLASS C SHARES
Class C Shares are offered at net asset value, without an initial sales
charge, subject to a continuing 0.95% annual distribution fee for the Fund (of
which 0.75% is an asset based sales charge and 0.20% is a service fee). Class
C Shares are subject to a contingent deferred sales charge ("CDSC") of 1% if
redeemed within one year of the purchase date. The first year, the annual dis-
tribution fee is paid to the Distributor. In subsequent years, the service fee
is paid to the Distributor and the remainder is paid to the Dealer.
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 trustees of the Fund; bona
fide, full-time and retired employees of Flagship, and subsidiaries thereof,
or their immediate family members; any person who, for at least 90 days, has
-- 7 --
<PAGE>
been an officer, director or bona fide employee of any Authorized Dealer, or
their immediate family members; officers and directors of bank holding compa-
nies 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, fi-
nancial planners or other financial intermediaries that charge periodic or as-
set-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares with-
out a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Flagship Funds Inc. (the "Distributor") for
distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and, conse-
quently, holders of Class R Shares may not receive the same types or levels of
services from Authorized Dealers. In choosing between Class A Shares and Class
R Shares, you should weigh the benefits of the services to be provided by Au-
thorized Dealers against the annual service fee imposed upon the Class A
Shares.
BUYING THROUGH YOUR FINANCIAL CONSULTANT
To purchase shares through your financial consultant, you should request that
the firm transmit your order for the appropriate dollar amount or number of
shares with your check or wire.
BUYING BY MAIL
To open a new account, please complete the enclosed Flagship Application and
mail it with your check to the address shown.
Make your check payable to Flagship High Yield Municipal Bond Fund. Your order
will be executed on the day your check is received, processed at the public
offering price based on the net asset value per share plus the applicable
sales charge next determined.
All purchases made by check should be in US dollars. Third-Party checks will
not be accepted.
The Fund executes purchase orders received in good order immediately prior to
declaration of the daily dividend as of the close of business on the day the
order is received. Payments by wire will begin to earn dividends on the busi-
ness 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 Sell Shares" and "Distributions and
Yield." Because dividends do not begin until payment is received, you should
request your financial consultant to forward payment promptly. To the extent
your securities account or bank account is charged for your purchase before
the Fund receives funds, your financial consultant or bank may be earning in-
terest on your funds. The Fund reserves the right to reject any order for
shares. The Fund may, in its sole discretion, accept in-kind payments.
AUTOMATIC INVESTMENT PLAN
The Fund offers shareholders who receive a quarterly statement from Flagship
the convenience of automatic monthly investing. On any regular business day
between the fifth and twenty-eighth of each month, the amount you specify ($50
minimum) will be transferred from your bank account to the Fund. To initiate
your automatic investment plan, complete the Flagship Application and attach a
voided check. The Fund pays the cost associated with these transfers, but re-
serves the right, upon 90 days written notice, to make reasonable charges for
this service. Your bank may charge for debiting your account. Shareholders may
change the amount or discontinue their participation in the plan by written
notice to Boston Financial 30 days prior to fund transfer date. Because a
sales charge is applied on new Class A Shares purchased, it would be disadvan-
tageous to purchase Class A Shares while also making systematic withdrawals.
REDUCED SALES CHARGES
The Fund's Distributor offers several reduced sales charge programs through:
. rights of accumulation and combinations
. letter of intent
. group purchases
. redemptions from unrelated funds
Letter of intent is explained below. Please see the SAI for additional infor-
mation.
LETTER OF INTENT (CLASS A SHARES ONLY)
A shareholder may qualify for reduced sales charges on Class A shares by com-
pleting the Letter of Intent section on the application form. All investments
in Class A shares of the Fund count toward the indicated goal. It is under-
stood that 5% of the dollar amount checked on this application will be held in
a special escrow account. These shares will be held by the escrow agent sub-
ject to the terms of the escrow. All dividends and capital gains distributions
on the escrowed shares will be credited to the shareholder's account in
shares. If the total purchases, less redemptions by the shareholder, his or
her spouse, children and parents, equal the amount specified under this Let-
ter, the shares held in escrow will be deposited to the shareholder's open ac-
count or delivered to the shareholder or to his order. If the total purchases,
less redemptions, exceed the amount specified under this Letter and an amount
which would qualify for a further discount, a retroactive price adjustment
will be made by Flagship Funds Inc. and the dealer through whom purchases were
made pursuant to this Letter of Intent (to reflect such further quantity dis-
count). The resulting difference in offering price will be applied to the pur-
chase of additional shares at the offering price applicable to a single pur-
chase of the
-- 8 --
<PAGE>
dollar amount of the total purchase. If the total purchases less redemptions
are less than the amount specified under this Letter, the shareholder will re-
mit to Flagship Funds Inc. an amount equal to the difference in the dollar
amount of sales charge actually paid and the amount of sales charge which
would have applied to the aggregate purchases if the total of such purchases
had been made at a single time. Upon such remittance, the shares held for the
shareholder's account will be deposited to his account or delivered to him or
to his order. If within 20 days after written request by Flagship such differ-
ence in sales charge is not paid, Flagship is hereby authorized to redeem an
appropriate number of shares to realize such difference. Flagship Funds Inc.
is hereby irrevocably constituted under this Letter of Intent to effect such
redemption as agent of the shareholder. The shareholder or the shareholder's
dealer will inform Boston Financial that this Letter is in effect each time a
purchase is made.
HOW TO SELL SHARES
You can arrange to take money out of your Flagship account by redeeming (sell-
ing) some or all of your shares on any day the New York Stock Exchange is
open, either through your financial consultant or directly.
Upon receipt of your request in good order by Boston Financial through one of
the methods discussed below, the Fund will redeem shares at their next deter-
mined net asset value. See "How Fund Shares are Priced". Proceeds of redemp-
tions of recently purchased shares may be delayed for 15 days or more, pending
collection of funds for the initial purchase. If you sell all shares owned,
the dividends declared during the month through the time of redemption will be
included in the remittance.
The sale of shares is a taxable transaction for federal and state income tax
purposes. Please see the SAI.
SELLING SHARES THROUGH FINANCIAL CONSULTANTS
You may sell shares through any financial consultant who has a Selling Agree-
ment with the Distributor. Your financial consultant must receive your request
before 4:00 p.m. Eastern time to receive that day's price. Your financial con-
sultant is responsible for furnishing all necessary documentation to Flagship
and may charge you for this service.
SELLING SHARES DIRECTLY
BY TELEPHONE. If you authorized the Telephone Redemption Service on your Ap-
plication, you may sell shares by calling toll-free 1-800-225-8530, OR FOR
TDD, 1-800- 360-4521.
For funds to be wired (minimum $5,000, maximum $50,000), your completed bank
account information from the Application must already be on file with Flag-
ship.
The Fund's purchase Application relieves the Fund and the Transfer Agent (Bos-
ton Financial) of any liability for loss, costs or expenses arising out of
telephone redemptions that are believed to be valid. The shareholder will uni-
laterally bear the risk of such transactions. 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 unau-
thorized instructions. The procedures include requiring a form of personal
identification prior to acting on telephone instructions, recording such in-
structions and providing written confirmation of such transactions.
BY MAIL. Write a letter of instruction with the following information: your
name, account number, dollar or share amount to be sold. Send it, along with
any certificates for shares to be sold, to the address shown on page 6.
Payment will be made by check to you at the address on your most recent Appli-
cation. Checks will normally be sent out within one business day, but in no
event more than seven days after the receipt of your redemption request in
good order. For requests over $50,000, or if the registration on your account
has been changed within the past 60 days, or if the redemption proceeds are to
go to an address other than the address of record, the Fund must receive a
letter of instruction signed by all persons authorized to sign for the account
exactly as it is registered. All signatures must be guaranteed.
SIGNATURE GUARANTEE
Boston Financial may require a signature guarantee on certain written transac-
tion requests. A signature guarantee may be executed by any eligible guaran-
tor. Eligible guarantors include member firms of a domestic stock exchange,
commercial banks, trust companies, savings associations and credit unions as
defined by the Federal Deposit Insurance Act. You should verify with the in-
stitution that it is an eligible guarantor prior to signing your request.
HOW TO EXCHANGE SHARES
You may exchange shares of the Fund for any other Flagship Fund within the
same Class, except for any money market fund available through Flagship, at
any time in any state where the exchange may legally be made. The Fund ac-
counts exchanged must be registered exactly the same, and you must have owned
the Fund shares you are exchanging from for at least 15 calendar days. Class A
Shares are sold and simultaneously purchased at net asset value (NAV). No con-
tingent deferred sales charge (CDSC) is assessed on Class B or Class C shares
at the time of the exchange. The period of time you held Class B or Class C
Shares of the Fund exchanged from will be counted toward any future CDSC when
shares are redeemed.
Shareholders 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.
-- 9 --
<PAGE>
This is a free service, although the Fund may at any time impose a fee, change
or terminate the exchange privilege or limit the number of exchanges you may
make.
An exchange is a sale and subsequent purchase for tax purposes. See the SAI
for more information about federal tax treatment of capital losses. Be sure to
read the Prospectus for the fund you are exchanging into before you invest.
SHAREHOLDER SERVICES
FREE RE-ENTRY
If you have sold Class A shares of any Flagship Fund within one year and wish
to reinvest your proceeds without incurring another initial sales charge, send
a written request to Flagship at the address shown in "How to Buy Shares." If
reopening an account by this re-entry privilege, be sure to meet the fund's
investment minimums. There is no charge by the fund for this service, although
your financial consultant may apply a fee.
Be sure to observe the "wash sale" rules for redemptions and exchanges from
funds within 30 days of purchase. Consult your tax adviser.
SYSTEMATIC WITHDRAWAL PLAN
If your Fund account is valued at $10,000 or more, you may have $50 or more
sent to you, or anyone you designate, every month or calendar quarter. These
"SWP" payments are drawn from redemption proceeds from your account and may
include shares added to your account through dividend reinvestments or from
the principal value. To the extent that redemptions for such periodic with-
drawals exceed dividend income reinvested in the account, such redemptions
will reduce and may ultimately exhaust the number of shares in the account.
You should not consider a SWP if you intend to add to your SWP account concur-
rently because new purchases of Class A shares will incur a sales charge and
new Class B or Class C Shares, other than through reinvestment, will be sub-
ject to the contingent deferred sales load schedule (Boston Financial redeems
first the principal shares purchased earliest). Similarly, use of the SWP for
Class B and Class C Shares and held for less than the contingent deferred
sales load period will result in imposition of the CDSC. To terminate your
SWP, to change the amount or frequency or to designate a new payee of your
payments, contact Flagship in writing. Boston Financial may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. Boston Financial does not
currently charge a fee against your account for this service, but could do so
upon 60 days written notice to shareholders.
DIRECT DEPOSITS
You may have dividend distributions or proceeds from your Systematic With-
drawal Plan deposited electronically into your bank account. Under normal cir-
cumstances direct deposits are credited to your account on the second business
day of the month following normal payment. In order to utilize this option,
your bank must be a member of Automated Clearing House ("ACH"). To elect di-
rect deposit, just fill out the appropriate section of the Flagship Applica-
tion inserted in this Prospectus and include a voided check from the bank ac-
count into which redemptions are to be deposited. You may terminate direct de-
posits at any time by writing to Flagship at the address shown in "How to Buy
Shares."
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value ("NAV")
of the Fund and of each class of shares of the Fund is determined as of the
close of the regular trading session on each day that the New York Stock Ex-
change is open. NAV also will be computed as of 4:00 p.m., Eastern time, on
any other day in which purchase or redemption orders are received and there is
sufficient trading in the portfolio securities of the Fund such that the
Fund's NAV might be affected. NAV per share of the Fund is calculated to the
nearest cent by adding the value of all securities and other assets of the
Fund, subtracting all of the liabilities and dividing the remainder by the
number of shares outstanding at the time of determination.
Assets of the Fund for which market quotations are readily available are val-
ued at market price. 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 Trustees.
TAXES
The Fund intends to qualify for taxation as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), and satisfy
certain other requirements, so that it will not be subject to federal income
tax to the extent that it distributes its income to its shareholders. The fol-
lowing discussion is for general information only. Prospective investors
should consult their own tax advisers regarding tax consequences of an invest-
ment in any Flagship Fund.
From time to time proposals have been discussed or introduced before Congress
that could, if enacted, limit the types of securities eligible to pay tax-ex-
empt interest. If the tax-exempt status of municipal obligations changes at
some future date, the Trustees may recommend changes in the fundamental objec-
tives, which would have to be approved by shareholder vote.
FEDERAL TAXATION OF DISTRIBUTIONS
If, at the close of each quarter of the taxable year of the Fund, 50% or more
of the total value of its assets consists of obligations, the interest on
which is exempt from federal income tax, the Fund will be able to designate
and pay "ex-
-- 10 --
<PAGE>
empt-interest dividends" to the extent of its tax-exempt interest income (less
any allocable expenses). Such dividends will be treated as interest excludable
from gross income for federal income tax purposes in the hands of the share-
holders of the Fund. Exempt-interest dividends are, however, included in de-
termining what portion, if any, of a person's social security benefits will be
includable in gross income subject to federal income tax. Interest with re-
spect to indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible to the extent that, under regula-
tions, it relates to exempt-interest dividends of the Fund. Similarly, invest-
ment and other shareholder expenses allocable to such exempt-interest divi-
dends generally are not deductible. Any dividends paid by the Fund that are
attributable to its taxable ordinary income (e.g., interest on U.S. Treasury
securities and net short-term capital gain) will be taxable to the sharehold-
ers of the Fund as ordinary income. Capital gain distributions, which are des-
ignated as distributions of the Fund's net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss), are treated as a
long-term capital gain regardless of the length of time you have owned shares.
To the extent that the Fund invests in certain tax exempt "private activity"
obligations issued after August 7, 1986, shareholders may be subject to the
federal alternative minimum tax on the portion of exempt-interest dividends
derived from such obligations. The Fund will provide information concerning
the tax status of its distributions, including the amount of its dividends
designated as exempt-interest dividends and as capital gain dividends, and any
applicable state tax information.
STATE TAXATION OF DISTRIBUTIONS
Except as otherwise stated earlier, shareholders in the Fund who otherwise are
subject to individual income taxes of the state named in a Fund will not be
subject to such taxes on distributions with respect to their shares to the ex-
tent that such distributions are attributable to interest on obligations of
the state and, generally, its political subdivisions or on obligations of the
United States, Puerto Rico, the U.S. Virgin Islands or Guam. Except as other-
wise indicated, shareholders will be required to include the entire amount of
capital gain distributions in income to the same extent for state income tax
purposes as for federal income tax purposes. Shareholders are urged to consult
their own tax advisers with respect to the alternative minimum tax imposed by
certain states.
Corporations should note that ownership of shares of certain Funds may have
tax consequences not discussed herein. Accordingly, corporate shareholders are
particularly urged to consult their own tax advisers with respect to the state
and local tax consequences of investment in the shares of any Fund.
REDEMPTIONS
Redemptions of shares of the Fund will be taxable transactions for federal and
state income tax purposes. Gain or loss will be recognized in an amount equal
to the difference between the shareholder's basis in his/her shares and the
amount received. Assuming that such shares are held as a capital asset, such
gain or loss will be a capital gain or loss and will be a long-term capital
gain or loss if the shareholder has held his/her shares for a period of more
than one year. If a shareholder redeems shares of the Fund at a loss and makes
an additional investment in the same series 30 days before or after such re-
demption, the loss may be disallowed under the wash sale rules.
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 shareholders 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. To have your dividend payments deposited electronically into your
bank account, see "Shareholder Services--Direct Deposits."
YIELD AND TOTAL RETURN CALCULATION
Flagship uses standardized SEC formulas to calculate the current yield and to-
tal returns of each of its Funds, including the Fund. These calculations help
investors compare past performance of funds they are considering for invest-
ment, while giving them confidence that any particular fund's performance re-
sults are based on the same type of data as those of another fund.
At any given time, the yields and total returns of the Fund will vary, depend-
ing on operating expenses, the underlying securities in the Fund's portfolio
and general market conditions during the time period calculated. Yields and
total returns are always based on historic performance and do not indicate fu-
ture results. Your actual performance will vary, and your shares may be worth
less than their original cost when redeemed.
CURRENT YIELD refers to the income from an investment in a fund over a stated
time period. It is expressed as an annual percentage rate, based on the actual
dividends paid to a shareholder as a percentage of the maximum offering price
of a share on the day that ends the performance period. The SEC yield is al-
ways a 30-day yield, net of fund expenses and adjustments (such as accretion
of original issue discounts and amortization of market premiums). When
annualized, it assumes semi-annual compounding of interest at an average daily
dividend rate over the period.
-- 11 --
<PAGE>
The current yields of tax-exempt income funds are often expressed in terms of
the yield an investor would have to earn in a taxable income fund to equal the
same after-tax yield once federal income taxes, and in some cases state and/or
local taxes, have been paid. This TAX-EQUIVALENT YIELD is calculated within
SEC guidelines and may be used in advertisements or information furnished to
shareholders or prospective investors, which will disclose the actual federal
tax bracket and state/local income tax, property tax or intangibles tax rates
applied in determining the tax-equivalent yield.
AVERAGE ANNUAL TOTAL RETURN shows how much a fund account would have grown
each year, on average, over a particular time period. Using the SEC formula, a
fund calculates the growth of an original hypothetical investment and assumes
that all dividends and any capital gains distribution were used to purchase
more shares in an account in that fund at net asset value (NAV). At the end of
the period, the total number of shares accrued are assumed to be sold at NAV,
less any contingent deferred sales charge. The change in the value from the
beginning to the end of the period is expressed as an average annual rate of
return. Return is always less when calculating the effects of sales charges.
The CUMULATIVE TOTAL RETURN is the actual change in the value of an account
from the beginning to the end of an investment period, less expenses. This
performance can be expressed with or without the effects of sales charges.
ABOUT THE DISTRIBUTOR
The Fund has entered into a Distribution Agreement (the "Distribution Agree-
ment") with the Distributor, which has the same address as the Manager. Ac-
cordingly, the Distributor serves as the exclusive selling agent and distribu-
tor of the Fund's shares, and in that capacity will make a continuous offering
of the shares of the Fund and will be responsible for all sales and promotion
efforts.
The Fund has adopted a plan (the "Plan") following Rule 12b-1 under the In-
vestment Company Act of 1940 (the "Act") 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 Plan conforms
to the requirements of the rules of the National Association of Securities
Dealers, Inc. 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 values attributable to each class of shares 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 Trustees. The scope of these activities
shall be interpreted by the Trustees, whose decision shall be conclusive ex-
cept to the extent it contravenes established legal authority.
The maximum amount payable annually by the Fund under the Plan and related
agreements is 0.95% (Class A 0.40%) of such series' average daily net assets
for the year. Of this amount, 0.75% is an asset based sales charge and up to
0.20% is a service fee. In the case of broker-dealers who have selling agree-
ments with the Distributor and others, such as banks, who have service agree-
ments or bank clearing agreements with the Fund, the maximum amount payable to
any recipient is 0.00260% per day (0.95% on an annualized basis) of the pro-
portion of average daily net assets of the Fund represented by such person's
customers. A salesperson and any other person entitled to receive compensation
for selling Fund shares may receive different compensation for selling one
particular class of shares over another. The Trustees may reduce these amounts
at any time. Amounts payable by the Fund or class of shares may be lower than
the maximum and have been described previously. Expenditures related to the
Plan and agreements may reduce current yield after expenses.
The Flagship Funds periodically undertake sales promotion programs with bro-
ker-dealers with whom they have Distribution Agreements, in which they will
grant a partial or full reallowance of its retained underwriting commission
for fund sales as permitted by applicable rules. In addition, they will sup-
port those firms' efforts in sales training seminars, management meetings, and
broker roundtables where it has the opportunity to present Flagship's products
and services. The Funds also provide recognition for outstanding sales
achievements during a year through membership in its Admiral, Captain or Yacht
Clubs which includes a membership plaque and a recognition memento. In addi-
tion, the distributor provides recognition through the awarding of imprinted
nominal promotional items; client leads; as well as "thank you" dinners and
entertainment. Its agents also typically provide food for office meetings. Un-
der appropriate terms it will share with broker-dealers a portion of the cost
of prospecting seminars and shareholder gatherings. In those situations where
there is no retained underwriting commission, i.e., on the sale of Class B,
Class C or Class R Shares, the Flagship funds will periodically pay for simi-
lar activities at their 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 each series of
the Fund's service agreements, the Fund would seek alternative providers of
such services and expects that shareholders would not experience any disadvan-
tage. In addition, under the securities laws in some states, banks and finan-
cial institutions may be required to register as dealers following state law.
The Fund does not offer its securities in conjunction with any qualified re-
tirement plan.
Please see the SAI for more details about the distribution payment and dealer
reallowances.
-- 12 --
<PAGE>
ABOUT THE TRUST
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 8,
1985 and as amended as of September 3, 1992 and April 21, 1995. The Trust's
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares in separate funds, each of which is deemed to be a sepa-
rate sub-trust.
Each share of each class represents an equal proportionate interest in the as-
sets of its fund with each other share in its fund and no interest in any
other fund. No fund is subject to the liabilities of any other fund. The Dec-
laration of Trust provides that shareholders are not liable for any liabili-
ties of the fund, requires inclusion of a clause to that effect in every
agreement entered into by a fund, and indemnifies shareholders against any
such liability. Although shareholders of an unincorporated business trust es-
tablished under Massachusetts law may, under certain limited circumstances, be
held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of such personal lia-
bility remote.
Shares entitle their holders to one vote per share; however, separate votes
are taken by each fund on matters affecting an individual fund. For example, a
change in investment policy for a fund would be voted upon by shareholders of
only the fund involved. Shares do not have cumulative voting rights, preemp-
tive rights or any conversion or exchange rights (other than as discussed
above). Shareholders of the Trust have certain rights, as set forth in the
Declaration of Trust, including the right to call a meeting of shareholders
for the purpose of electing Trustees or voting on the removal of one or more
Trustees. Such removal can be effected upon the action of two-thirds of the
outstanding shares of beneficial interest of the Trust.
The Trustees may amend the Declaration of Trust (including with respect to any
fund, including the Fund) in any manner without shareholder approval, except
that the Trustees may not adopt any amendment adversely affecting the rights
of shareholders of any Flagship Fund (including the Fund) without approval by
a majority of the shares of each affected Fund present at a meeting of share-
holders (or such higher vote as may be required by the 1940 Act or other ap-
plicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
ADDITIONAL INFORMATION
Please direct your inquiries to a Flagship representative:
1-800-414-7447, OR FOR TDD, 1-800-360-4521.
The Fund will issue semiannual reports containing unaudited financial state-
ments and annual reports containing audited financial statements approved an-
nually by the Board of Trustees.
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 according 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 statement being qualified in all respects by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE 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.
INVESTMENT ADVISER DISTRIBUTOR
Flagship Financial Inc.
Flagship Funds Inc.
One Dayton Centre One Dayton Centre
One South Main Street
One South Main Street
Dayton, OH 45402-2030
Dayton, OH 45402-2030
CUSTODIAN, SHAREHOLDER SERVICES AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02106
COUNSEL AUDITORS
Skadden, Arps, Slate,
Deloitte & Touche LLP
Meagher & Flom
The symbolsm indicates a service mark of Flagship Tax Exempt Funds Trust owned
by Flagship Financial Inc.
(C)1996, Flagship Funds Inc. TE-A-3000 (9-26-96)
-- 13 --
<PAGE>
Flagship High Yield Municipal Bond Fund Application
PLEASE PRINT OR TYPE ALL INFORMATION PLEASE MAIL THIS APPLICATION AND
YOUR
CHECK TO:
NOTE: You must complete Sections 1, Flagship Funds
2, 3, 4, 5 and sign the signature c/o Boston Financial
line. Your signature is required P.O. Box 8509
for processing. Complete sections Boston, MA 02266-8509
7, 8, 9, 10, 11, 12 and 13 for op-
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
[_] Corporation, Partnership, Trust or 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 the Flagship High Yield Municipal Bond Fund.
Please indicate class of shares
$ Amount* _______
A [_] ** C [_] ***
*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 Flagship High Yield Municipal Bond Fund
[_] Purchase or check through Dealer Account
[_] Exchange of bonds (Contact your Dealer or Flagship Funds)
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 the Fund
------------------------------------------------------------------------------
Existing Fund Account Number
[_] Deposit dividends directly into the bank account indicated on the
attached VOIDED check (subject to terms and conditions in the prospectus).
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
------------------------------------------------------------------------------
Investment Firm
------------------------------------------------------------------------------
Financial Consultant's Name
Rep Number
------------------------------------------------------------------------------
Branch Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
()-
------------------------------------------------------------------------------
Financial Consultant's Phone Number
X
------------------------------------------------------------------------------
Signature of Financial Consultant
7. LETTER OF INTENT (Class A Shares only)
Please see information on back page.
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 Flagship High
Yield Municipal Bond Fund 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
-- 14 --
<PAGE>
9. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we authorize
the automatic monthly transfer of funds from my/our bank account for
investment in the Flagship High Yield Municipal Bond 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 Number
------------------------------------------------------------------------------
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 Flagship High Yield Municipal Bond Fund _________________________________
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 Number
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
13. INTERESTED PARTY MAIL/DIVIDEND MAIL
[_] Send my distributions to the address listed below.
[_] Send duplicate confirmation statements to the interested party listed be-
low.
------------------------------------------------------------------------------
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 Flagship High Yield Municipal Bond Fund and affirm that I/we have re-
ceived and read a current Prospectus of the Flagship High Yield Municipal Bond
Fund 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 Flagship Fund(s). You will receive a con-
firmation statement shortly.
-- 15 --
<PAGE>
FLAGSHIP TAX EXEMPT FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 26, 1996
ONE DAYTON CENTRE, ONE SOUTH MAIN STREET; DAYTON, OHIO 45402-2030
Flagship Tax Exempt Funds Trust (the "Fund") is a registered open-end, man-
agement investment company organized in series. The Fund is divided into sepa-
rate series each of which is designed for individuals and taxable entities
that desire to invest in an actively managed portfolio of securities the in-
terest on which is exempt from Federal income taxes as well as income taxes of
the particular state indicated by the name of such series. There are two clas-
ses of shares authorized for each series (Class A Shares and Class C Shares),
although they may not be available for all series. The current state series
are:
Flagship Alabama Double Tax Exempt Fund
Flagship Arizona Double Tax Exempt Fund--Class A Shares
Flagship Arizona Double Tax Exempt Fund--Class C Shares
Flagship California Double Tax Exempt Fund
Flagship California Intermediate Tax Exempt Fund
Flagship Colorado Double Tax Exempt Fund
Flagship Connecticut Double Tax Exempt Fund--Class A Shares
Flagship Connecticut Double Tax Exempt Fund--Class C Shares
Flagship Florida Double Tax Exempt Fund--Class A Shares
Flagship Florida Double Tax Exempt Fund--Class C Shares
Flagship Florida Intermediate Tax Exempt Fund--Class A Shares
Flagship Florida Intermediate Tax Exempt Fund--Class C Shares
Flagship Florida Limited Term Tax Exempt Fund
Flagship Georgia Double Tax Exempt Fund--Class A Shares
Flagship Georgia Double Tax Exempt Fund--Class C Shares
Flagship Kansas Triple Tax Exempt Fund
Flagship Kentucky Limited Term Municipal Bond Fund--Class A Shares
Flagship Kentucky Limited Term Municipal Bond Fund--Class C Shares
Flagship Kentucky Triple Tax Exempt Fund--Class A Shares
Flagship Kentucky Triple Tax Exempt Fund--Class C Shares
Flagship Louisiana Double Tax Exempt Fund--Class A Shares
Flagship Louisiana Double Tax Exempt Fund--Class C Shares
Flagship Michigan Triple Tax Exempt Fund--Class A Shares
Flagship Michigan Triple Tax Exempt Fund--Class C Shares
Flagship Michigan Intermediate Tax Exempt Fund
Flagship Michigan Limited Term Tax Exempt Fund
Flagship Missouri Double Tax Exempt Fund--Class A Shares
Flagship Missouri Double Tax Exempt Fund--Class C Shares
Flagship New Jersey Double Tax Exempt Fund
Flagship New Jersey Intermediate Tax Exempt Fund
Flagship New Jersey Limited Term Tax Exempt Fund
Flagship New Mexico Double Tax Exempt Fund
Flagship New York Tax Exempt Fund--Class A Shares
Flagship New York Tax Exempt Fund--Class C Shares
Flagship New York Intermediate Tax Exempt Fund
Flagship New York Limited Term Tax Exempt Fund
Flagship North Carolina Double Tax Exempt Fund--Class A Shares
Flagship North Carolina Double Tax Exempt Fund--Class C Shares
Flagship Ohio Double Tax Exempt Fund--Class A Shares
Flagship Ohio Double Tax Exempt Fund--Class C Shares
Flagship Ohio Intermediate Tax Exempt Fund
Flagship Ohio Limited Term Tax Exempt Fund
Flagship Pennsylvania Triple Tax Exempt Fund--Class A Shares
Flagship Pennsylvania Triple Tax Exempt Fund--Class C Shares
<PAGE>
Flagship South Carolina Double Tax Exempt Fund
Flagship Tennessee Double Tax Exempt Fund--Class A Shares
Flagship Tennessee Double Tax Exempt Fund--Class C Shares
Flagship Virginia Double Tax Exempt Fund--Class A Shares
Flagship Virginia Double Tax Exempt Fund--Class C Shares
Flagship Wisconsin Double Tax Exempt Fund
National series:
Flagship All-American Tax Exempt Fund--Class A Shares
Flagship All-American Tax Exempt Fund--Class C Shares
Flagship High Yield Municipal Bond Fund
Flagship Intermediate Tax Exempt Fund--Class A Shares
Flagship Intermediate Tax Exempt Fund--Class C Shares
Flagship Limited Term Tax Exempt Fund--Class A Shares
Flagship Limited Term Tax Exempt Fund--Class C Shares
Flagship Short Term Tax Exempt Fund
Flagship U.S. Territories Tax Exempt Fund
Insured series:
Flagship Insured Limited Term Tax Exempt Fund
Flagship Insured Intermediate Tax Exempt Fund
Flagship Insured Tax Exempt Fund
The diversified series of the Fund are All-American, Arizona, Colorado, Con-
necticut, Florida, Georgia, High Yield, Insured, Insured Intermediate, Insured
Limited Term, Intermediate, Kentucky, Limited Term, Louisiana, Michigan, Mis-
souri, New York, North Carolina, Ohio, Pennsylvania, Short Term, Tennessee and
Virginia. All other series are non-diversified. The initial offering to the
public of any series is determined at the discretion of the Board of Trustees.
Each series seeks high current after tax income consistent with liquidity and
preservation of capital primarily through investment in investment grade tax
exempt obligations.
This Statement of Additional Information provides certain detailed informa-
tion concerning the Fund. It is not a Prospectus and should be read in conjunc-
tion with the current Prospectus (the "Prospectus") relating to the Fund. A
copy of the Prospectus may be obtained without charge by telephone or written
request to: Flagship Funds Inc., at One Dayton Centre, One South Main Street;
Dayton, Ohio 45402-2030; or by telephone (toll free) at 800-414-7447, or for
TDD call 800-360-4521.
This Statement of Additional Information relates to the Prospectus of the
Fund dated September 26, 1996.
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TABLE OF CONTENTS
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PAGE
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Investment Objectives and Policies......................................... 4
Shares of the Fund......................................................... 6
Officers and Trustees...................................................... 8
Investment Advisory Services............................................... 9
Distributor................................................................ 12
Custodian and Transfer Agent............................................... 16
Auditors................................................................... 16
Portfolio Transactions..................................................... 16
Yield and Total Return Calculation......................................... 17
Dividend Payment Options................................................... 19
Purchase, Redemption and Pricing of Shares................................. 19
Taxes...................................................................... 22
Exchange and Reinvestment Privilege........................................ 23
Systematic Withdrawal Plan................................................. 24
Servicemarks............................................................... 24
Other Information.......................................................... 24
Index to Financial Statements.............................................. F-1
Appendix I--Description of Municipal Securities Ratings.................... I-1
Appendix II--Description of Hedging Techniques............................. II-1
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The Fund has adopted the following investment restrictions (which supplement
the matters described under "The Funds and Their Objectives" in the Prospec-
tus), none of which may be changed with respect to any series of the Fund des-
ignated on the date hereof without the approval of the holders of a majority
of such series' outstanding shares. No existing series of the Fund may:
(1) Purchase the securities of any one issuer, other than the U.S. Govern-
ment or any of its instrumentalities, if immediately after such purchase more
than 5% of the value of its total assets would be invested in such issuer, or
if all series of the Fund would own in the aggregate more than 10% of the out-
standing voting securities of such issuer, except that up to 25% of the value
of the Fund's total assets may be invested without regard to such 5% and 10%
limitations.
(2) Make loans, except to the extent the purchase of the debt obligations
(including repurchase agreements) in accordance with the series' investment
objectives and policies are considered loans.
(3) Issue securities senior to the shares or borrow money, except from banks
for extraordinary or emergency purposes (and not for leveraging) or in order
to meet unexpectedly heavy redemption requests in an amount not exceeding 10%
of the value of the series' assets, or purchase any securities at any time
when the total outstanding borrowings from banks attributable to such series
exceeds 5% of the series' net assets.
(4) Mortgage, pledge or hypothecate any assets except as required by law or
agreement to secure borrowings permitted by clause (3) above.
(5) Purchase or sell real estate, real estate mortgage loans, real estate
investment trust securities, commodities, commodity contracts or oil and gas
interests, except to the extent that the tax-exempt and U.S. government secu-
rities the series may invest in would be considered to be such loans, securi-
ties, contracts or interests and except to the extent the various hedging in-
struments the series may invest in would be considered to be commodities or
commodities contracts.
(6) Acquire securities of other investment companies (other than in connec-
tion with the acquisition of such companies), except that a series may from
time to time invest up to 10% of its assets in tax-exempt funds, including
money market funds.
(7) Act as an underwriter of securities except to the extent that in connec-
tion with disposition of portfolio securities it may be deemed to be an under-
writer.
(8) Purchase securities on margin, make short sales of securities or main-
tain a net short position except to the extent the various hedging instruments
the series may invest in or the options the series may write would be consid-
ered to involve short sales or a net short position.
(9) Invest more than 25% of its assets in a single industry. However, as de-
scribed in the Prospectus, particular series may from time to time invest more
than 25% of their assets in one or more particular segments of the tax exempt
obligations market.
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
interests of the Fund and its stockholders, it will revoke the commitment by
terminating sales of its shares in the state involved. Specifically, in addi-
tion, each series has made a commitment, although not a fundamental policy, to
not purchase warrants.
Portfolio Turnover. Although the Fund anticipates that the portfolio turn-
over of each series will be less than 100% in any fiscal year, each series
will adjust its turnover as necessary or appropriate to seek to attain its in-
vestment objective.
By purchasing obligations in larger denominations and with greater variation
in maturity and interest payment dates than investors may be able to achieve
on their own, the Fund, through each of its series, offers investors economies
of scale and greater diversification. In addition, an investment in any series
of the Fund gives investors a convenient and affordable method of avoiding ad-
ministrative burdens and transaction costs normally involved in direct pur-
chases of tax exempt obligations. For instance, investors do not have to keep
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track of detailed maturity schedules, formulate specific reinvestment plans,
arrange for safekeeping of the obligations, obtain price and delivery terms
from numerous dealers, or maintain separate principal, income and capital gain
and loss records.
Municipal Leases and Participations Therein. These are obligations in the
form of a lease or installment purchase which is issued by state and local
governments to acquire equipment and facilities. Income from such obligations
is exempt from local and state taxes in the state of issuance. "Participa-
tions" in such leases are undivided interests in a portion of the total obli-
gation. Municipal Leases frequently have special risks not normally associated
with general obligation or revenue bonds. The constitutions and statutes of
all states contain requirements that the state or a municipality must meet to
incur debt. These often include voter referenda, interest rate limits and pub-
lic sale requirements. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass even-
tually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional
and statutory requirements for the issuance of debt. The debt-issuance limita-
tions are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis.
In addition to the "non-appropriation" risk, Municipal Leases have addi-
tional risk aspects because they represent a relatively new type of financing
that has not yet developed in many cases the depth of marketability and li-
quidity associated with conventional bonds; moreover, although the obligations
will be secured by the leased equipment, the disposition of the equipment in
the event of non-appropriation or foreclosure might, in some cases, prove dif-
ficult. In addition, in certain instances the tax-exempt status of the obliga-
tions will not be subject to the legal opinion of a nationally recognized
"bond counsel," as is customarily required in larger issues of municipal obli-
gations. However, in all cases the Fund will require that a Municipal Lease
purchased by the Fund be covered by a legal opinion (typically from the is-
suer's counsel) to the effect that, as of the effective date of such Lease,
the Lease is the valid and binding obligation of the governmental issuer.
Municipal Leases and participations will be purchased pursuant to analysis
and review procedures which the Manager believes will minimize risks to share-
holders. It is possible that more than 5% of a series' net assets will be in-
vested in Municipal Leases which, pursuant to guidelines established by the
Securities and Exchange Commission ("SEC"), have been determined by the Board
of Trustees to be liquid securities. When evaluating the liquidity of a Munic-
ipal Lease, the Board, or the investment adviser pursuant to procedures estab-
lished by the Board, considers all relevant factors including frequency of
trading, availability of quotations, the number of dealers and their willing-
ness to make markets, the nature of trading activity and the assurance that
liquidity will be maintained. With respect to unrated Municipal Leases, credit
quality is also evaluated.
Hedging and Other Defensive Actions. Each series of the Fund may periodi-
cally engage in hedging transactions. Hedging is a term used for various meth-
ods of seeking to preserve portfolio capital value by offsetting price changes
in one investment through making another investment whose price should tend to
move in the opposite direction. The Trustees and investment adviser of the
Fund believe that it is desirable and possible in various market environments
to partially hedge the portfolio against fluctuations in market value due to
interest rate fluctuations by investment in financial futures and index
futures as well as related put and call options on such instruments. Both par-
ties entering into an index or financial futures contract are required to post
an initial deposit of 1% to 5% of the total contract price. Typically, option
holders enter into offsetting closing transactions to enable settlement in
cash rather than take delivery of the position in the future of the underlying
security. The Fund will only sell covered futures contracts, which means that
the Fund segregates assets equal to the amount of the obligations.
These transactions present certain risks. In particular, the imperfect cor-
relation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the
hedge by a series of the Fund may be greater than gains in the value of the
securities in such series' portfolio. In addition, futures and options markets
may not be liquid in all circumstances. As a result, in volatile markets, a
series of the Fund may not be able to close out the transaction without incur-
ring losses substantially greater than the initial deposit. Finally, the po-
tential daily deposit requirements in futures contracts create an ongoing
greater potential financial risk than do options transactions, where the expo-
sure is limited to the cost of the initial premium. Losses due to hedging
transactions will reduce yield. Net gains, if any, from hedging and other
portfolio transactions will be distributed as taxable distributions to share-
holders.
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No series of the Fund will make any investment (whether an initial premium
or deposit or a subsequent deposit) other than as necessary to close a prior
investment if, immediately after such investment, the sum of the amount of its
premiums and deposits would exceed 5% of such series' net assets. Each series
will invest in these instruments only in markets believed by the investment
adviser to be active and sufficiently liquid. For further information regard-
ing these investment strategies and risks presented thereby, see Appendix II
to this Statement of Additional Information.
Each series of the Fund reserves the right, if necessary in the judgment of
the Trustees and the investment adviser for liquidity or defensive purposes
(such as thinness in the market for municipal securities or an expected sub-
stantial decline in value of long-term obligations), to temporarily invest up
to 20% of its assets in obligations issued or guaranteed by the U.S. Govern-
ment and its agencies or instrumentalities, including up to 5% in adequately
collateralized repurchase agreements relating thereto. Interest on each in-
struments is taxable for Federal income tax purposes and would reduce the
amount of tax-free interest payable to shareholders.
SHARES OF THE FUND
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares, are authorized for all series with Class A Shares currently
offered by all series and Class C Shares currently offered by some series.
Other classes of shares in other series may be offered in the future. Each se-
ries of 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"). See "How to Buy Shares" in the Prospectus. 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 discussed below.) The net in-
come 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 distri-
bution 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. Class B, Class C
and Class R Shares are authorized for all series, but may not be available for
all series. Prior to implementing the multiple class distribution for any se-
ries, the Trustees will re-denominate all outstanding shares in such series as
Class A Shares.
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 dis-
tribution services fee (see "Distributor" below). Purchasers of Class A Shares
may be entitled to reduced sales charges through a combination of investments,
rights of accumulation or a Letter of Intent even if their current investment
would not normally qualify for a quantity discount (see "Purchase, Redemption
and Pricing of Shares" below). Class A Shares also qualify for certain ex-
change and reinvestment privileges as described in "Exchange And Reinvestment
Privilege" below. The investor or the investor's broker or dealer is responsi-
ble for promptly forwarding payment to the Fund for shares purchased. Class A
Shares may be subject to a CDSC as explained in the Prospectus.
Class B Shares. Class B Shares are sold at net asset value without a sales
charge at the time of purchase. Instead, the sales charge is imposed on a con-
tingent deferred basis. The net assets attributable to Class B Shares are sub-
ject to an ongoing distribution fee (see "Distributor" below). The amount of
the contingent deferred sales charge, if any, will vary depending on the num-
ber of years from the time of payment of the purchase of Class B Shares until
the time such shares are redeemed. Solely for purposes of determining the num-
ber 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 (5
years intermediate and limited term) after the end of the month in which a
shareholder's order to purchase Class B Shares was accepted. As a
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result, the shares that converted will no longer be subject to a sales charge
upon redemption and will enjoy the lower Class A distribution services fee.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of
Class B Shares in a shareholder's account will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's ac-
count (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account also will con-
vert to Class A Shares. The conversion of Class B Shares to Class A Shares is
subject to the continuing availability of an opinion of counsel to the effect
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 divi-
dends or distributions constituting "preferential dividends" under the Inter-
nal Revenue Code of 1986, as amended (the "Code"), and (ii) that the conver-
sion of Class B Shares does not constitute a taxable event under federal in-
come tax law. The conversion of Class B Shares to Class A Shares may be sus-
pended 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 peri-
od, 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.
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, Class C Shares are subject to a 1% contingent deferred
sales charge ("CDSC") if they are redeemed within one year after purchase.
Their net assets are subject to an ongoing distribution services fee of (a)
0.95% for any fund with other than a short term or limited term maturity, of
which 0.75% is an asset based sales charge and 0.20% is a service fee or (b)
for any fund with a short term or limited term maturity, an ongoing distribu-
tion services fee of 0.70%, of which 0.50% is an asset based sales charge and
0.20%, is a service fee (see "Distributor" below). 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 as-
sessed 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 death of a shareholder, (ii) for redemptions following
the disability (as determined in writing by the Social Security Administra-
tion) or death of the shareholder, and (iii) when Class B or Class C Shares
are exchanged for Class B or Class C Shares of other Flagship Funds distrib-
uted by the Distributor (see "Exchange And Reinvestment Privilege" below). In
the case of an exchange, the length of time that the investor held the origi-
nal 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
Shares for which the exchange was made.
Class R Shares. You may purchase Class R Shares with monies representing
dividends and capital gain distributions on Class R Shares of the Fund. Also,
you may purchase Class R Shares if you are within the following specified cat-
egories of investors who are also eligible to purchase Class A Shares at net
asset value without an up-front sales charge: officers, current and former
trustees of the Fund, bona fide, full-time and retired employees of Flagship,
and subsidiaries thereof, or their immediate family members; any person who,
for at least 90 days, has been an officer, director or bona fide employee of
any Authorized Dealer, or their immediate family members; officers and direc-
tors of bank holding companies that make Fund shares available directly or
through subsidiaries or bank affiliates; and bank or broker-affiliated trust
departments; persons investing $1 million or more in Class R Shares; and cli-
ents of investment advisers, financial planners or other financial intermedi-
aries that charge periodic or asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the differ-
ences between these two classes of shares. Class A Shares are subject to an
annual distribution fee to compensate Flagship Funds Inc. (the "Distributor")
for distribution costs associated with the Fund and to an annual service fee
to compensate Authorized Dealers for providing you with ongoing account serv-
ices. Class R Shares are not subject to a distribution or service fee and,
consequently, holders of Class R Shares may not receive the same types or lev-
els of services from Authorized Dealers. In choosing between Class A Shares
and Class R Shares, you should weigh the benefits of the services to be pro-
vided by Authorized Dealers against the annual service fee imposed upon the
Class A Shares.
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OFFICERS AND TRUSTEES
The Trustees and executive officers of the Fund are listed below. Each of
them holds the same positions with each series of the Fund and with Flagship
Admiral Funds Inc. Except as indicated, each individual has held the office
shown or other offices in the same company for the last five years and has a
business address at One Dayton Centre, One South Main Street, Dayton, Ohio
45402-2030, which is also the address of the Fund.
The "interested" trustees of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act") are indicated by an asterisk (*).
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PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH THE FUND DURING PAST FIVE YEARS
---------------- ---------------------- ----------------------
<S> <C> <C>
Bruce Paul Bedford* Trustee Chairman and Chief Executive Officer of Flagship
Resources Inc. ("Flagship"), Flagship Financial Inc.
(the "Manager"), and Flagship Funds Inc. (the
"Distributor").
Richard P. Davis* Trustee and President President and Chief Operating Officer of Flagship, the
Manager, and the Distributor.
Robert P. Bremner Trustee Private Investor and Management Consultant.
3725 Huntington Street, NW
Washington, DC 20015
Joseph F. Castellano Trustee Professor and former Dean, College of Business and
4249 Honeybrook Avenue Administration, Wright State University.
Dayton, Ohio 45415
Paul F. Nezi Trustee Executive Vice President and Chief Marketing Officer,
227 E. Dixon Avenue ChoiceCare; prior to March 1993, Vice
Dayton, Ohio 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March 1991, Partner, Hooper & Nezi, a marketing
and communications firm.
William J. Schneider Trustee Senior Partner, Miller-Valentine Partners; Vice
4000 Miller-Valentine Ct. President, Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations of the Distributor
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer of Flagship,
the Manager and the Distributor
LeeAnne G. Sparling Controller Director of Portfolio Operations of the Manager
</TABLE>
COMPENSATION: TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM REGISTRANT AND
AGGREGATE FUND COMPLEX
NAME OF PERSON COMPENSATION PAID TO TRUSTEES
POSITION FROM REGISTRANT (NUMBER OF OTHER FUNDS)
-------------- --------------- ----------------------
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Robert P. Bremner $20,500 $25,500 (4)
Trustee
Joseph F. Castellano $21,500 $26,500 (4)
Trustee
William J. Schneider $21,500 $26,500 (4)
Trustee
Paul F. Nezi $21,500 $26,500 (4)
Trustee
</TABLE>
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As of August 8, 1996, to the knowledge of management, each of the following
persons beneficially owned the percentage noted of the fund listed beside
their name:
<TABLE>
<C> <S> <C>
Alabama Fund Farley L. Berman 10.39%
1234 Champaign Ave.
Anniston, AL 36207
Prudential Securities Inc. 7.32%
FBO Jerry F. Wilson
P.O. Box 300
Addison, AL 35540
Kansas Fund PaineWebber 8.62%
FBO Sonya & Leonard Ropfogel, Trustees
155 N. Market, Suite 1000
Wichita, KS 67202
South Carolina Fund Janece Marsha Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
J.C. Bradford & Co. Cust. FBO 6.38%
Ruth K. Keever
330 Commerce St.
Nashville, TN 37201
Joseph Christopher Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
James G. McMillan 8.96%
6 Rock Ledge Ct.
Banner Elk, NC 28604
</TABLE>
As of such date, no person beneficially owned 5% or more of the outstanding
shares of the following sub-trusts of the Trust: All-American Fund, Arizona
Fund, Colorado Fund, Connecticut Fund, Florida Fund, Florida Intermediate
Fund, Georgia Fund, Intermediate Fund, Kentucky Fund, Kentucky Limited Term
Fund, Limited Term Fund, Louisiana Fund, Michigan Fund, Missouri Fund, New
Jersey Fund, New Jersey Intermediate Fund, New Mexico Fund, New York Fund,
North Carolina Fund, Ohio Fund, Pennsylvania Fund, Tennessee Fund, Virginia
Fund and Wisconsin Fund.
All trustees and officers as a group own less than 1% of the outstanding
shares of the Trust.
Prior to the sale of shares of any series of the Fund to the public, all of
the shares of such series of the Fund will be owned by the Manager.
INVESTMENT ADVISORY SERVICES
As stated in the Prospectus, Flagship Financial Inc. acts as investment ad-
viser (the "Manager") to the Fund and each series pursuant to separate Invest-
ment Advisory Agreements (the "Advisory Agreements") with each series. See
"How the Funds are Managed" in the Prospectus for a description of the Manag-
er's duties as investment adviser. The Manager's administrative obligations
include: (i) assisting in supervising all aspects of the Fund's operations;
(ii) providing the Fund, at the Manager's expense, with the services of per-
sons competent to perform such administrative and clerical functions as are
necessary in order to provide effective corporate administration; and (iii)
providing the Fund, at the Manager's expense, with adequate office space and
related services. The Fund's accounting records are maintained, at the Fund's
expense, by its Custodian, Boston Financial.
As compensation for the services rendered by the Manager under the Advisory
Agreements dated March 8, 1985, with respect to the All American, Michigan and
Ohio series; November 21, 1985, with respect to the Georgia, North Carolina
and Virginia series; July 25, 1986, with respect to the Arizona series; Febru-
ary 2, 1987, with respect to the Colorado, Connecticut, Kentucky and Missouri
series; July 20, 1987 with respect to the New
9
<PAGE>
York, Florida, Louisiana, New Jersey, and Tennessee series; June 15, 1990,
with respect to the Kansas series; May 15, 1992, with respect to the Interme-
diate, New Jersey, New Jersey Intermediate, Pennsylvania and New Mexico se-
ries; June 15, 1992, with respect to the Alabama, Florida Intermediate and
South Carolina series; and February 4, 1994 with respect to the Wisconsin se-
ries; the Manager is paid a fee, computed daily and payable monthly with re-
spect to each series on a separate basis, at an annual rate of .50% of the av-
erage daily net assets of such series. As compensation for the services ren-
dered by the Manager under the Advisory Agreement dated July 20, 1987, with
respect to the Limited Term series, and April 21, 1995, with respect to the
Kentucky Limited Term Municipal Bond Fund, the Manager is paid a fee, computed
daily and payable monthly at an annual rate of .30% of the average daily net
assets up to $500 million plus .25% of the average daily net assets in excess
of $500 million.
For the most recent fiscal periods ended May 31, 1994, 1995, and 1996, with
respect to each series, the amounts paid to the Manager by such series of the
Fund were as follows:
<TABLE>
<CAPTION>
State Series 1994 1995 1996
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Alabama $ -- $ -- $ --
Arizona 43,162 122,032 140,063
Colorado -- -- --
Connecticut 255,441 396,094 421,811
Florida 314,749 633,336 980,751
Florida Intermediate -- -- --
Georgia 165,095 287,399 235,562
Kansas -- -- 38,552
Kentucky 294,356 559,150 799,646
Kentucky Limited 2,496
Louisiana 24,821 96,442 148,090
Michigan 645,194 729,008 873,242
Missouri 107,595 244,965 494,006
New Jersey -- -- --
New Jersey Intermediate -- -- --
New Mexico -- 17,972 32,291
New York -- -- 6,359
North Carolina 676,431 675,473 674,110
Ohio 1,901,128 1,926,295 1,899,111
Pennsylvania 104,513 58,095 76,802
South Carolina -- -- --
Tennessee 548,942 776,025 921,400
Virginia 133,981 211,367 310,198
Wisconsin -- -- --
<CAPTION>
National Series
- ---------------
<S> <C> <C> <C>
All-American 267,846 420,954 644,844
Intermediate -- -- --
Limited Term 1,313,071 1,369,218 1,259,810
---------- ---------- ----------
TOTAL $6,796,325 $8,523,825 $9,959,144
========== ========== ==========
</TABLE>
10
<PAGE>
The tables set forth above do not include portions of the Manager's fee
which were permanently waived by the Manager. The amounts of compensation
waived by the Manager for such period were:
<TABLE>
<CAPTION>
State Series 1994 1995 1996
- ------------ ----------- ---------- ----------
<S> <C> <C> <C>
Alabama $ 107 $ 4,854 $ 12,670
Arizona 377,569 277,079 279,976
Colorado 162,901 169,048 173,105
Connecticut 768,360 615,631 636,447
Florida 1,676,047 1,093,473 685,218
Florida Int. 2,503 19,498 38,041
Georgia 421,674 321,940 366,193
Kansas 425,046 404,085 429,494
Kentucky 1,521,748 1,357,696 1,328,971
Kentucky Limited -- -- 10,100
Louisiana 290,721 240,777 222,310
Michigan 653,131 626,290 586,307
Missouri 779,519 726,130 598,909
New Jersey 18,392 31,524 48,257
New Jersey Intermediate 40,542 45,333 45,699
New Mexico 225,840 226,715 226,537
New York 215,688 236,428 244,412
North Carolina 290,321 289,460 318,954
Ohio 404,687 375,587 522,006
Pennsylvania 111,454 164,423 156,472
South Carolina 23,928 37,587 46,785
Tennessee 597,902 442,963 389,150
Virginia 404,880 351,513 312,111
Wisconsin -- 22,083 55,421
National Series
All-American 753,169 632,023 588,351
Intermediate 146,230 187,583 228,684
Limited Term 657,881 458,100 332,579
----------- ---------- ----------
TOTAL $10,970,240 $9,357,823 $8,883,159
=========== ========== ==========
</TABLE>
Also, under separate agreements with the following Funds, for the period
ended May 31, 1996, Manager agreed to subsidize certain expenses, excluding
advisory and distribution fees, as set forth below. The Manager is not obli-
gated to subsidize such expenses and may not do so in the future.
<TABLE>
<CAPTION>
AMOUNT
SUBSIDIZED
5/31/96
----------
<S> <C>
State Series
- ------------
Alabama $ 57,787
Arizona 57,950
Colorado 84,532
Florida Intermediate 37,757
Kansas 66,694
Kentucky Limited 40,302
New Jersey 67,802
New Jersey Intermediate 56,297
New York 26,209
Pennsylvania 11,285
South Carolina 40,103
Wisconsin 47,172
National Series
- ---------------
Intermediate 41,246
--------
Total $635,136
========
</TABLE>
11
<PAGE>
Each Advisory Agreement will terminate automatically upon its assignment and
its continuance must be approved annually by the Fund's trustees or a majority
of the particular series' outstanding voting shares and in either case, by a
majority of the Fund's disinterested trustees. Each Advisory Agreement is ter-
minable at any time without penalty by the trustees or by a vote of a majority
of the particular series' outstanding voting shares on 60 days' written notice
to the Manager, or by the Manager on 60 days' written notice to the Fund.
The Manager has advanced all organization expenses of the Fund and each se-
ries, which include printing of documents, fees and disbursements of the
Fund's counsel and accountants, registration fees under the Securities Act of
1933, the 1940 Act, and state securities laws, as well as the initial fees of
the Fund's custodian and transfer agent. Such fees aggregated approximately
$83,600 for the Colorado series, $69,000 for the Limited Term series, $83,600
for the Missouri series, $72,000 for the Louisiana series, $284,600 for the
Florida series, $257,000 for the New York series, $42,800 for the Kansas se-
ries, $58,900 for the New Jersey series, $32,200 for the New Jersey Intermedi-
ate series, $51,700 for the New Mexico series, $35,700 for the Intermediate
series, $35,400 for the South Carolina series, $27,400 for the Florida Inter-
mediate series, $60,800 for the Alabama series, $98,000 for the Wisconsin se-
ries and $29,400 for the Kentucky Limited Term series. The Manager advanced
$63,000 for reorganizational expenses for the Pennsylvania Series.
The expenses are being reimbursed to the Manager by uniform pro rata deduc-
tions from the net asset value of each series of the Fund accrued daily and
paid monthly over the five-year period which commenced June 1, 1991, with re-
spect to the Louisiana, and Missouri series; June 1, 1992, with respect to the
New York series; June 1, 1993, with respect to the Colorado, Kansas and New
Mexico series, and January 1, 1996 with respect to the Pennsylvania Series.
For the Alabama, Florida, Intermediate, Kentucky Limited Term, New Jersey In-
termediate, South Carolina and Wisconsin Series, reimbursement commenced on
June 1, 1996 and will be paid pro rata over a three-year period.
The Manager has agreed that in the event the operating expenses of the se-
ries (including fees paid to the Manager and payments to the Distributor but
excluding taxes, interest, brokerage and extraordinary expenses) for any fis-
cal year ending on a date on which the related Advisory Agreement is in ef-
fect, exceed the expense limitations imposed by applicable state securities
laws or any regulations thereunder, it will, up to the amount of its fee, re-
duce its fee or reimburse the Fund in the amount of such excess.
A series may advertise its actual expenses expressed as a percentage of its
net assets and may also quote the average expense percentage of funds of the
same type as calculated by Lipper Analytical Services.
Securities held by any series may also be held by, or be appropriate invest-
ments for, other series or other investment advisory clients of the Manager.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security.
If purchases or sales of securities for any series of the Fund or other ad-
visory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the affected series
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 price.
DISTRIBUTOR
As stated in the Prospectus, Flagship Funds Inc. acts as the Distributor
(the "Distributor") of shares of each series in accordance with the terms of
separate Distribution Agreements with each series. The Distributor may conduct
an initial subscription period offering respecting each series of the Fund and
may thereafter make a continuous offering of such series' shares and will be
responsible for all sales and promotion efforts. The Distribution Agreements
must be approved in the same manner as the Advisory Agreements discussed under
"How the Funds are Managed" in the Prospectus and will terminate automatically
if assigned by either party thereto and are terminable at any time without
penalty by the Board of Trustees of the Fund or by vote of a majority of the
pertinent series' outstanding shares on 60 days' written notice to the Dis-
tributor and by the Distributor on 60 days' written notice to the 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 Fund's shares.
12
<PAGE>
The Plan authorizes each Fund to expend its monies in an amount equal to the
aggregate for all such expenditures to such percentage of each Fund's daily
net asset values attributable to each class of shares as may be determined
from time to time by vote cast in person at a meeting called for such purpose,
by a majority of the Funds' disinterested trustees. The scope of the foregoing
shall be interpreted by the trustees, whose decision shall be conclusive ex-
cept to the extent it contravenes established legal authority. Without in any
way limiting the discretion of the trustees, 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 adviser's mutual fund
activities; compensating underwriters, dealers, brokers, banks and other sell-
ing 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, con-
tingent, deferred or other basis; compensating underwriters, dealers, brokers,
banks and other servicing entities and servicing personnel (including the
Fund's investment adviser and its personnel of any of them for providing serv-
ices to shareholders of the Fund relating to their investment in the Fund, in-
cluding assistance in connection with inquiries relating to shareholder ac-
counts; the production and dissemination of prospectuses including statements
of additional information) of the Fund and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials; and the
ordinary or capital expenses, such as equipment, rent, fixtures, salaries, bo-
nuses, reporting and record-keeping and third party consultancy or similar ex-
penses relating to any activity for which payment is authorized by the trust-
ees; and the financing of any activity for which payment is authorized by the
trustees. Pursuant to the Plan, each series itself through authorized officers
may make similar payments for marketing services to non-broker-dealers who en-
ter into service agreements with such series. Distribution costs in the early
years of any series of the Fund are likely to be higher than the distribution
fee paid to the Distributor by such series of the Fund. For example, in the
first year of operations distribution expenses might amount to $500,000 and
the fee paid by the Fund might be capped at only $100,000 in view of the
Fund's relatively small size, whereas in later years distribution expenses
might be $1 million but the distribution fee could be even greater than $1
million in view of the growth of the Fund.
The maximum amount payable annually by any series of the Fund under the Plan
and related agreements with respect to the Class A Shares is .40% of such se-
ries' 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 series' average daily net assets attributable to such Class B Shares. For
Class C Shares, the maximum amount payable annually is .95% of such series'
average daily net assets attributable to such Class C Shares. In the case of
broker-dealers who have selling agreements with the Distributor and others,
such as banks, who have service agreements with any series of the Fund, the
maximum amount payable to any recipient is .001096% per day (.40% on an
annualized basis) of the proportion of average daily net assets of such series
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 series attributable to Class B Shares represented by
such person's customers. The maximum amount payable to any such recipient with
respect to Class C Shares is .00260% per day (.95% on an annualized basis) of
the proportion of average daily net assets of such series attributable to
Class C Shares represented by such person's customers. The Board of Trustees
may reduce these amounts at any time. All distribution expenses incurred by
the Distributor and others, such as broker-dealers, in excess of the amount
paid by the Fund will be borne by such persons without any reimbursement from
the Fund or any series.
During the period ended May 31, 1996, the amounts paid to the Distributor by
each series of the Fund pursuant to the Plan were as follows:
<TABLE>
<CAPTION>
SALARIES MATERIALS
BROKER & INCENTIVE AND SELLING
CLASS PAYMENTS BENEFITS COMPENSATION FULFILMENT ACTIVITIES TOTAL
------ -------- -------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
State Se-
ries
Alabama 5,193 1,278 1,922 846 846 10,085
Arizona A 172,738 40,769 33,210 26,367 55,007 328,091
C 11,759 896 1,396 2,191 465 16,707
Colorado 74,330 17,123 13,096 6,992 26,572 138,113
Connecticut A 413,718 101,546 74,020 31,198 197,518 818,000
C 52,470 3,289 3,976 2,000 407 62,142
Florida A 662,408 164,117 120,873 54,748 325,924 1,328,070
C 2,748 421 -- -- -- 3,169
Florida
Int. A 10,143 2,586 3,116 4,574 -- 20,419
C 19,302 1,157 2,180 836 -- 23,475
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION UPFRONT ADVERTISING & SALARIES &
CLASS TO BROKERS COMMISSIONS PROMOTIONS BENEFITS OTHER TOTAL
------ ------------ ----------- ------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
State Series
Georgia A 221,898 55,538 42,053 20,987 108,015 448,491
C 67,291 3,736 4,019 -- -- 75,046
Kansas 216,586 46,501 53,076 53,704 3,247 373,114
Kentucky A 821,365 201,713 153,206 77,786 367,244 1,621,314
C 158,023 9,602 12,342 1,807 -- 181,774
Kentucky
Limited A 8,450 -- -- -- -- 8,450
C 3,532 -- -- -- -- 3,532
Louisiana A 143,051 34,484 29,834 25,110 44,783 277,262
C 35,638 2,306 3,754 1,381 -- 43,079
Michigan A 506,976 124,353 92,905 48,156 230,567 1,002,957
C 337,687 20,181 19,123 6,253 -- 383,244
Missouri A 465,343 105,958 86,346 55,801 138,003 851,451
C 41,343 2,578 4,381 -- -- 48,302
New Jersey 20,430 4,797 5,920 7,297 -- 38,444
New Jersey
Intermediate 18,192 4,604 3,756 2,523 7,395 36,470
New Mexico 102,945 25,626 19,125 10,090 48,715 206,501
New York A 99,416 24,886 21,298 16,886 37,656 200,142
C 533 -- -- -- -- 533
N. Carolina A 378,621 94,866 67,823 32,435 191,517 765,262
C 55,544 3,402 4,142 1,565 -- 64,653
Ohio A 924,924 223,595 165,812 76,854 411,049 1,802,234
C 270,416 16,259 20,206 441 -- 307,322
Pennsylvania A 101,147 21,299 18,416 15,672 14,438 170,972
C 29,841 1,923 2,397 1,742 -- 35,903
South Caro-
lina 18,382 4,656 4,770 5,467 4,029 37,304
Tennessee A 546,564 123,001 101,192 68,622 149,370 988,749
C 115,085 7,114 9,196 3,055 -- 134,450
Virginia A 227,640 57,827 45,610 28,110 105,191 464,378
C 72,478 3,375 -- -- -- 75,853
Wisconsin 21,996 5,622 8,478 8,068 -- 44,164
National
Series
- --------
All-American A 460,073 99,403 85,217 69,713 86,005 800,411
C 373,587 22,918 24,007 15,918 -- 436,430
Intermediate A 93,973 22,576 24,346 27,048 12,960 180,903
C 3,450 -- -- -- -- 3,450
Limited Term A 1,133,290 259,839 211,727 138,760 365,561 2,109,177
C 28,351 -- -- -- -- 28,351
</TABLE>
14
<PAGE>
The Plan, the Distribution Agreements, the Selling Agreements and the Serv-
ice Agreements have been approved by the Fund's trustees, including a majority
of the trustees 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 a meeting 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 disinter-
ested trustees or by a majority of the Fund's outstanding shares. Any amend-
ment increasing the maximum percentage payable under the Plan for any class of
shares must be approved by a majority of each series' outstanding shares of
such class, and all other material amendments to the Plan or any related
agreement must be approved by a majority of each series' outstanding shares.
Any amendment increasing the maximum must be approved by a majority of such
disinterested trustees.
In order for the Plan to remain effective, the selection and nomination of
trustees who are not "interested persons" of the Fund must be done by the
trustees who are not "interested persons" and the persons authorized to make
payments under the Plan must provide written reports at least quarterly to the
trustees for their review.
Also, in its capacity as national wholesale underwriter for shares of the
Funds, the Distributor received commissions on sales of the Funds' Class A
Shares and, if applicable, contingent deferred sales load on Class C Shares
offered on a continuous basis for the years ended May 31, 1994; 1995; and 1996
as follows (there is no historical data for Class B or R Shares)
CLASS A SHARES
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ---------------------
AGGREGATE RETAINED AGGREGATE RETAINED AGGREGATE RETAINED
AMOUNT BY DIST. AMOUNT BY DIST. AMOUNT BY DIST.
----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
State Series
Alabama $ 14,500 $ -- $ 40,800 $ 5,600 $ 36,800 $ 4,500
Arizona 743,600 84,700 226,600 31,400 193,700 26,200
Colorado 326,900 43,800 95,400 13,300 98,000 12,900
Connecticut 1,033,000 137,900 446,500 59,500 349,000 47,400
Florida 2,135,700 296,700 882,000 111,900 608,800 83,000
Florida In-
termediate 24,400 -- 23,300 3,200 22,700 4,200
Georgia 945,300 127,200 347,400 46,900 292,900 38,600
Kansas 1,400,000 185,200 384,000 51,100 251,000 35,000
Kentucky 3,192,800 423,600 1,304,200 174,100 1,057,100 144,700
Kentucky Lim-
ited 23,400 4,200
Louisiana 575,400 71,400 246,500 31,500 254,300 32,900
Michigan 1,222,500 139,300 593,700 80,600 552,600 75,500
Missouri 2,103,300 278,200 892,200 119,700 631,600 86,900
New Jersey 112,100 10,800 115,700 14,700 105,700 13,400
New Jersey
Intermediate 117,500 20,400 30,800 5,600 19,100 3,600
New Mexico 646,900 85,500 191,100 28,400 131,800 17,500
New York 596,817 69,217 242,700 31,800 202,800 26,900
N. Carolina 1,076,400 146,300 438,500 46,900 358,200 49,300
Ohio 2,337,100 274,500 1,065,900 141,100 931,000 124,400
Pennsylvania 173,900 20,000 118,700 15,300 107,100 14,200
S. Carolina 111,100 6,100 44,300 5,700 47,900 7,800
Tennessee 2,123,600 284,800 845,900 113,400 639,000 88,400
Virginia 677,600 88,700 381,200 49,800 311,100 25,900
Wisconsin 272,200 23,800 169,600 21,300
National Se-
ries
All-American 1,188,000 161,798 763,400 104,100 556,900 73,800
Intermediate 460,600 89,100 171,100 34,400 136,700 27,900
Limited Term 4,055,400 818,100 797,200 160,100 543,300 108,400
----------- ---------- ----------- ---------- ---------- ----------
TOTAL $27,394,417 $3,863,315 $10,961,300 $1,503,900 $8,632,100 $1,198,800
=========== ========== =========== ========== ========== ==========
</TABLE>
15
<PAGE>
CLASS C SHARES
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
CONTINGENT DEFERRED CONTINGENT DEFERRED CONTINGENT DEFERRED
SALES CHARGE SALES CHARGE SALES CHARGE
------------------- ------------------- -------------------
<S> <C> <C> <C>
State Series
Arizona $ -- $ 4,000 $ 1,900
Connecticut 800 5,900 400
Florida 200
Florida Intermedi-
ate 400 1,200 3,600
Georgia 600 7,300 2,000
Kentucky 5,900 6,900 7,300
Kentucky Limited 200
Louisiana 200 1,300 1,000
Michigan 10,500 20,400 7,800
Missouri 100 2,700 1,300
New York --
North Carolina 400 4,500 1,600
Ohio 11,600 7,800 12,300
Pennsylvania 100 800 900
Tennessee 3,900 16,300 18,400
Virginia 1,200 9,600 1,700
National Series
- ---------------
All-American 26,000 31,500 13,400
Intermediate --
Limited Term 1,800
------- -------- -------
TOTAL $61,700 $120,200 $75,800
======= ======== =======
</TABLE>
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin, Boston, MA 02106, is the custodian, transfer
agent and dividend disbursing agent for each series. It also maintains the ac-
counting records, determines the net asset value and performs other share-
holder services for the Fund and each series.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are the
independent auditors for the Fund and each series.
PORTFOLIO TRANSACTIONS
The obligations in which the various series invest are traded primarily in
the over-the-counter market. Portfolio securities normally are purchased di-
rectly from dealers who make a market in the securities involved or directly
from the issuer. Such dealers are usually acting as principals for their own
account. Because such obligations are usually bought and sold on a net basis
without any brokerage commissions, the cost of portfolio transactions to the
Fund will primarily consist of dealer spreads.
Subject to policy established by the Fund's trustees, the Manager is primar-
ily responsible for each series' portfolio decisions and the placing of port-
folio transactions. 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 firm's general execution and operational fa-
cilities; and the firm's risk in the positioning of the securities involved.
While the Manager seeks reasonably competitive prices or commissions, the Fund
will not necessarily always be paying the lowest price or commission avail-
able. The Manager does not expect to use any one particular dealer, but, sub-
ject to obtaining the best price and execution, dealers who provide supplemen-
tal investment research to the Fund or the Manager may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu
16
<PAGE>
of the services required to be performed by the Manager under the Advisory
Agreements and the expenses of the Manager or any of its affiliates, acting
either as principal or as paid broker. No brokerage commissions were paid by
any series of the Fund from its respective date of commencement through the
period ended May 31, 1996.
YIELD AND TOTAL RETURN CALCULATION
Each series of the Fund may include its current yield or total return in ad-
vertisements of information furnished to stockholders or potential investors.
The yield of each series is calculated in accordance with the Securities and
Exchange Commission's standardized yield formula and, in the case of series
offering both Class A and Class C Shares, is so calculated separately for
Class A and Class C Shares. Under this formula, interest income over a 30-day
measurement period (including appropriate adjustments for accretion of origi-
nal issue discounts and amortization of market premiums) 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 corresponding tax equivalent yield
reflects the rate an investor would have to earn on a taxable security in or-
der to equal the same after-tax return. As appropriate, the tax equivalent
yield may reflect exemption from federal and/or state income taxes, as well as
property and/or intangible taxes.
A series 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. This computation does not include the effect
of the applicable sales charges which, if included, would reduce total return.
A nonstandardized quotation of total return will always be accompanied by the
series' or class's "average annual total return." A series' average annual to-
tal return for any time period is calculated (separately for each class of
shares) 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 charge). The
change in total value at the end of the investment period is then expressed as
an average annual total rate of return. Each class of each series may also
quote its current yield and total return on a tax equivalent basis assuming
specified applicable Federal, state and local tax rates and may also quote
rankings, yields or returns as published by recognized statistical services or
publishers wherein a series' performance is categorized or compared with other
national or state tax-exempt bond funds with similar investment objectives,
such as Lipper Analytical Service's Fixed Income Performance Analysis for Mu-
nicipal Bond Funds under "Short (1-5 Yr.) Municipal Bond Funds," "Intermediate
(5-10 Yr.) Municipal Bond Funds," or "Single State Municipal Bond Funds," or
this same data as quoted by Barrons, 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 Com-
panies under "Mutual Fund Tax Exempt Bond Funds"; or Morningstar, Inc.'s Mu-
tual Fund Values under "Municipal Bond General Overview."
A series may also quote from articles or commentary published by these same
statistical services or publishers. In addition, a series may show, in narra-
tive or chart form, such series' credit rating analysis, sector analysis, com-
position, portfolio holdings, coupon range, as well as information contained
in such series' audited financial report.
From time to time the tax equivalent yield and average annual total return
of any national or state tax exempt funds, may be compared to the yield of a
three-month, six-month or five-year Certificate of Deposit (a "CD"). Such com-
parisons will, of course, indicate that while the principal value and yield of
the series may fluctuate, the principal value of a CD is FDIC insured, and
both its principal value and yield are fixed and stable.
Current yield and total return of each class of each series will vary from
time to time depending on market conditions, the composition of the portfolio
of the particular series, operating expenses and other factors. These factors
and possible differences in method of calculating performance figures should
be considered when comparing the performance figures of any series of the Fund
with those of other investment vehicles.
17
<PAGE>
Yield and Total Return Calculation as of May 31, 1996 (there is no historical
data for Class B or R Shares):
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
CURRENT YIELD ------------------------
CLASS PRIOR 30 DAYS 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
----- ------------- ------ ------ ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
State Funds
- -----------
Alabama 5.18% (.64%) 4.33%* April 11, 1994
Arizona A 5.16% (.16%) 6.95% 7.18%* October 29, 1986
C 4.83% 2.75% 3.18%* February 7, 1994
Colorado 5.78% (.24%) 6.59% 6.44%* May 4, 1987
Connecticut A 5.12% (.19%) 6.09% 6.70%* July 13, 1987
C 4.80% 2.72% 2.49%* October 4, 1993
Florida A 4.93% (1.19%) 6.30% 6.86%* June 15, 1990
C 4.58% (.05%)* September 14, 1995
Florida Inter-
mediate A 4.46% .34% 3.92%* February 1, 1994
C 4.05% 1.90% 4.74%* February 2, 1994
Georgia A 5.32% (1.28%) 5.60% 6.92% March 27, 1986
C 5.01% 1.51% 2.24%* January 4, 1994
Kansas 5.82% (.72%) 5.35%* January 9, 1992
Kentucky A 4.94% (.33%) 6.46% 7.53%* May 4, 1987
C 4.60% 2.40% 2.99%* October 4, 1993
Kentucky Lim-
ited A 5.22% 1.29%* September 14, 1995
C 5.05% 2.64%* September 14, 1995
Louisiana A 5.11% .37% 6.84% 7.49%* September 12, 1989
C 4.79% 3.12% 2.83%* February 2, 1994
Michigan A 4.87% (.74%) 6.22% 7.37% June 27, 1985
C 4.55% 1.98% 3.73%* June 22, 1993
Missouri A 4.83% (.84%) 6.28% 7.14%* August 3, 1987
C 4.50% 1.86% 1.82% February 2, 1994
New Jersey 5.35% (.39%) 5.65%* September 16, 1992
New Jersey 4.27% .77% 5.45%*
Intermediate September 16, 1992
New Mexico 4.99% (1.16%) 4.85%* September 16, 1992
New York A 5.11% (.23%) 7.53% 7.58%* January 16, 1991
C 4.77% (3.88%)* March 4, 1996
North Carolina A 4.66% (.69%) 5.70% 6.85% March 27, 1986
C 4.32% 2.02% 2.09%* October 4, 1993
Ohio A 4.48% (.77%) 5.98% 7.20% June 27, 1985
C 4.12% 2.05% 3.62%* August 3, 1993
Pennsylvania A 5.31% (.53%) 6.18% 6.57%* October 29, 1986
C 4.99% 2.19% 2.47%* February 2, 1994
South Carolina 4.93% (.82%) 2.62%* July 6, 1993
Tennessee A 4.69% (.58%) 5.94% 7.31%* November 2, 1987
C 4.35% 2.24% 2.39%* October 4, 1993
Virginia A 5.01% (.34%) 6.31% 7.40% March 27, 1986
C 4.69% 2.38% 2.67%* October 4, 1993
Wisconsin 5.03% (.99%) 3.09%* June 1, 1994
National Funds
- --------------
All-American A 5.33% .25% 7.36% 7.96%* October 3, 1988
C 5.02% 3.08% 4.53%* June 2, 1993
Intermediate A 5.37% 1.70% 5.90%* September 15, 1992
C 4.98% (1.86%)* December 1, 1995
Limited Term A 3.84% 1.43% 5.84% 6.45%* October 19, 1987
C 3.64% (.75%)* December 1, 1995
</TABLE>
- --------
*Inception to date
18
<PAGE>
DIVIDEND PAYMENT OPTIONS
Several dividend payment options are available to shareholders. The activa-
tion of these options varies with the nature of a shareholder's administrative
relationship with the Fund. If the shareholder receives periodic statements
regarding the Fund from their broker/dealer, then all dividends are automati-
cally paid in cash unless the shareholder instructs their broker/dealer to im-
plement a different option. If the shareholder receives a periodic statement
directly from the Fund, then all dividends are automatically reinvested unless
the shareholder instructs the Fund to implement a different option.
The dividend payment options are to:
1. Automatically reinvest all interest and capital gains distributions.
2. Pay interest dividends in cash, and reinvest capital gains
distributions.
3. Pay both interest and capital gains distributions in cash.
4. Direct all dividends to another Flagship tax exempt or utility fund
account which has an identical registration and tax identification
number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via automated clearing house
into a bank account. The Fund's Prospectus contains complete
information.
If a shareholder's dividend or capital gains distribution check is returned
by the postal or other delivery service, such shareholder's check may be rein-
vested in their account. The shareholder's distribution options may also be
converted to having all dividends and other distributions reinvested in addi-
tional shares.
All reinvested or directed dividends will be at net asset value without any
sales charge. Your broker, or Flagship customer service representative can
help you change your option from your initial account opening instructions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The ways in which the shares of the series of the Fund are offered to the
public is described in the Fund's Prospectus.
PURCHASE
The Distributor offers several reduced sales charge programs as described
below.
1. Cumulative Purchase Discount (Class A Shares Only). Whenever an individ-
ual shareholder purchases Class A Shares of any series of the Fund, such indi-
vidual shareholder may aggregate his holdings of all Class A Shares in any
other open-end mutual fund subject to a front-end sales charge distributed by
the Distributor and any current purchases of Class A Shares to determine the
applicable sales charge. A reduced sales charge will be imposed if the aggre-
gate amount qualifies under the rate schedule. An individual shareholder may
also aggregate the holdings of a spouse, any of their children and parents in
the same fashion when making a particular purchase. Finally, for purposes of
determining the applicable sales charge, trusts and other fiduciaries may ag-
gregate the holdings of each trust estate or other fiduciary account in the
same fashion even if the beneficiaries are unrelated. Any shareholder may also
combine his holdings of Class A Shares subject to a front-end sales charge and
current purchases of Class A Shares in all such funds distributed by the Dis-
tributor in order to qualify for a reduced sales charge on any particular pur-
chase.
2. Letter of Intent (Class A Shares Only). A shareholder may also qualify
for reduced sales charges by sending to the Fund (within 90 days after the
first purchase desired to be included in the purchase program) a signed, non-
binding letter of intent to purchase, during a 13-month period, an amount suf-
ficient to qualify for a reduced sales charge. A single letter may be used for
spouses, their children and parents or any single trust estate or other fidu-
ciary account. All investments in Class A Shares of the Fund or in Class A
Shares of any other open-end mutual fund subject to a front-end sales charge
distributed by the Distributor count toward the indicated goal. Once the Dis-
tributor receives the required letter of intent, it will apply to qualifying
purchases within the 13-month period the sales charge that would be applicable
to a single purchase of the total amount indicated in the letter. During the
period covered by the letter of intent, 5% of the shares purchased will be re-
stricted until
19
<PAGE>
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 shareholder does not pay the increased sales charge.
3. Broker-dealer and Flagship Employees. In view of the reduction of distri-
bution expenses associated with sales of the Fund's shares to registered rep-
resentatives 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 pur-
chaser must certify to the Fund that certain qualifications have been met and
agree to certain restrictions (such as an investment letter) in order to take
advantage of this program. For similar reasons, shares of the Fund may be pur-
chased at net asset value and in amounts less than the minimum purchase price
by officers, trustees and full-time employees of the Fund, the Distributor and
the Manager. For this purpose, the terms "registered representatives of
broker/dealers who have signed Dealer Agreements with the Distributor," "offi-
cers," "trustees" and "employees" include such persons' spouses, children and
parents, as well as the trustee or custodian of any trust, qualified pension
or profit sharing plan or IRA established by or for the benefit of such offi-
cer, trustee, employee, spouse, child or parent.
4. Group Purchasers (Class A Shares Only). Members of a qualified group may
purchase shares of the Fund at a reduced sales charge applicable to the group
as a whole, if such purchases are made in an amount and manner acceptable to
the Fund. The sales charge, if any, is based on the aggregate dollar value of
shares purchased and still owned by the group, plus the current purchase
amount. Members of a qualified group may purchase shares at net asset value
(without sales charge) where the amount invested is documented to the Fund to
be proceeds from distributions of a unit investment trust. Shares of the Fund
may be purchased at net asset value (without sales charge) by tax-qualified
employee benefit plans and by trust companies and bank trust departments for
funds over which they exercise exclusive discretionary investment authority
for which they charge customary fees and which are held in a fiduciary, agen-
cy, advisory, custodial or similar capacity.
A "qualified group" is one which (i) has previously been in existence, (ii)
has a primary purpose other than acquiring Fund shares at a discount and (iii)
satisfies investment criteria described in the Prospectus which enables the
Distributor to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members and must agree to comply with
certain administrative requirements relating to its group purchases. Under
such purchase plans, subsequent investments will continue until such time as
the investor notifies his group to discontinue further investments. There may
be a delay between the time a member's funds are received by the group and the
time the money reaches the Fund because of a qualified group's remittance pro-
cedures. Unless otherwise noted above, the investment in the Fund will be made
at the public offering price based on net asset value determined on the day
that the funds are received in proper form by the Fund.
5. Redemptions from Unrelated Funds. Shares of the Fund may be purchased at
net asset value where the amount invested is documented to the Fund to be pro-
ceeds from (i) the redemption (within one year of the purchase of Fund shares)
of shares of unrelated investment companies on which the investor has paid
initial or contingent deferred sales charges or is no longer subject to a
CDSC, (ii) the redemption of related or unrelated investment companies with a
Class "R" Share or a share class similar in all material respects to Flag-
ship's Class R Shares or (iii) a Unit Investment Trust.
6. Wrap Fee Accounts (Class A or Class R Shares Only). Shares of the Fund
may be purchased at net asset value by broker/dealers on behalf of wrap fee
client accounts for which the broker/dealer charges a fee and performs adviso-
ry, custodial, record keeping or other services.
7. Waiver of CDSC. For purchases of Class A Shares in amounts over
$1,000,000, the contingent deferred sales charge may be waived for purchases
through a broker-dealer that waives its commission.
EXCHANGES
Any Class A Shares which have been registered in a shareholder'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 without a sales charge for
Class A Shares of any other tax exempt, cash management, utility fund, stock
fund or series thereof distributed by the Distributor in any state where such
exchange may legally be made.
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, shareholders who exchange be-
tween funds within 90 days of the initial purchase date may not take as a loss
the amount of
20
<PAGE>
the sales charge paid, if a sales charge was assessed on the exchanged shares.
Also, if a shareholder receives tax-exempt dividends and shares have not been
held for more than six months, any loss on the sale or exchange of such hold-
ings shall be disallowed to the extent of the tax-exempt dividends.
REDEMPTION
To redeem shares, your dealer is responsible for transmitting the redemption
request to Boston Financial, the Fund's custodian, by the close of trading on
the New York Stock Exchange on a particular day in order for you to receive
the redemption price based upon the net asset value per share determined that
day. If the dealer fails to do so, you will receive the redemption price next
calculated after your request and any other materials are received and your
entitlement to any prior day's redemption price must be settled between you
and your dealer. Your dealer may charge a service fee for handling your re-
demption request.
If you meet the requirements stated below, you may redeem shares by tele-
phone toll free at 800-225-8530.
If you request payment by wire, proceeds will be sent by wire to a previ-
ously designated bank or trust company account normally on the next business
day Boston Financial is open for business. The minimum amount to be wired is
$5,000. Payment by mail may also be requested by telephone, in which case the
Fund will make the redemption as of the close of business on the date on which
such request is received and will normally send a check on the next business
day in the appropriate amount to the shareholder of record at the address
listed in the most recent Application Form received for such shareholder.
In order to use the telephone redemption procedure, an Application Form with
the expedited payment section properly completed must be on file with Boston
Financial before an expedited redemption request is submitted. This form re-
quires you to designate the bank or trust company account to which your re-
demption proceeds should be sent. Any change in the account designated to re-
ceive the proceeds must be submitted in proper form on a new Application Form
with signature guaranteed (see "Ordinary Redemption" for guaranty require-
ments).
Neither the Fund nor Boston Financial will be responsible for the authentic-
ity of any redemption instructions received by telephone or for the accuracy
or authenticity of anything contained in the most recent Application Form re-
ceived from you.
For all redemptions other than through your dealer or by telephone, your re-
demption request must be submitted in writing to:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
Such redemptions will be made immediately after the next determination of
net asset value, and the Fund will make payment by sending a check to you at
the address on your most recent Application Form. Checks will normally be sent
out within one business day, but in no event more than the required settlement
period as set by regulation following receipt of the redemption request in
proper form. Proceeds of redemptions of recently purchased shares may be de-
layed for 15 days or more, pending collection of funds for the initial pur-
chase. For redemption requests over $50,000, or if the address 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, your signature on the re-
demption request must be guaranteed by a commercial bank, trust company, sav-
ings bank or savings and loan association that is a member of the FDIC or
FSLIC, or by a member firm of a domestic national securities exchange. In cer-
tain instances, Boston Financial may request additional documentation which it
believes necessary to insure proper authorization.
The Fund reserves the right to suspend the right of redemption and to post-
pone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than weekend and holiday closings, or
trading on the New York Stock Exchange is restricted or during which (as de-
termined by the Commission by rule or regulation) and emergency exists as a
result of which disposal or evaluation of a series' portfolio securities is
not reasonably practicable, or for such other periods as the Commission by or-
der permits.
21
<PAGE>
The Fund will use its best efforts to pay in cash for all shares redeemed,
but under abnormal conditions which make payment in cash impractical or un-
wise, the Fund may make payment wholly or partly in portfolio securities at
their then market value equal, when added to any cash payment, to the redemp-
tion price. In such cases an investor may incur brokerage costs in converting
such securities to cash.
Due to the relatively high cost of handling small investments, the Fund re-
serves the right to involuntarily redeem, at net asset value, the shares in a
series of any shareholder whose redemptions cause the value of its holdings in
such series to have a value of less than $1,000. Before the Fund redeems such
shares and sends the proceeds to the shareholder, the shareholder will be
given written notice that the value of the shares of such series in the ac-
count is less than the minimum amount and will be allowed 30 days to make an
additional investment in an amount which will increase the value of his hold-
ings in such series to at least $1,000. Accounts with balances of less than
$25 will be redeemed without written notice. No CDSC will be imposed on invol-
untary redemptions.
Shares purchased other than by Federal Funds wire or bank wire may not be
redeemed by telephone until 15 calendar days after the purchase of such shares
but may be redeemed pursuant to the ordinary redemption procedure during such
period.
PRICE
The public offering price is based on net asset value and includes the ap-
plicable sales charge. Because the Fund determines net asset value for each
series daily as of the close of trading (normally 4:00 p.m. New York time) on
the New York Stock Exchange on each day that the Exchange is open for trading,
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 pro-
vide timely payment (normally five business days after the order is received),
the Distributor may sell the shares to other investors at the then current of-
fering 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.
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. Boston Financial will send to each share-
holder of record a confirmation of each purchase and redemption transaction
(including the aggregate number of shares owned after such transaction) by
such shareholder and a quarterly statement summarizing purchases, redemptions
and dividend accruals and distributions in the account during the prior month.
TAXES
Each series of the Fund intends to qualify and elect to be treated as a
"regulated investment company" under Sections 851-855 of the Internal Revenue
Code of 1986, as amended (the "Code"). To so qualify, each series must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currency,
or certain other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of invest-
ing in stock, securities or currencies; (ii) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of the follow-
ing assets held for less than three months: (a) stock or securities, (b) op-
tions, futures or forward contracts on stock or securities, or (c) foreign
currencies (or foreign currency options, futures or forward contracts) not di-
rectly related to its principal business of investing in stock or securities;
and (iii) diversify its holdings so that, at the end of each quarter of its
taxable year, the following two conditions are met: (a) at least 50% of the
value of the Fund's total assets is represented by cash, U.S. Government secu-
rities, securities of other regulated investment companies and other securi-
ties (for this purpose, such other securities will qualify only if the Fund's
investment is limited, in respect of any issuer, to an amount not greater than
5% of the Fund's assets and 10% of the outstanding voting securities of such
issuer) and (b) not more than 25% of the value of the Fund's assets is in-
vested in securities of any one issuer (other than U.S. Government securities
or securities of other regulated investment companies). Because each series of
the Fund generally invests in the obligations of a single state and its polit-
ical subdivisions, it may be more difficult for a series to comply with the
above-mentioned diversification requirements than would be the case if such
series invested in a broader category of obligations.
22
<PAGE>
Corporate shareholders may also be taxed on exempt interest dividends not
otherwise considered to be a preference item since the computation of a corpo-
ration's alternative minimum tax liability includes an adjustment generally
based on the difference between adjusted current earnings (an alternative
measure of income that includes interest on tax-exempt obligations) and the
amount otherwise determined to be alternative minimum taxable income.
Each series intends to declare and pay dividends and capital gains distribu-
tions so as to avoid imposition of a four percent Federal excise tax. To do
so, each series expects to distribute during the calendar year at least an
amount equal to (i) 98% of its calendar year ordinary income, (ii) 98% of its
capital gain net income (the excess of short and long-term capital gain over
short and long-term capital loss) for each one-year period ending October 31,
and (iii) 100% of any undistributed ordinary or capital gain net income from
the prior calendar year which has not been taxed to such series. Dividends de-
clared in October, November or December made payable to shareholders of record
in such a month, and paid in the following January would be deemed to have
been paid by the Fund and received by shareholders as of December 31st of the
year declared.
Dividends paid by any series will not qualify for the 70 percent dividends-
received deduction generally available to corporate shareholders because none
of any series' gross income will consist of dividends from domestic corpora-
tions. Shareholders will be subject to federal and state taxes on distribu-
tions attributable to interest earned on certificates issued by U.S. agencies
(e.g., GNMA, FNMA, and FHLMC).
A series may engage in various defensive hedging transactions. Under various
Code provisions, such transactions may change the character of recognized
gains and losses, accelerate the recognition of certain gains and losses, and
defer the recognition of certain losses. If a shareholder receives an exempt-
interest dividend with respect to any share of a series and such share is held
by such shareholder for less than six months, any loss on the sale or exchange
of such share shall be disallowed to the extent of such exempt-interest divi-
dend. Also, if a capital gain dividend is paid with respect to any shares of a
series which are sold at a loss after being held for less than six months, 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 dividend. There are special rules
for determining holding periods for purposes of these rules.
EXCHANGE AND REINVESTMENT PRIVILEGE
Any Class of Shares which have been registered in a shareholder's name for
at least 15 calendar days, may be exchanged, on the basis of relative net as-
set value per share, for shares of any other tax exempt, cash management,
stock, or utility mutual fund or series thereof distributed by Flagship Funds
Inc. ("Substitute Fund"). Class A Shares may only be exchanged for other
shares which are sold subject to an initial sales charge in any state where
such exchange may legally be made. Any Class B and Class C Shares may be ex-
changed without the payment of any contingent deferred sales charge otherwise
due upon redemption of Class B and Class C Shares for shares of any other Sub-
stitute Fund which are sold pursuant to a deferred sales charge arrangement in
any state where such exchange may legally be made. Any Class R Shares may be
exchanged for any other series of Class R Shares. Shares must be on deposit at
the transfer agent before the exchange can be made. Before effecting an ex-
change, a shareholder should obtain and read a current prospectus of the Sub-
stitute Fund.
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
short or long-term capital gain or loss may be realized. However, shareholders
who exchange between funds within 90 days of the initial purchase date may not
take as a loss the amount of the sales charge paid, if a sales charge was as-
sessed on the exchanged shares.
The exchange privilege may be modified or terminated at any time. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. To exercise the exchange privilege, you must either con-
tact your dealer or broker, who will advise the Fund of the exchange, or com-
plete the Exchange Application available from the Fund's Transfer Agent and
submit it to the Transfer Agent. If you have certificates for any shares being
exchanged, you must surrender such certificates.
A shareholder who has redeemed Class A Shares may repurchase shares (or
shares of any other fund distributed by the Distributor or series thereof
which are sold subject to a sales charge) at net asset value without incurring
the applicable sales charge. Such a purchase must, however, be in an amount
between the stated
23
<PAGE>
minimum investment of such fund and the amount of the proceeds of redemption.
The reinvestment request must be received by the Transfer Agent within one
year of the redemption, and this feature may be exercised by a shareholder
only twice per calendar year. Exercising the reinvestment privilege will not
affect the character of any gain or loss realized on the redemption for fed-
eral 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 and reinvestments, please contact your
dealer or call the Fund toll free at 1-800-414-7447, or for TDD call 800-360-
4521.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders of any series of the Fund whose account is valued at $10,000 or
more may establish a Systematic Withdrawal Plan ("SWP") and receive monthly or
quarterly checks for $50 or any specified greater amount. Shareholders who es-
tablish a SWP must receive their distributions of the Fund's investment income
in the form of additional full and fractional shares at net asset value with-
out any sales charge. Such distributions and other shares in the shareholder's
account will be redeemed to the extent necessary at net asset value on the day
of the month that monthly dividends are paid in order to pay the specified
amount to be withdrawn that month pursuant to the shareholder's SWP. Depending
upon the size of withdrawal payments specified, the size of the shareholder's
account and fluctuations in net asset value, such redemptions may reduce or
exhaust the shareholder's account.
Generally, it will be disadvantageous for a shareholder to purchase shares
(except through reinvestment of distributions) while the shareholder is par-
ticipating in a SWP because the shareholder will be paying a sales charge to
purchase shares at the same time that the shareholder is redeeming shares upon
which the shareholder may already have paid a sales charge. Therefore, the
Fund will not knowingly permit a shareholder to make additional investments of
less than $5,000 if such shareholder is at the same time making systematic
withdrawals at a rate greater than the dividends being paid on his shares. The
Fund reserves the right to amend or terminate the systematic withdrawal pro-
gram on thirty days' notice. Shareholders may withdraw from the program at any
time or change the payee or the specified amount of payments.
If you are interested in establishing a SWP, please contact Flagship toll
free at 1-800-225-8530, or for TDD call 800-360-4521.
SERVICEMARKS AND TRADEMARKS
Flagship Financial has obtained federal registration of combination
servicemarks for each of the state and national series described in this pro-
spectus. The servicemarks consist of both the full name of each fund and an
accompanying logo. In the case of the state funds, the logo is presented as
white stars on a blue field, along with red and white stripes covering an out-
line of the specific state, and in the case of the national funds, a similar
design covering an outline of the United States. These servicemarks are filed
for federal registration. In addition, Flagship Financial was granted a fed-
eral registered trademark for its use of "Plain Vanilla(R)" in the investment
and mutual fund area.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the securi-
ties offered by 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 Additional Statement as to
the contents of any contract of other documents referred to are not necessar-
ily 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.
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF SUB-TRUSTS OF
THE FLAGSHIP TAX-EXEMPT FUNDS TRUST
Financial Statements and Independent Auditors' Report for the period ending
May 31, 1996, for the following funds:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Flagship Alabama Double Tax Exempt Fund.................................. F-2
Flagship All-American Tax Exempt Fund.................................... F-11
Flagship Arizona Double Tax Exempt Fund.................................. F-24
Flagship Colorado Double Tax Exempt Fund................................. F-36
Flagship Connecticut Double Tax Exempt Fund.............................. F-46
Flagship Florida Double Tax Exempt Fund and Flagship Florida Intermediate
Tax Exempt Fund......................................................... F-59
Flagship Georgia Double Tax Exempt Fund.................................. F-80
Flagship Intermediate Tax Exempt Fund.................................... F-92
Flagship Kansas Triple Tax Exempt Fund................................... F-104
Flagship Kentucky Triple Tax Exempt Fund and Flagship Kentucky Limited
Term Municipal Bond Fund................................................ F-114
Flagship Limited Term Tax Exempt Fund.................................... F-138
Flagship Louisiana Double Tax Exempt Fund................................ F-159
Flagship Michigan Triple Tax Exempt Fund................................. F-170
Flagship Missouri Double Tax Exempt Fund................................. F-183
Flagship New Jersey Intermediate Tax Exempt Fund and Flagship New Jersey
Double Tax Exempt Fund.................................................. F-198
Flagship New Mexico Double Tax Exempt Fund............................... F-214
Flagship New York Tax Exempt Fund........................................ F-224
Flagship North Carolina Double Tax Exempt Fund........................... F-235
Flagship Ohio Double Tax Exempt Fund..................................... F-248
Flagship Pennsylvania Triple Tax Exempt Fund............................. F-264
Flagship South Carolina Double Tax Exempt Fund........................... F-275
Flagship Tennessee Double Tax Exempt Fund................................ F-284
Flagship Virginia Double Tax Exempt Fund................................. F-297
Flagship Wisconsin Double Tax Exempt Fund................................ F-310
</TABLE>
F-1
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Description Face Market
(000) Education Rate Maturity Value
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$495 Alabama Agricultural and Mechanical University Board of Trustees Revenue -
Series 1995 5.500% 11/01/20 $ 465,270
110 University of South Alabama Tuition Revenue Refunding Capital Improvement -
Series 1996 5.000 11/15/15 98,398
Health Care
--------------------------------------------------------------------------------------------------------------------------
100 Colbert County-Northwest, AL Health Care Facilities Authority Revenue -
Series 1995 5.750 06/01/15 97,078
Hospitals
--------------------------------------------------------------------------------------------------------------------------
100 Birmingham-Carraway, AL Special Care Facilities Financing Authority Revenue -
Carraway Methodist Health Systems - Series 1995 A 5.875 08/15/15 97,464
25 Huntsville, AL Health Care Facilities Authority Revenue - Series 1992 B 6.500 06/01/13 26,140
75 Commonwealth of Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority Revenue -
Hospital Auxilio Mutuo - Series 1995 6.250 07/01/24 77,099
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
85 Alabama Housing Finance Authority - Single Family Mortgage Revenue -
Series 1995 A-2 6.400 10/01/20 85,585
25 Alabama Housing Finance Authority - Single Family Mortgage Revenue -
Series 1994 A-1 6.600 04/01/19 25,762
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
100 Courtland, AL Industrial Development Board - Solid Waste Disposal Revenue -
Champion International Corporation - Series 1995 A 6.500 09/01/25 97,161
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
200 Alabama State Docks Department Facilities Revenue - Series 1996 6.100 10/01/13 199,556
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
90 Huntsville, AL Electric System Revenue - Warrants - Series 1994 6.100 12/01/10 92,546
185 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.375 07/01/24 189,477
200 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 182,984
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
25 Alabama Water Pollution Control Authority Revenue - Revolving Fund Loan -
Series 1994 A 6.750 08/15/17 26,618
50 Madison, AL Waterworks and Sewer Board Revenue - Series 1993 6.250 12/01/12 50,988
100 Mobile, AL Water and Sewer Commissioners Board Revenue - Series 1995 5.000 01/01/06 97,911
100 Mobile, AL Water and Sewer Commissioners Board Revenue - Series 1995 5.500 01/01/10 98,492
125 Prichard, AL Water Works and Sewer Board Revenue - Series 1994 6.125 11/15/14 127,460
</TABLE>
4 F-2 Alabama
<PAGE>
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets May 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Municipal Bonds (continued)
Face
Amount Face Market
(000) Description Rate Maturity Value
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$150 Birmingham, AL General Obligation - Series 1993 A 5.750% 04/01/19 $ 143,384
200 Mobile, AL General Obligation Capital Improvement Warrants - Series 1996 5.750 02/15/16 196,056
100 Montgomery, AL Downtown Redevelopment Authority - State of Alabama Project -
Mortgage Revenue Refunding - Series 1992 5.500 10/01/13 95,791
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
45 Alabama State Municipal Electric Supply 6.500 09/01/05 48,969
150 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 166,224
20 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 22,107
100 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public Education
and Health Facilities - Series K 6.875 07/01/21 112,151
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
100 Alabama Mental Health Finance Authority - Special Tax Revenue - Series 1995 5.500 05/01/15 95,581
50 Alabama Public School and College Authority - Series 1993 6.000 08/01/02 53,002
20 Commonwealth of Puerto Rico Highway and Transportation Authority
Revenue - Series V 6.625 07/01/12 21,088
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
100 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.500 07/01/23 103,353
Total Investments in Securities - Municipal Bonds (cost $3,184,999) - 98.1% 3,193,695
Excess of Other Assets over Liabilities - 1.9% 62,705
Total Net Assets - 100.0% $3,256,400
</TABLE>
See notes to financial statements.
Alabama F-3 5
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $3,184,999) $ 3,193,695
Cash 29,190
Receivable for Fund shares sold 19,168
Interest receivable 51,588
Other 65
Total assets 3,293,706
LIABILITIES:
Payable for Fund shares reacquired 8,422
Distributions payable 14,854
Accrued expenses 14,030
Total liabilities 37,306
NET ASSETS:
Applicable to 333,444 shares of beneficial interest issued and
outstanding $3,256,400
Net asset value per share $ 9.77
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 144,570
EXPENSES:
Distribution fees (Note E) 10,085
Investment advisory fees (Note E) 12,670
Custody and accounting fees 41,578
Transfer agent's fees 9,440
Registration fees 732
Legal fees 204
Audit fees 7,320
Trustees' fees 31
Shareholder services fees (Note E) 275
Other 130
Advisory fees waived (Note E) (12,670)
Expense subsidy (Note E) (57,787)
Total expenses before credits 12,008
Custodian fee credit (Note B) (1,923)
Net expenses 10,085
Net investment income 134,485
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 519
Change in unrealized appreciation (depreciation) of investments (63,639)
Net loss on investments (63,120)
Net increase in net assets resulting from operations $ 71,365
</TABLE>
See notes to financial statements.
6 F-4 Alabama
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 134,485 $ 53,146
Net realized gain (loss) on security transactions 519 (14,088)
Change in unrealized appreciation (depreciation) of investments (63,639) 70,459
Net increase in net assets resulting from operations 71,365 109,517
Distributions to shareholders:
From net investment income (134,144) (52,972)
From net realized capital gains (1,200)
Net decrease in net assets from distributions to shareholders (135,344) (52,972)
Net increase in net assets from Fund share transactions (Note C) 1,440,812 1,465,784
Total increase in net assets 1,376,833 1,522,329
NET ASSETS:
Beginning of year 1,879,567 357,238
End of year $3,256,400 $1,879,567
NET ASSETS CONSIST OF:
Paid-in surplus $3,261,958 $1,821,146
Undistributed net investment income 515 174
Accumulated net realized gain (loss) on security transactions (14,769) (14,088)
Unrealized appreciation (depreciation) of investments 8,696 72,335
$3,256,400 $1,879,567
</TABLE>
See notes to financial statements.
Alabama F-5 7
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship Alabama Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced investment operations on April 11, 1994.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
8 F-6 Alabama
<PAGE>
Notes to Financial Statements
................................................................................
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------- ------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 174,099 $1,733,573 166,351 $1,599,456
Shares issued on reinvestment 5,583 55,732 2,463 23,382
Shares reacquired (35,361) (348,493) (16,664) (157,054)
Net increase 144,321 $1,440,812 152,150 $1,465,784
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $2,622,482 and $1,044,947, respectively. At May 31, 1996, cost for
federal income tax purposes is $3,184,999 and net unrealized appreciation
aggregated $8,696, of which $38,929 related to appreciated securities and
$30,233 related to depreciated securities.
At May 31, 1996, the Fund had post-October losses of approximately $14,800
which will be deferred for tax purposes until the Fund's next fiscal year.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived all of its advisory
fees amounting to $12,670. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's shares. The maximum amount payable for these expenses on an annual
basis is .40% of the Fund's average daily net assets. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $1,100. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
ALABAMA F-7 9
<PAGE>
Notes to Financial Statements
................................................................................
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $36,800 for the year ended May 31, 1996, of which approximately
$32,300 was paid to other dealers. Certain officers and trustees of the Trust
are also officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$60,800) will be reimbursed to the Advisor on a straight-line basis over a
period of three years beginning June 1, 1996. In the event that the
Advisor's current investment in the Trust falls below $100,000 prior to the
full reimbursement of the organizational expenses, then it will forego any
further reimbursement.
10 F-8 ALABAMA
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended April 11, 1994 to
May 31, 1996 May 31, 1995 May 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period: $ 9.94 $ 9.66 $ 9.58
Income from investment operations:
Net investment income 0.53 0.52 0.03
Net realized and unrealized gain (loss) on securities (0.17) 0.28 0.09
Total from investment operations 0.36 0.80 0.12
Less distributions:
From net investment income (0.53) (0.52) (0.04)
Total distributions (0.53) (0.52) (0.04)
Net asset value, end of period $ 9.77 $ 9.94 $ 9.66
Total return/(a)/ 3.72% 8.77% 9.34%
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.48% 0.16% 0.00%
Net investment income 5.24% 5.47% 2.42%
Assuming credits and no waivers or reimbursements:
Expenses 3.19% 7.61% 34.92%
Net investment income 2.53% (1.98%) (32.50%)
Net assets at end of period (000's) $3,256 $ 1,880 $ 357
Portfolio turnover rate 42.03% 120.19% 0.00%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.40%; prior period numbers have not
been restated to reflect these credits.
ALABAMA F-9 11
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP ALABAMA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Alabama Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Alabama
Double Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
12 F-10 ALABAMA
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
<TABLE>
<CAPTION>
...................................................................................................................................
Municipal Bonds
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Alabama
$2,000 Jasper, AL Water Works and Sewer Board, Incorporated - Water and Sewer
Revenue - Series 1996 6.000% 06/01/18 $1,987,920
Alaska
310 Alaska State Housing Finance Corporation 7.800 12/01/30 315,589
California
8,000 Contra Costa, CA Home Mortgage Finance Authority - Multifamily Mortgage
Revenue - Series 1984 0.000 09/01/17 2,114,880
2,000 Foothill/Eastern Transportation Corridor Agency - Toll Road Revenue -
Series 1995 0.000 01/01/05 1,152,120
6,000 Long Beach, CA Aquarium of the Pacific Revenue - Series 1995 A 6.125 07/01/23 5,494,440
4,000* Los Angeles, CA Regional Airports Improvement Corporation - Facilities
Sublease Revenue - Delta Air Lines, Incorporated - Series 1996 6.350 11/01/25 3,936,920
500 Sacramento, CA Cogeneration Authority Revenue - Procter & Gamble -
Series 1995 6.200 07/01/06 495,100
1,000 Sacramento, CA Cogeneration Authority Revenue - Procter & Gamble -
Series 1995 6.500 07/01/21 1,005,260
5,000 Sacramento, CA Power Authority Revenue - Cogeneration Project - Series 1995 5.875 07/01/15 4,650,450
Colorado
6,000 Arapahoe County CO E-470 Public Highway Authority Revenue - 0.000 08/31/05 3,326,340
E-470 Project - Series 1986
3,000 Arapahoe County, CO E-470 Public Highway Authority Revenue - E-470 Project -
Series 1986 0.000 08/31/06 1,545,000
2,000 Arapahoe County, CO E-470 Public Highway Authority Revenue - E-470 Project -
Series 1986 6.950 08/31/20 2,056,220
2,500 Hyland Hills Park and Recreation District - Special Revenue - Series 1996 A 6.750 12/15/15 2,496,125
Connecticut
2,710 Connecticut State Health and Educational Facilities Authority Revenue -
Quinnipiac College - Series D 6.000 07/01/23 2,427,781
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
AHF/Hartford, Incorporated - Series 1994 7.125 11/01/14 2,236,080
3,500 Eastern Connecticut Resource Recovery Authority - Solid Waste Revenue -
Wheelabrator Lisbon Project - Series 1993 A 5.500 01/01/20 3,088,120
District of Columbia
1,480 District of Columbia Revenue - Georgetown University - Series 1990B 7.150 04/01/21 1,573,714
Florida
1,000 Lady Lake, FL Industrial Development Revenue - Sunbelt Utilities 9.625 07/01/15 1,194,390
1,975 Nassau County, FL Amelia Island Properties - Series 1993A 9.750 01/01/23 2,166,200
1,000 Orange County, FL Tourist Development Tax Revenue - Series 1992 B 6.500 10/01/19 1,042,290
1,965 Sanford Airport Authority, Florida - Industrial Development Revenue Bonds -
(Central Florida Terminals, Inc. Project) - Series 1995 A and B 7.500 05/01/10 1,858,713
Georgia
1,000 Municipal Electric Authority - Georgia Project One Special Obligation -
Fifth Crossover - Series 1992 6.500 01/01/17 1,057,370
Illinois
1,750 Chicago, IL Gas Supply Revenue - Peoples Gas Light and Coke Company 8.100 05/01/20 1,930,355
1,000 Chicago, IL Gas Supply Refunding Revenue - Peoples Gas Light and Coke Company -
Series 1995 A 6.100 06/01/25 1,002,380
4,000 Illinois Educational Facilities Authority Revenue - Columbia College -
Series 1992 6.875 12/01/17 4,029,360
3,750 Illinois Educational Facilities Authority Revenue - Loyola College and
University - Series 1991 7.125 07/01/21 4,020,188
</TABLE>
4 F-11 All-American
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,000 Illinois Health Facilities Authority Revenue - Galesburg Cottage Hospital -
Series 1992 6.250% 05/01/11 $1,018,660
3,000 Illinois Health Facilities Authority Revenue - Fairview Obligated Group -
Series 1995 A, B and C 7.125 08/15/17 2,897,010
145 Illinois Health Facilities Authority
Revenue - Westlake Community Hospital 7.875 01/01/13 152,932
1,200 Romeoville, IL General Obligation - Series C 8.375 01/01/16 1,395,936
Indiana
1,000 Fishers, IN Economic Development Revenue First Mortgage 8.375 09/01/14 1,057,440
1,750 Indiana State Health Facilities Authority Revenue - Hancock Memorial
Hospital 8.300 08/15/20 1,867,442
1,250 Indiana Transportation Finance Authority Revenue - Airport Facilities - Series A 6.750 11/01/11 1,313,688
4,000 Indiana University of Trustees - Student Fee Revenue - Series K 0.000 08/01/11 1,619,840
2,000 Indianapolis, IN Airport Authority Revenue - Federal Express Corporation -
Series 1994 7.100 01/15/17 2,074,280
4,000 Indianapolis, IN Airport Authority Revenue - United Air Lines, Incorporated,
Indianapolis Maintenance Center - Series 1995A 6.500 11/15/31 3,852,760
1,500 Indianapolis, IN Local Public Improvement - Series 1991C 6.700 01/01/17 1,655,325
1,500 Monroe County, IN Community School Building Corporation - Series 1992 6.600 07/01/09 1,618,755
500 Monroe County, IN Hospital Authority - Bloomington Hospital - Series 1992 6.700 05/01/12 530,435
1,000 Rockport, IN Industrial Pollution Control Revenue - Indiana-Michigan Power 7.600 03/01/16 1,069,110
Kentucky
5,000 Ashland, KY Sewage and Solid Waste Revenue - Ashland Inc. - Series 1995 7.125 02/01/22 5,207,850
3,000 Boone County, KY Pollution Control Revenue - Cincinnati Gas and Electric -
Series 1994A 5.500 01/01/24 2,821,830
1,750 Henderson County, KY Solid Waste Disposal Revenue - MacMillan Bloedel -
Series 1995 7.000 03/01/25 1,800,330
3,250 Jefferson County, KY Health Facilities Revenue - Jewish Hospital Health Care
Services 6.500 05/01/15 3,365,505
4,500 Jefferson County, KY Capital Projects Corporation Revenue - Municipal Lease -
Series 1993A 0.000 08/15/12 1,646,865
5,000 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1994A 6.750 05/15/25 5,380,500
2,500 Mt. Sterling, KY League of Cities Funding Trust Lease Program Revenue -
Series 1993A 6.200 03/01/18 2,487,900
3,500 Pendleton County, KY Multi-County Lease Revenue Program - Series 1993A 6.500 03/01/19 3,627,015
500 Pendleton County, KY Multi-County Lease Revenue Program - Series 1993A 6.400 03/01/19 518,890
Louisiana
2,000 New Orleans, LA Audubon Park Commission - Aquarium Revenue - Series 1992A 8.000 04/01/12 2,149,800
Maryland
2,025 Montgomery County, MD Housing Opportunities Commission - Metropolitan
Housing Development - Issue 1995 A, B, and C 6.100 07/01/15 2,011,352
Massachusetts
3,000 Massachusetts State Housing Finance Agency - Series 1993A 6.300 10/01/13 3,007,740
2,500 Massachusetts State Health and Educational Facilities Authority Revenue -
Dana-Farber Cancer Institute - Series G-1 and G-2 6.250 12/01/22 2,468,150
2,750 Massachusetts Industrial Finance Agency Revenue - Holy Cross College -
Series 1996 5.500 03/01/20 2,583,460
Michigan
2,000 Pontiac, MI Hospital Finance Authority Revenue - NOMC Group - Series 1993 6.000 08/01/13 1,776,200
420 Western Townships Michigan Utility Authority - Sewer Disposal System 8.200 01/01/18 462,143
Mississippi
2,000 Claiborne County, MS Pollution Control Revenue - System Energy Resources
Incorporated - Series 1995 7.300 05/01/25 2,051,300
</TABLE>
All-American F-12 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,725 Gautier, MS Combined Utility District System Revenue - Jackson County -
Series 1992 6.375% 03/01/19 $1,765,503
New Hampshire
700 New Hampshire Higher Educational and Health Facilities Authority Revenue -
Catholic Medical Center 6.000 07/01/17 642,460
600 New Hampshire Higher Educational and Health Facilities Authority Revenue -
St. Joseph Hospital 7.500 01/01/16 624,198
New Jersey
425 Essex County, NJ Improvement Authority - General Obligation Lease Revenue -
Series 1994 6.600 04/01/14 433,882
2,400 New Jersey Economic Development Authority - Electric Energy Facility Revenue -
Vineland Cogeneration Project - Series 1992 7.875 06/01/19 2,547,336
1,375 New Jersey Economic Development Authority Revenue - Educational Testing
Services - Series 1995B 6.125 05/15/15 1,400,768
650 New Jersey Economic Development Authority Revenue - Clara Maass Health
System Obligated Group - Series 1995 5.000 07/01/25 561,048
1,500 New Jersey State Housing and Mortgage Finance Agency - Home Buyer Project -
Series 1 6.600 11/01/14 1,545,720
1,290 New Jersey State Housing and Mortgage Finance Agency Revenue -
Series 1994K 6.375 10/01/26 1,295,908
New Mexico
1,500 Gallup, NM Pollution Control Revenue - Plains Electric Generation and
Transmission Cooperative - Series 1992 6.650 08/15/17 1,598,265
New York
500 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.700 10/01/06 488,750
2,500 Metropolitan Transit Authority of New York - Commuter Facilities Revenue -
Series 1994A 6.500 07/01/24 2,534,875
3,700 Metropolitan Transportation Authority, NY - Transit Facilities Revenue -
Series 1996A 6.100 07/01/21 3,709,176
1,900 New York City, NY General Obligation - Series 1991B 7.500 02/01/09 2,076,434
685 New York City, NY General Obligation - Series 1992D 7.500 02/01/17 746,876
750 New York City, NY General Obligation - Series 1992D 7.500 02/01/18 817,748
2,060 New York City, NY General Obligation - Series 1996J 6.000 02/15/24 1,891,265
1,750 New York City Housing Development Corporation - Multifamily 7.350 06/01/19 1,858,080
1,000 New York City Municipal Water Finance Authority Revenue - Water and Sewer
System - Series 1995A 5.500 06/15/23 916,050
1,480 New York State Dormitory Authority Revenue - City University System
Consolidated Revenue - Series 1993B 5.750 07/01/18 1,385,206
2,500 New York State Dormitory Authority Revenue - Department of Health -
Series 1995 6.625 07/01/24 2,547,950
2,000 New York State Energy Research and Development Authority Facilities Revenue -
Edison Company of New York - Series 1995A 6.100 08/15/20 2,014,280
3,000 New York State Housing Finance Agency Revenue - Service Contract -
Series 1995A 6.375 09/15/15 2,978,280
1,590 New York State Mortgage Agency Revenue - Single Family - Series UU 7.750 10/01/23 1,669,484
5,500 New York State Urban Development Corporation Revenue - State Facilities -
Series 1995 5.700 04/01/20 5,088,710
North Carolina
1,299 Woodfin, NC Treatment Facilities - Certificates of Participation - Series 1993 6.750 12/01/13 1,325,716
North Dakota
635 North Dakota State Housing Finance Agency - Single Family Mortgage Revenue -
Series B 8.000 07/01/13 658,755
</TABLE>
6 F-13 All-American
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Ohio
<C> <S> <C> <C> <C>
$1,400 Cleveland, OH Public Power System First Mortgage Revenue - Series 1994 7.000% 11/15/17 $ 1,540,182
1,350 Columbiana County, OH Jail Facilities Construction - General Obligation -
Series 1994 6.700 12/01/24 1,427,152
1,000 Cuyahoga County, OH Health Care Facilities Revenue - Altenheim Nursing Home 9.280 06/01/15 1,096,190
3,000 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 6.250 08/15/24 2,945,070
1,000 Cuyahoga County, OH Hospital Facilities Revenue - Fairview General Hospital/
Lutheran Medical Center - Series 1993 6.300 08/15/15 987,830
2,350 Garfield Heights, OH Hospital and Improvement Revenue - Marymont Hospital -
Series 1992 A 6.700 11/15/15 2,435,704
1,500 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series A 8.125 12/01/11 1,606,425
500 Mahoning Valley, OH Sanitary District - Series 1991 7.900 12/15/15 550,155
1,600 Mahoning Valley, OH Sanitary District - Series 1991 7.900 12/15/16 1,760,496
2,750 Ohio State Air Quality Development Authority Revenue - Dayton Power and
Light Company - Series 1995 6.100 09/01/30 2,745,765
1,750 Ohio State Higher Educational Facilities Commission Revenue - University of
Dayton - Series 1992 6.600 12/01/17 1,861,668
3,500 Shelby County, OH Hospital Facilities and Improvement Revenue - Wilson
Memorial Hospital 7.700 09/01/18 3,662,155
Oklahoma
3,750 Tulsa, OK Municipal Airport Trustees Trust Revenue - AMR Corporation -
Series 1995 6.250 06/01/20 3,662,625
Pennsylvania
2,500 Allegheny County, PA Higher Education Building Authority Revenue -
Robert Morris College - Series 1996 A 6.400 02/15/14 2,417,575
1,500 Clarion County, PA Hospital Authority Revenue - Clarion Hospital 8.100 07/01/12 1,548,780
1,000 Delaware County, PA Industrial Development Authority - Pollution Control
Revenue - Philadelphia Electric Company - Series 1991 A 7.375 04/01/21 1,110,130
500 Falls Township, PA Hospital Authority Revenue - Delaware Valley Medical
Center - Series 1992 7.000 08/01/22 520,080
1,500 Lancaster County, PA Hospital Authority Revenue - Health Care Center Masonic
Homes - Series 1994 5.000 11/15/20 1,296,795
1,000 Latrobe, PA Industrial Development Authority Revenue - St. Vincent College -
Series 1994 6.750 05/01/24 992,470
1,700 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 6.375 07/01/26 1,678,597
Puerto Rico
1,190 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400 07/01/25 1,072,702
150 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series A 7.875 07/01/17 163,868
2,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 2,210,740
500 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 539,915
Rhode Island
160 Rhode Island Housing and Mortgage Finance Corporation - Homeownership
Series 1B 8.300 10/01/11 161,645
1,600 Rhode Island Housing and Mortgage Finance Corporation - Homeownership
Series 3A 7.850 10/01/16 1,685,072
South Carolina
1,975 Berkeley County, SC School District - Certificates of Participation -
Berkeley School Facilities Group, Incorporated - 6.300 02/01/16 2,020,682
1,770 Georgetown County, SC Water and Sewer District - Water and Sewer System
Revenue - Series 1995 6.500 06/01/25 1,713,997
</TABLE>
All-American F-14 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
...............................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,000 South Carolina State Housing Finance and Development Authority - Multifamily
Housing Mortgage Revenue - United Dominion-Hunting Ridge - Series 1995 6.750% 06/01/25 $ 1,022,590
1,000 South Carolina State Housing Finance And Development Authority Revenue -
Multifamily - Runaway Bay Apartments - Series 1995 6.125 12/01/15 987,130
1,750 York County, SC Water and Sewer Revenue - Series 1995
Tennessee 6.500 12/01/25 1,694,331
2,500 Jackson, TN Hospital Revenue - Jackson-Madison County General Hospital - Series
1995 5.625 04/01/15 2,405,750
1,000 Memphis-Shelby County, TN Airport Authority Special Facilities and Project
Revenue - Federal Express - Series 1992 6.750 09/01/12 1,031,070
1,095 Shelby County, TN Health, Educational and Housing Facilities Board Revenue -
Open Arms Development Center - Series 1992A 9.750 08/01/19 1,264,944
1,110 Shelby County, TN Health, Educational and Housing Facilities Board Revenue -
Open Arms Development Center - Series 1992C 9.750 08/01/19 1,286,379
1,380 South Fulton, TN Industrial Development Board Revenue - Tyson Foods -
Series 1995 6.350 10/01/15 1,367,428
1,500 Wilson County, TN Educational Facilities Corporation - Certificates of
Participation - Series 1994 6.250 06/30/15 1,486,710
Texas
5,000 Alliance Airport Authority, Incorporated, TX - Special Facilities Revenue -
Federal Express Corporation Project - Series 1996 6.375 04/01/21 4,852,300
2,000 Dallas-Fort Worth, TX International Airport Facility Improvement Revenue -
American Airlines, Inc. - Series 1992 7.250 11/01/30 2,095,260
2,895 Port of Bay City Authority Revenue - Matagorda County, Texas - Hoechst
Celanese Corporation Project - Series 1996 6.500 05/01/26 2,916,270
Utah
2,000 Carbon County, UT Solid Waste Disposal Revenue - Laidlaw, Incorporated/ECDC -
Series 1995 A 7.500 02/01/10 2,179,420
Virginia
3,000 Fairfax County, VA Redevelopment and Housing Authority Revenue -
Multifamily Housing - Mount Vernon Apartments - Series 1995 6.625 09/20/20 3,094,200
2,000 Hanover County, VA Industrial Development Authority Hospital Revenue -
Memorial Regional Medical Center - Series 1995 6.375 08/15/18 2,150,180
3,250 Prince William County, VA Industrial Development Authority Revenue -
Hospital Facility - Potomac Hospital - Series 1995 6.850 10/01/25 3,406,292
1,000 Virginia College Building Authority Education Facilities Revenue -
Marymount University - Series 1992 7.000 07/01/12 1,055,390
1,400 Virginia College Building Authority Education Facilities Revenue -
Marymount University - Series 1992 7.000 07/01/22 1,468,460
1,930 Virginia State Housing Development Authority - Commonwealth Mortgage -
Series 1995 B, Subseries B-3 6.350 01/01/16 1,959,915
West Virginia
500 Mason County, WV Pollution Control Revenue - Appalachian Power Company -
Series G 7.400 01/01/14 524,080
Wisconsin
870 Fall Creek, WI Municipal Nursing Home Mortgage Revenue 9.875 07/01/19 934,719
Total Investments in Securities - Municipal Bonds (cost $245,848,473) - 99.3% 253,413,762
Excess of Other Assets over Liabilities - 0.7% 1,891,781
Total Net Assets - 100.0% $255,305,543
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
</TABLE>
8 F-15 All-American
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $245,848,473) $253,413,762
Cash 2,123,093
Receivable for investments sold 2,132,500
Receivable for Fund shares sold 591,116
Interest receivable 4,751,271
Other 13,385
Total assets 263,025,127
LIABILITIES:
Payable for investments purchased 5,971,503
Payable for Fund shares reacquired 323,445
Distributions payable 1,184,699
Accrued expenses 239,937
Total liabilities 7,719,584
NET ASSETS 255,305,543
Class A:
Applicable to 19,497,708 shares of beneficial interest issued and outstanding $207,991,889
Net asset value per share $ 10.67
Class C:
Applicable to 4,438,578 shares of beneficial interest issued and outstanding $ 47,313,654
Net asset value per share $ 10.66
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 15,813,555
EXPENSES:
Distribution fees - Class A (Note E) 800,411
Distribution fees - Class C (Note E) 436,430
Investment advisory fees (Note E) 1,233,195
Custody and accounting fees 130,681
Transfer agent's fees 150,745
Registration fees 44,521
Legal fees 6,525
Audit fees 18,300
Trustees' fees 6,892
Shareholder services fees (Note E) 23,790
Other 6,829
Advisory fees waived (Note E) (588,351)
Total expenses before credits 2,269,968
Custodian fee credit (Note B) (86,481)
Net expenses 2,183,487
Net investment income 13,630,068
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 4,802,765
Change in unrealized appreciation (depreciation) of investments (8,074,381)
Net loss on investments (3,271,616)
Net increase in net assets resulting from operations $ 10,358,452
See notes to financial statements.
</TABLE>
All-American F-16 9
<PAGE>
[LOGO OF SHIP ART]
Statement of Changes in Net Assets May 31, 1996
................................................................................
<TABLE>
<S> <C> <C>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 13,630,068 $ 12,448,223
Net realized gain (loss) on security transactions 4,802,765 (2,401,225)
Change in unrealized appreciation (depreciation) of
investments (8,074,381) 7,063,617
Net increase in net assets resulting from operations 10,358,452 17,110,615
Distributions to Class A shareholders:
From net investment income (11,330,827) (10,192,392)
Distributions to Class C shareholders:
From net investment income (2,350,784) (2,292,789)
Net decrease in net assets from distributions to shareholders (13,681,611) (12,485,181)
Fund share transactions (Note C):
Proceeds from shares sold 64,410,375 78,490,559
Net asset value of shares issued in reinvestment of distributions 7,107,483 6,449,621
Cost of shares reacquired (43,626,650) (58,692,724)
Net increase in net assets from Fund share transactions 27,891,208 26,247,456
Total increase in net assets 24,568,049 30,872,890
NET ASSETS:
Beginning of year 230,737,494 199,864,604
End of year $255,305,543 $230,737,494
NET ASSETS CONSIST OF:
Paid-in surplus $247,585,234 $219,745,569
Accumulated net realized gain (loss) on security transactions 155,020 (4,647,745)
Unrealized appreciation (depreciation) of investments 7,565,289 15,639,670
$255,305,543 $230,737,494
See notes to financial statements.
</TABLE>
10 F-17 All-American
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship All-American Tax Exempt Fund is a sub-trust of the Flagship Tax
Exempt Funds Trust (Trust), a Massachusetts business trust organized on March
8, 1985. The Fund is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended. The Fund
commenced investment operations on October 3, 1988. On June 2, 1993, the Fund
began to offer Class C shares to the investing public. Class A shares are
sold with a front-end sales charge. Class C shares are sold with no front-end
sales charge but are assessed a contingent deferred sales charge if redeemed
within one year from the time of purchase. Both classes of shares have
identical rights and privileges except with respect to the effect of sales
charges, the distribution and/or service fees borne by each class, expenses
specific to each class, voting rights on matters affecting a single class and
the exchange privilege of each class. Shares of beneficial interest in the
Fund, which are registered under the Securities Act of 1933, as amended, are
offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
All-American F-18 11
<PAGE>
Notes to Financial Statements
................................................................................
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were $4,000,000 "when-issued" purchase
commitments included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------ --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 4,757,928 $ 51,859,159 6,061,151 $ 62,111,690
Shares issued on reinvestment 529,263 5,744,859 489,911 5,084,125
Shares reacquired (2,979,351) (32,444,225) (4,433,277) (45,427,491)
Net increase 2,307,840 $ 25,159,793 2,117,785 $ 21,768,324
Class C:
Shares sold 1,153,142 $ 12,551,216 1,586,375 $ 16,378,869
Shares issued on reinvestment 125,662 1,362,624 131,645 1,365,496
Shares reacquired (1,035,684) (11,182,425) (1,296,278) (13,265,233)
Net increase 243,120 $ 2,731,415 421,742 $ 4,479,132
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $219,079,058 and $190,762,124, respectively. At May 31, 1996, cost
for federal income tax purposes is $245,971,944 and net unrealized
appreciation aggregated $7,441,818, of which $8,714,652 related to
appreciated securities and $1,272,834 related to depreciated securities.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $588,351 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $69,220. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible
12 F-19 All-American
<PAGE>
Notes to Financial Statements
................................................................................
for all sales and promotional efforts including printing of prospectuses and
reports used for sales purposes. Pursuant to Rule 12b-1 under the Investment
Company Act of 1940, the Fund has adopted a plan to reimburse the Distributor
for its actual expenses incurred in the distribution and promotion of all
classes of the Fund's shares. The maximum amount payable for these expenses
on an annual basis is .40% and .95% of the Fund's average daily net assets
for Class A and Class C shares, respectively. Included in accrued expenses at
May 31, 1996 are accrued distribution fees of $85,165 and $12,487 for Class A
and Class C shares, respectively. Certain non-promotional expenses directly
attributable to current shareholders are aggregated by the Distributor and
passed through to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $639,000 for the year ended May 31, 1996, of which
approximately $550,600 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $18,400 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $12 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$407,400, at a weighted average annualized interest rate of 6.85%. At May 31,
1996, the Fund had $672,142 outstanding under the line of credit.
All American F-20 13
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.79 $ 10.61 $ 11.07 $ 10.40 $ 9.95
Income from investment operations:
Net investment income 0.61 0.63 0.65 0.67 0.69
Net realized and unrealized gain (loss)
on securities (0.12) 0.18 (0.30) 0.76 0.45
Total from investment operations 0.49 0.81 0.35 1.43 1.14
Less distributions:
From net investment income (0.61) (0.63) (0.65) (0.67) (0.69)
From net realized capital gains (0.06) (0.09)
In excess of net realized capital gains (0.10)
Total distributions (0.61) (0.63) (0.81) (0.76) (0.69)
Net asset value, end of year $ 10.67 $ 10.79 $ 10.61 $ 11.07 $ 10.40
Total return/(a)/ 4.64% 8.01% 2.99% 14.25% 11.94%
Ratios to average net assets
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.83% 0.76% 0.62% 0.65% 0.56%
Net investment income 5.60% 6.02% 5.77% 6.24% 6.81%
Assuming credits and no waivers or
reimbursements:
Expenses 1.02% 1.06% 1.05% 1.05% 1.05%
Net investment income 5.41% 5.72% 5.34% 5.84% 6.32%
Net assets at end of year (000's) $207,992 $185,495 $159,867 $170,831 $129,525
Portfolio turnover rate 78.75% 70.54% 81.29% 72.49% 85.69%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.79%; prior year numbers have not
been restated to reflect these credits.
14 F-21 All-American
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended June 2, 1993 to
May 31, 1996 May 31, 1995 May 31, 1994
Class C
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.78 $ 10.60 $ 11.09
Income from investment operations:
Net investment income 0.55 0.57 0.57
Net realized and unrealized gain
(loss) on securities (0.12) 0.18 (0.32)
Total from investment operations 0.43 0.75 0.25
Less distributions:
From net investment income (0.55) (0.57) (0.57)
From net realized capital gains (0.07)
In excess of net realized capital gains (0.10)
Total distributions (0.55) (0.57) (0.74)
Net asset value, end of period $ 10.66 $ 10.78 $ 10.60
Total return/(a)/ 4.07% 7.42% 2.16%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.37% 1.31% 1.09%
Net investment income 5.05% 5.47% 5.16%
Assuming credits and no
waivers or reimbursements:
Expenses 1.57% 1.61% 1.63%
Net investment income 4.85% 5.17% 4.62%
Net assets at end of period (000's) $47,314 $45,242 $39,997
Portfolio turnover rate 78.75% 70.54% 81.29%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.33%; prior period numbers have not
been restated to reflect these credits.
All-American F-22 15
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP ALL-AMERICAN
TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship All-
American Tax Exempt Fund as of May 31, 1996, the related statement of operations
for the year then ended, and the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship All-
American Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-23 All-American
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,370 University of Arizona Foundation Lease Revenue 7.750% 07/01/07 $1,442,898
Health Care
--------------------------------------------------------------------------------------------------------------------------
1,670 Cochise County, AZ Industrial Development Authority Revenue - Sierra Vista
Care Center - Series 1994A 6.750 11/20/19 1,753,483
Hospitals
--------------------------------------------------------------------------------------------------------------------------
1,250 Arizona Health Facilities Authority Revenue - Arizona Voluntary Hospital
Federation Pooled Loan Program - Series 1985B 7.250 10/01/13 1,345,062
2,275 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue - Samaritan Health Services - Series 1990A 7.000 12/01/16 2,657,359
750 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue - John C. Lincoln Hospital 7.500 12/01/13 828,420
500 Pima County, AZ Industrial Development Authority Revenue - Carondelet
Health Care Corporation - Series 1993 5.250 07/01/12 475,980
1,000 Scottsdale, AZ Industrial Development Authority Hospital Revenue -
Scottsdale Memorial Hospital - 1987A 8.500 09/01/17 1,066,770
1,500 Scottsdale, AZ Industrial Development Authority Hospital Revenue -
Scottsdale Memorial Hospital - Series 1993 5.500 09/01/12 1,473,015
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
425 Phoenix, AZ Industrial Development Authority Revenue - Chris Ridge Village -
Series 1992 6.800 11/01/25 437,572
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
255 Maricopa County, AZ Industrial Development Authority - Single Family
Mortgage Revenue - Series 1991A 7.500 08/01/12 266,279
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
250 Casa Grande, AZ Industrial Development Authority Revenue -
Frito-Lay/PepsiCo Pollution Control Project - Series 1984A 6.650 12/01/14 263,118
1,000 Mesa, AZ Industrial Development Authority - TRW Vehicle Safety Systems, Inc. 7.250 10/15/04 1,026,330
500 Mohave County, AZ Industrial Development Authority Revenue - Citizens
Utility Company Project 7.150 02/01/26 528,770
195 Navajo County, AZ Pollution Control Revenue - Arizona Public Service Company -
Series 1993 5.875 08/15/28 181,535
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
225 Arizona State Municipal Financing Program - Certificates of Participation -
Series 11 8.000 08/01/17 292,784
850 Tucson, AZ Certificates of Participation - Series 1994 6.375 07/01/09 900,804
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
375 Salt River Pima-Maricopa Indian Community - Arizona Special Obligation
Revenue - Phoenix Cement Company 7.750 02/15/97 383,749
</TABLE>
4 F-24 Arizona
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Phoenix, AZ Airport Revenue - Series 1994 D 6.400% 07/01/12 $ 517,610
500 Tucson, AZ Airport Authority Revenue - Series B 7.125 06/01/15 537,245
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
500 Central Arizona Water Conservation District Revenue - Central Arizona Project -
Contract Revenue - Series 1993A 5.500 11/01/10 497,515
5 Central Arizona Water Conservation District Revenue - Series 1991 B 6.500 11/01/11 5,334
500 Salt River Project - Arizona Agricultural Improvement and Power District -
Electric System Refunding Revenue - Series 1993 A 5.750 01/01/10 508,470
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
1,750 Chandler, AZ Water and Sewer Revenue 6.750 07/01/06 1,875,895
500 Cottonwood, AZ Sewer Revenue - Series 1992 6.900 07/01/03 541,495
100 Cottonwood, AZ Sewer Revenue - Series 1992 7.000 07/01/06 107,255
100 Cottonwood, AZ Sewer Revenue - Series 1992 7.000 07/01/07 106,671
540 Pima County, AZ Sewer Revenue - Series 1991 6.750 07/01/15 572,659
800 Sedona, AZ Sewer Revenue - Series 1992 7.000 07/01/12 838,280
500 Tucson, AZ Water System Revenue - Series 1991 6.700 07/01/12 538,240
1,000 Tucson, AZ Water System Revenue - Series 1993 5.500 07/01/10 991,250
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
800 Chandler, AZ General Obligation 7.000 07/01/12 868,968
250 Cochise County, AZ Sierra Unified School District Number 68 - General
Obligation - Series 1992 7.500 07/01/09 297,225
250 Coconino and Yavapai Counties, AZ Unified School District Number 9 -
Sedona-Oak Creek - Series 1992 A 6.700 07/01/06 266,975
750 Maricopa County, AZ School District Number 11 - Peoria - Series 1992 6.400 07/01/10 783,532
675 Maricopa County, AZ School District Number 11 - Peoria - Series 1992 0.000 07/01/06 389,806
4,000 Maricopa County, AZ School District Number 28 - Kyrene Elementary -
Series 1993 C 0.000 07/01/07 2,161,760
2,460 Maricopa County, AZ School District Number 28 - Kyrene Elementary -
Series 1993 C 0.000 07/01/08 1,242,989
1,870 Maricopa County, AZ School District Number 28 - Kyrene Elementary -
Series 1993 C 0.000 01/01/09 918,563
3,805 Maricopa County, AZ School District Number 28 - Kyrene Elementary -
Series 1993 C 0.000 01/01/10 1,743,223
6,000 Maricopa County, AZ School District Number 28 - Kyrene Elementary -
Series 1993 C 0.000 01/01/11 2,558,820
500 Maricopa County, AZ Glendale Elementary School District Number 40 -
School Improvement - Series 1995 6.200 07/01/09 505,560
3,000 Maricopa County, AZ Glendale Elementary School District Number 40 -
School Improvement - Series 1995 6.250 07/01/10 3,035,670
1,750 Maricopa County, AZ Glendale Elementary School District Number 40 -
School Improvement - Series 1995 6.300 07/01/11 1,770,755
2,000 Maricopa County, AZ Unified School District Number 41 - Gilbert - Series 1994 0.000 01/01/06 1,197,980
500 Maricopa County, AZ Unified School District Number 41 - Gilbert - Series 1995 D 6.250 07/01/15 491,770
</TABLE>
Arizona F-25 5
<PAGE>
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets May 31, 1996
....................................................................................................................................
Municipal Bonds (continued)
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 515 Maricopa County, AZ School District Number 68 - Alhambra Elementary -
Series 1994 A 6.750% 07/01/14 $ 557,189
2,000 Maricopa County, AZ Paradise Valley Unified School District Number 69 -
Series 1995 7.000 07/01/12 2,287,280
500 Maricopa County, AZ School District Number 80 - Chandler - Series 1994 6.250 07/01/11 535,415
1,275 Maricopa County, AZ School District Number 98 - Fountain Hills - Series 1992 0.000 07/01/06 736,300
125 Navajo County, AZ Unified School District Number 2 - Joseph City -
Series 1992 A 6.800 07/01/01 132,910
375 Navajo County, AZ Unified School District Number 2 - Joseph City -
Series 1992 A 6.800 07/01/02 398,302
1,000 Pima County, AZ Unified School District Number 1 - Tucson - Series 1992 7.500 07/01/10 1,190,930
500 Pima County, AZ Unified School District Number 13 - Tanque Verde -
Series 1994 6.700 07/01/10 543,440
1,100 Santa Cruz, AZ Nogales Unified School District Number 1 - General Obligation -
Series 1995 0.000 01/01/09 540,331
315 Scottsdale, AZ Mountain Community Facilities District - General Obligation -
Series 1993A 6.200 07/01/17 319,561
1,925 Tatum Ranch, AZ Community Facilities District - Phoenix, Arizona -
General Obligation - Series 1991 A 6.875 07/01/16 2,072,282
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
500 Arizona State Transportation Board - Highway Revenue - Series 1990 7.000 07/01/09 546,580
300 Arizona State University Revenues 7.000 07/01/15 335,685
1,995 Central Arizona Water Conservation District Revenue - Series 1991 B 6.500 11/01/11 2,171,637
35 Glendale, AZ Municipal Property Corporation 8.850 07/01/08 35,847
395 Maricopa County, AZ Hospital Revenue - St. Luke's Hospital Medical Center 8.750 02/01/10 464,619
135 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue - Samaritan Health Services 12.000 01/01/08 144,987
1,250 Maricopa County, AZ Industrial Development Authority - Mercy Health System
Revenue 7.150 07/01/12 1,365,875
10,800 Maricopa County, AZ Industrial Development Authority - Single Family
Mortgage Revenue 0.000 02/01/16 3,262,680
13,040 Maricopa County, AZ Industrial Development Authority - Single Family
Mortgage Revenue - Series 1983 0.000 12/31/14 4,209,442
575 Maricopa County, AZ School District Number 214 - Tolleson Union High 6.500 07/01/09 617,774
300 Maricopa County, AZ School District Number 214 - Tolleson Union High 6.500 07/01/10 322,317
1,250 Northern Arizona University Revenue 7.500 06/01/08 1,355,238
700 Peoria, AZ Municipal Development Authority Facilities Revenue 7.000 07/01/10 761,817
500 Phoenix, AZ Street and Highway User Revenue - Series 1992 6.250 07/01/11 521,770
650 Pima County, AZ Unified School District Number 1 - Tucson 7.200 07/01/09 713,810
460 Pima County, AZ Sewer Revenue - Series 1991 6.750 07/01/15 504,063
1,500 Price-Elliott Research Park, Incorporated - Arizona State University Research
Park Development - Series 1991 7.000 07/01/21 1,671,510
300 Salt River Project - Arizona Agricultural Improvement and Power District -
Electric System Revenue - Series A 7.500 01/01/27 312,432
100 Salt River Project - Arizona Agricultural Improvement and Power District -
Electric System Revenue - Series E 8.250 01/01/28 106,537
</TABLE>
6 F-26 Arizona
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 100 Salt River Project - Arizona Agricultural Improvement and Power District -
Electric System Revenue - Series E 8.250% 01/01/13 $ 106,537
450 Scottsdale, AZ Certificates of Participation - Scottsdale Municipal Property
Corporation 7.875 11/01/14 466,659
850 Tucson, AZ Water System Revenue 7.700 07/01/15 869,762
10,320 Tucson and Pima County, AZ Industrial Development Authority - Single Family
Mortgage Revenue - Series 1983 A 0.000 12/01/14 3,348,943
1,085 University of Arizona Medical Center Corporation - Tucson, Arizona -
Hospital Revenue - Series 1986 8.100 07/01/16 1,151,673
1,000 University of Arizona Medical Center Corporation - Tucson, Arizona -
Hospital Revenue - Series 1987 8.100 07/01/16 1,064,101
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
965 Bullhead City, AZ Parkway Improvement District 6.100 01/01/13 948,170
760 Flagstaff, AZ Junior Lien and Highway User Revenue - Series 1992 5.900 07/01/10 788,584
350 Nogales, AZ Street and Highway Users Revenue - Series 1993 5.500 07/01/11 326,522
365 Nogales, AZ Street and Highway Users Revenue - Series 1993 5.500 07/01/12 337,804
460 Peoria, AZ Improvement District Number 8801 - North Valley Power Center 7.300 01/01/13 493,787
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
1,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public 3.750 07/01/16 894,760
Education and Health Facilities - Series M
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
370 Arizona Educational Loan Revenue - Series B 7.000 03/01/05 391,279
1,000 Arizona Student Loan Acquisition Authority Revenue - Series 1994 B 6.600 05/01/10 1,040,500
Total Investments in Securities - Municipal Bonds (cost $78,251,477) - 100.1% 82,163,084
Excess of Liabilities over Other Assets - (0.1)% (98,674)
Total Net Assets - 100.0% $ 82,064,410
</TABLE>
See notes to financial statements.
Arizona F-27 7
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
...............................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $78,251,477) $ 82,163,084
Receivable for Fund shares sold 233,221
Interest receivable 1,421,524
Other 5,550
Total assets 83,823,379
LIABILITIES:
Bank borrowings (Note F) 830,576
Payable for investments purchased 245,558
Payable for Fund shares reacquired 264,547
Distributions payable 357,574
Accrued expenses 60,714
Total liabilities 1,758,969
NET ASSETS 82,064,410
Class A:
Applicable to 7,463,231 shares of beneficial interest issued and outstanding $ 80,094,252
Net asset value per share $ 10.73
Class C:
Applicable to 183,587 shares of beneficial interest issued and outstanding $ 1,970,158
Net asset value per share $ 10.73
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 4,932,741
EXPENSES:
Distribution fees--Class A (Note E) 328,091
Distribution fees--Class C (Note E) 16,707
Investment advisory fees (Note E) 420,039
Custody and accounting fees 61,467
Transfer agent's fees 57,035
Registration fees 9,890
Legal fees 2,923
Audit fees 14,762
Trustees' fees 2,164
Shareholder services fees (Note E) 8,047
Other 2,746
Advisory fees waived (Note E) (279,976)
Expense subsidy (Note E) (57,950)
Total expenses before credits 585,945
Custodian fee credit (Note B) (15,992)
Net expenses 569,953
Net investment income 4,362,788
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 317,259
Change in unrealized appreciation (depreciation) of investments (1,200,471)
Net loss on investments (883,212)
Net increase in net assets resulting from operations $ 3,479,576
</TABLE>
See notes to financial statements.
8 F-28 Arizona
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income $ 4,362,788 $ 4,453,941
Net realized gain (loss) on security transactions 317,259 155,116
Change in unrealized appreciation (depreciation) of investments (1,200,471) 2,669,143
Net increase in net assets resulting from operations 3,479,576 7,278,200
Distributions to Class A shareholders:
From net investment income (4,301,398) (4,420,414)
Distributions to Class C shareholders:
From net investment income (82,198) (72,191)
Net decrease in net assets from distributions to shareholders (4,383,596) (4,492,605)
Fund share transactions (Note C):
Proceeds from shares sold 11,832,617 9,819,607
Net asset value of shares issued in reinvestment of distributions 1,939,151 1,866,427
Cost of shares reacquired (12,829,723) (16,243,843)
Net increase (decrease) in net assets from Fund share transactions 942,045 (4,557,809)
Total increase (decrease) in net assets 38,025 (1,772,214)
NET ASSETS:
Beginning of year 82,026,385 83,798,599
End of year $ 82,064,410 $ 82,026,385
NET ASSETS CONSIST OF:
Paid-in surplus $ 78,032,113 $ 77,110,876
Accumulated net realized gain (loss) on security transactions 120,690 (196,569)
Unrealized appreciation (depreciation) of investments 3,911,607 5,112,078
$ 82,064,410 $ 82,026,285
</TABLE>
See notes to financial statements.
Arizona F-29 9
<PAGE>
[LOGO OF SHIP ARTS]
Notes of Financial Statements
...............................................................................
A. Description of Business
The Flagship Arizona Double Tax Exempt Fund (Fund) is a sub-trust of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on October 29, 1986. On
February 7, 1994, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Realized gains and
losses on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
10 F-30 Arizona
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to
each sub-trust as incurred. Fund expenses not specific to any class of shares
are prorated among the classes based upon the eligible net assets of each
class. Specifically identified direct expenses of each class are charged to
that class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon
adequate segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
---------------------------- ---------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 987,074 $ 10,720,918 868,576 $ 9,000,803
Shares issued on reinvestment 174,172 1,897,941 178,972 1,839,048
Shares reacquired (1,111,337) (12,066,428) (1,563,719) (15,834,858)
Net increase (decrease) 49,909 $ 552,431 (516,171) $ (4,995,007)
Class C:
Shares sold 101,591 $ 1,111,699 78,796 $ 818,804
Shares issued on reinvestment 3,779 41,210 2,677 27,379
Shares reacquired (71,245) (763,295) (39,624) (408,985)
Net increase 34,125 $ 389,614 41,849 $ 437,198
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,285,040 and $31,763,502, respectively. At May 31, 1996,
cost for federal income tax purposes is $78,251,477 and net unrealized
appreciation aggregated $3,911,607, of which $4,166,528 related to
appreciated securities and $254,921 related to depreciated securities.
Arizona F-31 11
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities
to the Fund, receives fees computed monthly on the average daily net assets
of the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $279,976 of its
advisory fees. Also, under an agreement with the Fund, the Advisor may
subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of
the Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $27,298 and $1,587 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through
to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $193,700 for the year ended May 31, 1996, of which
approximately $167,500 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,900 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Line of Credit
The Trust participates in a line of credit in which a maximum amount of
$30 million is provided by State Street Bank & Trust Co. The Fund may
temporarily borrow up to $4 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$296,300, at a weighted average annualized interest rate of 6.96%. At
May 31, 1996, the Fund had $830,576 outstanding under the line of credit.
12 F-32 Arizona
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
...............................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.85 $ 10.43 $ 10.81 $ 10.13 $ 9.81
Income from investment operations:
Net investment income 0.57 0.58 0.60 0.63 0.65
Net realized and unrealized gain
(loss) on securities (0.12) 0.42 (0.38) 0.69 0.32
Total from investment operations 0.45 1.00 0.22 1.32 0.97
Less distributions:
From net investment income (0.57) (0.58) (0.60) (0.64) (0.65)
Total distributions (0.57) (0.58) (0.60) (0.64) (0.65)
Net asset value, end of year $ 10.73 $ 10.85 $ 10.43 $ 10.81 $ 10.13
Total return(a) 4.21% 10.03% 1.92% 13.37% 10.25%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.69% 0.82% 0.64% 0.44% 0.44%
Net investment income 5.20% 5.59% 5.48% 6.03% 6.55%
Assuming credits and no waivers or
reimbursements:
Expenses 1.07% 1.20% 1.09% 1.11% 1.20%
Net investment income 4.82% 5.21% 5.03% 5.36% 5.79%
Net assets at end of year (000's) $80,094 $80,406 $82,676 $72,778 $51,123
Portfolio turnover rate 38.15% 26.79% 21.08% 20.04% 33.75%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.67%; prior year numbers have not
been restated to reflect these credits.
Arizona F-33 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 7, 1994 to
CLASS C May 31, 1996 May 31, 1995 May 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.84 $10.43 $ 11.22
Income from investment operations:
Net investment income 0.51 0.52 0.14
Net realized and unrealized gain
(loss) on securities (0.11) 0.41 (0.79)
Total from investment operations 0.40 0.93 (0.65)
Less distributions:
From net investment income (0.51) (0.52) (0.14)
Total distributions (0.51) (0.52) (0.14)
Net asset value, end of period $10.73 $10.84 $ 10.43
Total return(a) 3.75% 9.32% (16.61%)
Ratios to average net assets:
(annualized where appropriate)
Actual net of waivers and
reimbursements:
Expenses(b) 1.23% 1.36% 1.20%
Net investment income 4.64% 5.01% 4.36%
Assuming credits and no
waivers or reimbursements:
Expenses 1.63% 1.75% 1.62%
Net investment income 4.24% 4.62% 3.94%
Net assets at end of period (000's) $1,970 $1,621 $ 1,122
Portfolio turnover rate 38.15% 26.79% 21.08%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.21%; prior period numbers have not
been restated to reflect these credits.
14 F-34 Arizona
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP ARIZONA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Arizona Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Arizona
Double Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Arizona F-35 15
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 30 Colorado State Board of Agriculture Revenue - 7.800% 03/01/11 $ 30,572
Colorado State University Auxiliary Facilities - Series 1986
175 Commonwealth of Puerto Rico Industrial, Medical and Environmental - Pollution
Control Facilities Financing Authority - Catholic University of 5.600 12/01/07 173,829
Puerto Rico Project - Series 1993
Hospitals
--------------------------------------------------------------------------------------------------------------------------
1,250 Colorado Health Facilities Authority Revenue - Sisters of Charity
Health Care Systems, Incorporated - Series 1992 6.250 05/15/11 1,310,812
1,500 Colorado Springs, CO Hospital Revenue - Series 1995 5.750 12/15/09 1,520,160
250 Pueblo County, CO Hospital Facilities Revenue - Parkview Episcopal Medical Center 7.000 09/01/09 272,445
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
100 Aurora, CO Multifamily Revenue - Dayton Plaza Project - Series A 8.250 01/20/29 106,456
500 Colorado Housing Finance Authority - Multifamily Housing
Mortgage Revenue - Series 1995 A 6.650 10/01/28 509,605
1,000 Lakewood, CO Multifamily Housing Mortgage Revenue -
Heights by Marston Lake - Series 1995 6.650 10/01/25 1,022,240
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
150 Colorado Housing Finance Authority - Single Family - Series A 8.125 09/01/17 157,154
335 Colorado Housing Finance Authority - Single Family - Series 1991 C 7.375 08/01/23 348,430
850 Colorado Housing Finance Authority - Single Family - Series 1991 A 0.000 11/01/06 438,328
245 Commerce City, CO Single Family Mortgage Revenue - Series 1992 A 6.875 03/01/12 253,433
135 Pueblo County, CO Single Family Mortgage Revenue - Series 1992 A 6.850 12/01/25 138,334
500 Pueblo County, CO Single Family Mortgage Revenue - Series 1994 A 7.050 11/01/27 520,540
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
500 Denver, CO City and County Special Facilities Airport Revenue -
United Air Lines - Series 1992 A 6.875 10/01/32 503,395
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
200 Boulder, CO Property Authority Lease Purchase - Series B 7.400 12/01/02 208,888
175 Jefferson County, CO Certificates of Participation - Series 1992 6.650 12/01/08 190,946
100 University of Colorado - Certificates of Participation - Series D 7.400 12/01/05 108,253
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
1,500 Hyland Hills Park and Recreation District - Special Revenue - Series 1996 A 6.750 12/15/15 1,497,675
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
4,300 Arapahoe County, CO E-470 Public Highway Authority Revenue -
E-470 Project - Series 1986 0.000 08/31/06 2,214,500
500 Colorado Springs, CO Airport Revenue - Series 1992 A 6.450 01/01/01 515,925
</TABLE>
4 F-36 Colorado
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Water & Sewer
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 120 Colorado Water Resources and Power Development Authority Revenue -
Series 1992A 6.700% 11/01/12 $ 127,424
250 Northern Colorado Municipal Subdistrict - Water Conservancy District Revenue -
Series D 7.750 12/01/12 258,912
250 Ute, CO Water Conservancy District Revenue 7.900 06/15/06 258,552
Non-State General Obligations
---------------------------------------------------------------------------------------------------------------------------
450 Cherry Creek, CO Vista Park and Recreation District - General Obligation -
Arapahoe County - Series 1992B 6.875 10/01/11 467,806
1,000 Denver, CO City and County School District Number 1 - General Obligation -
Series 1994 A 6.500 12/01/10 1,090,640
500 Douglas County, CO School District Number RE-1 - General Obligation -
Series 1994 A 6.400 12/15/11 529,235
500 El Paso, CO School District Number RJ-1 - General Obligation - Series 1995 6.800 12/01/14 539,790
1,025 El Paso County, CO School District Number 49 - Falcon Schools - General
Obligation - Series 1996 0.000 12/15/07 518,168
1,020 El Paso County, CO School District Number 49 - Falcon Schools - General
Obligation - Series 1996 0.000 12/15/08 483,092
500 El Paso County, CO School District Number 38 - Series A 6.900 12/01/13 538,025
250 Pitkin County, CO General Obligation - Open Space Revenue - Series 1994 6.875 12/01/24 265,460
190 Valley Metropolitan District, CO General Obligation - Series 1992 7.000 12/15/06 190,880
Pre-refunded or Escrowed
---------------------------------------------------------------------------------------------------------------------------
1,000 Adams County, CO Multi-County Single Family Mortgage Revenue -
Series 1985 0.000 06/01/16 295,460
200 Adams County, CO School District Number 1 - General Obligation - Series 1992 6.500 12/01/07 219,442
4,500 Arapahoe County, CO Single Family Mortgage Revenue - Series 1984 0.000 09/01/10 1,937,970
175 Aspen, CO Certificates of Participation - Public Facilities Authority 7.000 09/01/09 186,158
100 Colorado Association of School Boards Certificates of Participation -
Pueblo School District Number 60 7.250 12/01/09 109,534
7,500 Colorado Health Facilities Authority - Retirement Facilities - Liberty Heights -
Series B 0.000 07/15/24 1,028,850
300 Colorado Health Facilities Authority Revenue - Rose Medical Center 7.000 08/15/21 334,887
350 Colorado Health Facilities Authority Revenue - Bethesda PsycHealth Project 9.125 09/01/17 374,283
2,000 Colorado Housing Finance Authority Revenue - Single Family - Series 1985 A 0.000 09/01/14 659,200
900 Colorado Springs, CO Utilities Revenue - Series B 6.600 11/15/18 961,938
180 Colorado Springs, CO Utilities Revenue - Series C 6.750 11/15/21 199,629
100 Colorado State Board of Agriculture Revenue - Colorado State University Sports
Recreation Facilities 7.700 04/01/09 108,044
220 Colorado State Board of Agriculture Revenue - Colorado State University
Auxiliary Facilities - Series 1986 7.800 03/01/11 224,433
300 Colorado Water Resources and Power Development Authority Revenue -
Stagecoach Project - Series 1986 8.000 11/01/17 332,793
250 Denver, CO City and County Industrial Development Revenue - University of
Denver 7.500 03/01/16 283,018
200 Denver, CO City and County Hospital Revenue - Children's Hospital Association 8.000 10/01/15 204,828
</TABLE>
Colorado F-37 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 350 Denver, CO City and County Hospital Revenue - Sisters of Charity Health Care
Systems - Mercy Medical Center 7.700% 05/01/07 $ 375,924
100 El Paso County, CO Revenue - St. Francis Hospital - Series 1988 A 7.750 05/01/14 108,411
4,300 El Paso County, CO Single Family Mortgage Revenue - Series 1984 0.000 09/01/15 1,332,398
3,000 El Paso County, CO Single Family Mortgage Revenue - Series 1985 0.000 05/01/15 948,630
250 Fountain Valley, CO Water Treatment Revenue - Series 1991 6.800 12/01/19 272,202
250 Logan County, CO Health Care Facilities Revenue - Western Health Network 7.625 01/01/19 273,682
4,000 Mesa County, CO Residual Revenue - Series 1992 0.000 12/01/11 1,587,960
300 Parker, CO Sales and Use Tax Revenue 7.600 11/01/10 334,674
350 Poudre Valley, CO Hospital District Revenue - Series A 6.625 12/01/11 383,432
100 Regional Transportation District - Colorado Sales Tax Revenue 7.100 11/01/10 110,323
175 Thornton, CO Sales and Use Tax Revenue - Series D 8.000 09/01/07 183,788
250 University of Colorado - Boulder Campus Auxiliary Facilities System Revenue 7.050 06/01/15 273,178
Special Tax Revenue
---------------------------------------------------------------------------------------------------------------------------
200 Mesa County, CO Sales Tax Revenue 7.750 12/01/13 214,280
750 Woodland Park, CO Limited Sales Tax Revenue - Series 1994 6.400 12/01/12 774,777
Student Loan Revenue Bonds
---------------------------------------------------------------------------------------------------------------------------
1,000 Colorado Student Obligation Bond Authority - Student Loan Revenue -
Series 1993 I-B 5.700 12/01/06 1,002,670
400 Colorado Student Obligation Bond Authority - Student Loan Revenue 7.250 09/01/05 416,184
250 Colorado Student Obligation Bond Authority - Student Loan Revenue -
Series 1992C 7.150 09/01/06 264,462
Total Investments in Securities - Municipal Bonds (cost $32,665,579) - 99.9% 33,627,346
Excess of Other Assets over Liabilities - 0.1% 9,155
Total Net Assets - 100.0% $33,636,501
See notes to financial statements.
</TABLE>
6 F-38 Colorado
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $32,665,579) $33,627,346
Receivable for investments sold 30,203
Receivable for Fund shares sold 57,991
Interest receivable 433,447
Other 2,394
Total assets 34,151,381
LIABILITIES:
Bank overdraft 241,480
Payable for Fund shares reacquired 79,547
Distributions payable 154,541
Accrued expenses 39,312
Total liabilities 514,880
NET ASSETS:
Applicable to 3,436,028 shares of beneficial interest issued
and outstanding $33,636,501
Net asset value per share $ 9.79
</TABLE>
<TABLE>
<CAPTION>
LOGO OF SHIP ART
Statement of Operations For the year ended May 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME - INTEREST $ 2,058,328
EXPENSES:
Distribution fees (Note E) 138,113
Investment advisory fees (Note E) 173,105
Custody and accounting fees 67,940
Transfer agent's fees 29,395
Registration fees 486
Legal fees 868
Audit fees 11,725
Reimbursement of organizational expenses (Note F) 16,763
Trustees' fees 1,098
Shareholder services fees (Note E) 4,730
Other 1,340
Advisory fees waived (Note E) (173,105)
Expense subsidy (Note E) (84,532)
Total expenses before credits 187,926
Custodian fee credit (Note B) (5,390)
Net expenses 182,536
Net investment income 1,875,792
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 86,320
Change in unrealized appreciation (depreciation) of investments (554,501)
Net loss on investments (468,181)
Net increase in net assets resulting from operations $ 1,407,611
See notes to financial statements.
</TABLE>
Colorado F-39 7
<PAGE>
LOGO OF SHIP ART
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income $ 1,875,792 $ 2,024,845
Net realized gain (loss) on security transactions 86,320 (79,900)
Change in unrealized appreciation (depreciation) of
investments (554,501) 1,061,286
Net increase in net assets resulting from operations 1,407,611 3,006,231
Distributions to shareholders:
From net investment income (1,893,445) (2,019,448)
Net decrease in net assets from distributions to shareholders (1,893,445) (2,019,448)
Net decrease in net assets from Fund share transactions (Note C) (769,636) (1,890,578)
Total decrease in net assets (1,255,470) (903,795)
NET ASSETS:
Beginning of year 34,891,971 35,795,766
End of year $33,636,501 $34,891,971
NET ASSETS CONSIST OF:
Paid-in surplus $33,229,675 $34,011,567
Undistributed net investment income 5,397
Accumulated net realized gain (loss) on security transactions (554,941) (641,261)
Unrealized appreciation (depreciation) of investments 961,767 1,516,268
$33,636,501 $34,891,971
See notes to financial statements.
</TABLE>
8 F-40 Colorado
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Colorado Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on May 4, 1987. Shares of
beneficial interest in the Fund, which are registered under the Securities
Act of 1933, as amended, are offered to the public on a continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Colorado F-41 9
<PAGE>
Notes to Financial Statements
................................................................................
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 416,678 $ 4,177,017 439,378 4,171,350
Shares issued on reinvestment 90,419 901,092 104,858 990,289
Shares reacquired (586,370) (5,847,745) (749,821) (7,052,217)
Net decrease (79,273) $ (769,636) (205,585) (1,890,578)
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $23,979,859 and $25,108,901, respectively. At May 31, 1996, cost
for federal income tax purposes is $32,665,579 and net unrealized
appreciation aggregated $961,767, of which $1,122,408 related to appreciated
securities and $160,641 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $554,900 to offset future net capital gains expiring on May 31,
2003.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived all of its advisory
fees amounting to $173,105. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees. The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's shares. The maximum amount payable for these expenses on an annual
basis is .40% of the Fund's average daily net assets. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $11,403. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
10 F-42 Colorado
<PAGE>
Notes to Financial Statements
................................................................................
In its capacity as national wholesale underwriter for the shares of the Fund,
the Distributor received commissions on sales of the Fund's shares of
approximately $98,000 for the year ended May 31, 1996, of which approximately
$85,100 was paid to other dealers. Certain officers and trustees of the Trust
are also officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$83,600) are being reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $50,197 has been reimbursed. In the
event that the Advisor's current investment in the Trust falls below $100,000
prior to the full reimbursement of the organizational expenses, then it will
forego any further reimbursement.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are collateralized
with pledged securities and are due on demand with interest at 1% above the
federal funds rate. The average daily amount of borrowings under the line of
credit during the year ended May 31, 1996 was approximately $150,200, at a
weighted average annualized interest rate of 6.61%. At May 31, 1996, the Fund
had no borrowings outstanding under the line of credit.
Colorado F-43 11
<PAGE>
[LOGO OF SHIP]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.93 $ 9.62 $ 10.04 $ 9.56 $ 9.29
Income from investment operations:
Net investment income 0.54 0.57 0.58 0.60 0.61
Net realized and unrealized gain (loss) on
securities (0.13) 0.30 (0.37) 0.55 0.27
Total from investment operations 0.41 0.87 0.21 1.15 0.88
Less distributions:
From net investment income (0.55) (0.56) (0.58) (0.60) (0.61)
From net realized capital gains (0.07)
In excess of net realized capital gains (0.05)
Total distributions (0.55) (0.56) (0.63) (0.67) (0.61)
Net asset value, end of year $ 9.79 $ 9.93 $ 9.62 $ 10.04 $ 9.56
Total return/(a)/ 4.14% 9.54% 2.03% 12.41% 9.80%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.55% 0.50% 0.37% 0.41% 0.49%
Net investment income 5.41% 5.99% 5.71% 6.05% 6.42%
Assuming credits and no waivers or
reimbursements:
Expenses 1.27% 1.27% 1.27% 1.35% 1.51%
Net investment income 4.69% 5.22% 4.81% 5.11% 5.40%
Net assets at end of year (000's) $33,637 $34,892 $35,796 $26,656 $15,699
Portfolio turnover rate 69.76% 37.84% 41.76% 30.49% 39.07%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.53%; prior period numbers have not
been restated to reflect these credits.
12 F-44 Colorado
<PAGE>
[LOGO OF SHIP ART] Independent Auditor's Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP COLORADO
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Colorado Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the years presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Colorado Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated years, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Colorado F-45 13
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250 Connecticut State Health and Educational Facilities Authority Revenue -
Fairfield University - Series F 6.900% 07/01/14 $ 252,532
500 Connecticut State Health and Educational Facilities Authority Revenue -
Quinnipiac College - Series D 6.000 07/01/13 465,150
5,575 Connecticut State Health and Educational Facilities Authority Revenue -
Quinnipiac College - Series D 6.000 07/01/23 4,994,420
500 Connecticut State Health and Educational Facilities Authority Revenue -
Capital Asset - Series C 7.000 01/01/20 538,000
500 Connecticut State Health and Educational Facilities Authority Revenue -
Sacred Heart University - Series 1993 B 5.700 07/01/16 433,815
1,500 Connecticut State Health and Educational Facilities Authority Revenue -
Sacred Heart University - Series 1993 B 5.500 07/01/09 1,427,370
500 Connecticut State Health and Educational Facilities Authority Revenue -
Sacred Heart University - Series 1993 B 5.800 07/01/23 434,045
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Trinity College - Series C 6.000 07/01/12 1,012,060
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
Yale University 5.929 06/10/30 1,959,600
6,475 Connecticut State Health and Educational Facilities Authority Revenue -
Hartford University - Series 1992 D 6.750 07/01/12 6,530,556
4,000 Connecticut State Health and Educational Facilities Authority Revenue -
Trinity College - Series D 6.125 07/01/24 4,064,400
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Sacred Heart University - Series 1992 A 6.850 07/01/22 1,044,180
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
Loomis Chaffee School - Series B 6.000 07/01/25 1,994,420
2,500 Connecticut State Health and Educational Facilities Authority Revenue -
Kent School - Series 1995 B 5.400 07/01/23 2,328,675
2,240 Connecticut State Health and Educational Facilities Authority Revenue -
Connecticut State University System - Series 1995 5.125 11/01/15 2,024,714
Health Care
--------------------------------------------------------------------------------------------------------------------------
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
Saint Camillus Health Center - Series 1994 6.250 11/01/18 2,052,200
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Sharon Health Care - Series 1994 6.250 11/01/21 1,024,540
5,000 Connecticut State Health and Educational Facilities Authority Revenue -
Saint Joseph's Manor - Series 1994 6.250 11/01/16 5,134,450
3,695 Connecticut State Health and Educational Facilities Authority Revenue -
Saint Camillus Health Center - Series 1994 6.250 11/01/18 3,785,675
3,000 Connecticut State Health and Educational Facilities Authority Revenue -
Jewish Home for the Elderly - Series 1994 6.250 11/01/20 3,073,620
1,500 Connecticut State Health and Educational Facilities Authority Revenue -
Highland View Manor, Incorporated - Series 1994 7.200 11/01/10 1,653,555
4,200 Connecticut State Health and Educational Facilities Authority Revenue -
Highland View Manor, Incorporated - Series 1994 7.500 11/01/16 4,700,892
</TABLE>
4 F-46 Connecticut
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,100 Connecticut State Health and Educational Facilities Authority Revenue -
Wadsworth Glen Health Care Center - Series 1994 7.200% 11/01/10 $1,212,607
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Wadsworth Glen Health Care Center - Series 1994 7.500 11/01/16 1,119,260
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
AHF/Hartford, Incorporated - Series 1994 7.125 11/01/24 2,237,520
4,115 Connecticut State Health and Educational Facilities Authority Revenue -
Nursing Home Program - Abbott Terrace Health Center Project - Series 1996 A 5.750 11/01/13 3,991,591
4,365 Connecticut State Health and Educational Facilities Authority Revenue -
Fairfield Nursing Home Program - Series 1996 6.250 11/01/21 4,315,414
7,000 Connecticut Development Authority - Duncaster - Series 1992 6.750 09/01/15 7,208,390
Hospitals
-----------------------------------------------------------------------------------------------------------------------
100 Connecticut State Health and Educational Facilities Authority Revenue -
St. Mary's Hospital - Issue B 7.600 07/01/03 104,871
1,000 Connecticut State Health and Educational
Facilities Authority Revenue -
Greenwich Academy Issue - Series 1996 A 5.700 03/01/16 974,470
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
Greenwich Academy Issue - Series 1996 A 5.750 03/01/26 1,933,500
2,600 Connecticut State Health and Educational Facilities Authority Revenue -
Bristol Hospital - Series A 7.000 07/01/20 2,792,296
190 Connecticut State Health and Educational Facilities Authority Revenue -
St. Mary's Hospital - Series C 7.375 07/01/20 195,164
5,500 Connecticut State Health and Educational Facilities Authority Revenue -
Yale-New Haven Hospital - Issue F 7.100 07/01/25 5,926,690
1,750 Connecticut State Health and Educational Facilities Authority Revenue -
Waterbury Hospital - Issue B 7.000 07/01/20 1,879,430
900 Connecticut State Health and Educational Facilities Authority Revenue -
St. Raphael Hospital - Series D 6.625 07/01/14 952,740
3,500 Connecticut State Health and Educational Facilities Authority Revenue -
Middlesex Hospital - Series G 6.250 07/01/12 3,584,420
2,000 Connecticut State Health and Educational Facilities Authority Revenue -
Bridgeport Hospital - Series 1992 6.625 07/01/18 2,094,640
4,200 Connecticut State Health and Educational Facilities Authority Revenue -
New Britain Hospital - Series B 6.000 07/01/24 4,154,766
1,100 Connecticut State Health and Educational Facilities Authority Revenue -
William W. Backus Hospital - Series 1992 C 6.000 07/01/12 1,071,191
1,645 Connecticut State Health and Educational Facilities Authority Revenue -
Day Kimball Hospital - Series 1995 A 5.375 07/01/26 1,502,494
3,000 Connecticut State Health and Educational Facilities Authority Revenue -
Greenwich Hospital Issue - Series 1996 A 5.750 07/01/16 2,930,040
Housing/Multifamily
-----------------------------------------------------------------------------------------------------------------------
835 Connecticut State Housing Finance Authority - Series 1991A 7.200 11/15/08 863,699
955 Connecticut State Housing Finance Authority - Series 1991C 6.700 11/15/22 973,451
2,250 Connecticut State Housing Finance Authority - Series 1993 A 6.200 05/15/14 2,268,360
1,045 Connecticut State Housing Finance Authority - Series C 7.625 11/15/17 1,082,024
70 Connecticut State Housing Finance Authority - Series B1 7.550 11/15/08 70,692
</TABLE>
Connecticut F-47 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$3,750 Connecticut State Housing Finance Authority - Series A 6.100% 05/15/17 $3,741,075
1,505 Connecticut State Housing Finance Authority - Subseries B-2 6.750 05/15/22 1,541,060
1,500 New Britain, CT Senior Citizens Housing Development Mortgage Revenue -
Nathan Hale Apartments - Series 1992A 6.875 07/01/24 1,543,980
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
1,500 Connecticut State Housing Finance Authority - Subseries A-1 6.100 05/15/17 1,501,125
2,500 Connecticut Housing Finance Authority - Housing Mortgage Finance Program -
Series 1993 E, Subseries E-1 & E-2 - Series 1995 F, Subseries F-1, F-2 & Series H 6.000 05/15/17 2,456,075
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
770 Connecticut State Development Authority Water Facility Revenue -
Bridgeport Hydraulic Company 7.250 06/01/20 823,253
2,000 Connecticut State Development Authority Water Facility Revenue -
Connecticut Water Company 6.650 12/15/20 2,190,300
2,250 Connecticut State Development Authority Revenue - Solid Waste Disposal
Facilities - Pfizer Incorporated - Series 1994 7.000 07/01/25 2,500,358
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
1,690 Connecticut State Development Authority Revenue -
Jewish Community Center - Greater New Haven - Series 1992 6.600 09/01/17 1,746,446
405 New Haven, CT Facility Revenue - Easter Seal Goodwill Industries
Rehabilitation Center Project 8.500 04/01/01 420,601
995 New Haven, CT Facility Revenue - Easter Seal Goodwill Industries
Rehabilitation Center Project 8.875 04/01/16 1,046,899
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
1,000 Commonwealth of Puerto Rico Electric Power Authority Revenue -
Series 1995 Z 5.500 07/01/16 932,100
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
1,000 Connecticut State Clean Water Revenue - Series 1991 7.000 01/01/11 1,081,500
1,000 Connecticut State Clean Water Revenue - Series 1994 5.800 06/01/16 995,320
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
325 Canterbury, CT General Obligation 7.200 05/01/09 374,611
225 East Haven, CT General Obligation 7.000 09/15/02 240,664
300 East Haven, CT General Obligation 7.000 09/15/05 323,439
200 Glastonbury, CT General Obligation 7.200 08/15/06 232,554
200 Glastonbury, CT General Obligation 7.200 08/15/07 233,070
200 Glastonbury, CT General Obligation 7.200 08/15/08 233,222
200 Griswold, CT General Obligation 7.500 04/01/02 227,826
200 Griswold, CT General Obligation 7.500 04/01/03 230,622
200 Griswold, CT General Obligation 7.500 04/01/04 233,048
150 Griswold, CT General Obligation 7.500 04/01/05 176,324
340 Middletown, CT General Obligation 6.900 04/15/06 383,323
3,105 New Haven, CT General Obligation - Series 1991 7.400 08/15/11 3,372,682
</TABLE>
6 F-48 Connecticut
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,000 New Haven, CT General Obligation - Series 1992 A 9.250% 03/01/02 $1,166,490
1,000 New Haven, CT General Obligation - Series 1992 A 7.400 03/01/12 1,085,410
1,250 New Haven, CT General Obligation - Series 1995 5.750 02/15/14 1,249,875
1,250 New Haven, CT General Obligation - Series 1995 5.750 02/15/15 1,242,800
120 New London, CT General Obligation 7.300 12/01/05 139,477
100 New London, CT General Obligation 7.300 12/01/07 117,247
160 Old Saybrook, CT General Obligation - Series 1989 7.400 05/01/08 186,461
160 Old Saybrook, CT General Obligation - Series 1989 7.400 05/01/09 186,379
275 Old Saybrook, CT General Obligation - Series 1991 6.500 02/15/10 301,202
270 Old Saybrook, CT General Obligation - Series 1991 6.500 02/15/11 295,526
925 Oxford, CT General Obligation 7.000 02/01/09 1,000,332
225 Plainfield, CT General Obligation - Series 1991 7.000 09/01/00 237,175
100 Plainfield, CT General Obligation - Series 1991 7.000 09/01/01 105,815
100 Plainfield, CT General Obligation - Series 1991 7.100 09/01/02 106,399
310 Plainfield, CT General Obligation - Series 1991 7.100 09/01/03 330,104
100 Plainfield, CT General Obligation - Series 1991 7.200 09/01/04 106,463
335 Plainfield, CT General Obligation - Series 1991 7.250 09/01/06 364,976
335 Plainfield, CT General Obligation - Series 1991 7.300 09/01/08 363,019
155 Plainfield, CT General Obligation - Series 1991 7.300 09/01/10 165,850
825 Plainfield, CT General Obligation - Series 1992 6.375 08/01/11 869,616
700 Torrington, CT General Obligation 6.400 05/15/11 738,080
680 Torrington, CT General Obligation 6.400 05/15/12 715,224
535 Waterbury, CT General Obligation - Series 1992 7.250 03/01/01 574,531
140 Winchester, CT General Obligation 6.750 04/15/06 156,810
140 Winchester, CT General Obligation 6.750 04/15/07 156,848
140 Winchester, CT General Obligation 6.750 04/15/08 156,919
140 Winchester, CT General Obligation 6.750 04/15/09 156,668
140 Winchester, CT General Obligation 6.750 04/15/10 156,527
725 Woodstock, CT Special Obligation Revenue - Woodstock Academy 6.900 03/01/06 783,585
Pre-refunded or Escrowed
-------------------------------------------------------------------------------------------------------------------------
2,200 Bridgeport, CT General Obligation - Series 1995 5.700 09/01/15 2,311,650
1,300 Connecticut State Health and Educational Facilities Authority Revenue -
Lutheran General Health Care - Parkside Lodges 7.375 07/01/19 1,523,704
3,255 Connecticut State Health and Educational Facilities Authority Revenue -
University of Hartford - Series C 8.000 07/01/18 3,630,725
1,250 Connecticut State Health and Educational Facilities Authority Revenue -
San Raphael Hospital - Series C 7.500 07/01/14 1,354,325
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Taft School - Series A 7.375 07/01/20 1,103,620
645 New Haven, CT General Obligation - Series 1988 7.200 10/01/07 698,470
1,130 Stratford, CT General Obligation 7.300 03/01/12 1,261,634
535 Waterbury, CT General Obligation - Series 1992 7.250 03/01/02 598,328
785 Waterbury, CT General Obligation 7.300 03/01/05 879,640
780 Waterbury, CT General Obligation - Series 1992 7.400 03/01/06 877,453
</TABLE>
Connecticut F-49 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Resource Recovery
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$3,085 Connecticut State Resource Recovery Authority - Bridgeport Resco Company - Project A 7.625% 01/01/09 $ 3,212,102
170 Connecticut State Resource Recovery Authority - Bridgeport Resco Company - Project A 7.500 01/01/04 177,760
1,180 Connecticut State Resource Recovery Authority - Wallingford Project 7.125 11/15/08 1,227,460
3,300 Connecticut State Resource Recovery Authority - American Ref-Fuel Company of
Southeastern Connecticut - Series A 8.000 11/15/15 3,569,478
400 Connecticut State Resource Recovery Authority - Wallingford Project - Series 1991 6.750 11/15/03 421,240
500 Connecticut State Resource Recovery Authority - Wallingford Project - Series 1991 6.800 11/15/04 524,355
5,250 Connecticut State Resource Recovery Authority - American Ref-Fuel Project - Series 1992 A 6.450 11/15/22 5,341,612
6,465 Eastern Connecticut Resource Recovery Authority - Solid Waste Revenue -
Wheelabrator Lisbon Project - Series 1993 A 5.500 01/01/20 5,704,199
Special Tax Revenue
----------------------------------------------------------------------------------------------------------------------------
1,150 Connecticut State Special Tax Obligation Revenue Transportation Infrastructure -
Series 1992 B 6.125 09/01/12 1,197,495
3,475 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 3,752,409
State/Territorial General Obligations
----------------------------------------------------------------------------------------------------------------------------
2,800 Connecticut State College Savings - Series B 0.000 12/15/11 1,139,544
1,000 Connecticut State General Obligation Capital Appreciation - College Savings
Plan - Series A 0.000 05/15/09 481,590
3,000 Connecticut State College Savings - Series 1993 A 0.000 06/15/11 1,256,760
2,000 Connecticut State General Obligation - Series 1995 B 5.375 10/01/13 1,911,880
3,000 Connecticut State General Obligation - Series 1995 B 5.375 10/01/14 2,848,860
1,400 Connecticut State General Obligation - Series 1995 B 5.375 10/01/15 1,321,936
2,350 Commonwealth of Puerto Rico Public Improvement - General Obligation - Series 1996 A 5.400 07/01/25 2,118,360
Student Loan Revenue Bonds
----------------------------------------------------------------------------------------------------------------------------
440 Connecticut State Higher Education Supplemental Loan Authority Revenue - Series A 7.000 11/15/05 467,751
4,225 Connecticut State Higher Education Supplemental Loan Authority Revenue - Series A 7.200 11/15/10 4,500,681
1,890 Connecticut State Higher Education Supplemental Loan Authority Revenue - Family
Educational Loan - Series 1994 A 6.300 11/15/10 1,914,457
1,415 Connecticut State Higher Education Supplemental Loan Authority Revenue - Family
Educational Loan - Series 1994 A 6.350 11/15/11 1,438,715
Total Investments in Securities - Municipal Bonds (cost $200,073,283) - 98.9% 207,134,067
Excess of Other Assets over Liabilities - 1.1% 2,327,792
Total Net Assets - 100.0% $209,461,859
</TABLE>
See notes to financial statements.
8 F-50 Connecticut
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $200,073,283) $207,134,067
Receivable for Fund shares sold 397,955
Interest receivable 3,284,125
Other 12,418
Total assets 210,828,565
LIABILITIES:
Bank overdraft 334
Payable for Fund shares reacquired 242,791
Distributions payable 983,056
Accrued expenses 140,525
Total liabilities 1,366,706
NET ASSETS 209,461,859
Class A:
Applicable to 19,768,778 shares of beneficial interest
issued and outstanding $202,219,158
Net asset value per share $ 10.23
Class C:
Applicable to 708,990 shares of beneficial interest issued
and outstanding $ 7,242,701
Net asset value per share $ 10.22
</TABLE>
LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 13,204,254
EXPENSES:
Distribution fees - Class A (Note E) 818,000
Distribution fees - Class C (Note E) 62,142
Investment advisory fees (Note E) 1,058,258
Custody and accounting fees 120,470
Transfer agent's fees 116,400
Registration fees 4,414
Legal fees 5,463
Audit fees 18,300
Trustees' fees 5,856
Shareholder services fees (Note E) 16,315
Other 6,391
Advisory fees waived (Note E) (636,447)
Total expenses before credits 1,595,562
Custodian fee credit (Note B) (23,850)
Net expenses 1,571,712
Net investment income 11,632,542
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 951,483
Change in unrealized appreciation (depreciation) of
investments (3,913,226)
Net loss on investments (2,961,743)
Net increase in net assets resulting from operations $ 8,670,799
See notes to financial statements.
</TABLE>
Connecticut F-51 9
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 11,632,542 $ 11,797,430
Net realized gain (loss) on security transactions 951,483 (1,147,834)
Change in unrealized appreciation (depreciation) of
investments (3,913,226) 5,043,946
Net increase in net assets resulting from operations 8,670,799 15,693,542
Distributions to Class A shareholders:
From net investment income (11,371,201) (11,573,696)
Distributions to Class C shareholders:
From net investment income (327,137) (271,123)
Net decrease in net assets from distributions to
shareholders (11,698,338) (11,844,819)
Fund share transactions (Note C):
Proceeds from shares sold 17,698,654 18,096,796
Net asset value of shares issued in reinvestment of
distributions 6,666,728 6,902,687
Cost of shares reacquired (20,622,363) (27,068,572)
Net increase (decrease) in net assets from Fund share transactions 3,743,019 (2,069,089)
Total increase in net assets 715,480 1,779,634
NET ASSETS:
Beginning of year 208,746,379 206,966,745
End of year $209,461,859 $208,746,379
NET ASSETS CONSIST OF:
Paid-in surplus $204,040,272 $200,363,049
Accumulated net realized gain (loss) on security
transactions (1,639,197) (2,590,680)
Unrealized appreciation (depreciation) of investments 7,060,784 10,974,010
$209,461,859 $208,746,379
</TABLE>
See notes to financial statements.
10 F-52 Connecticut
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Connecticut Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on July 13, 1987. On
October 4, 1993, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Connecticut F-53 11
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
-------------------------- -------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,453,108 $ 15,066,282 1,602,626 $ 15,975,568
Shares issued on reinvestment 624,317 6,491,833 678,768 6,764,804
Shares reacquired (1,889,024) (19,630,307) (2,620,302) (25,899,326)
Net increase (decrease) 188,401 $ 1,927,808 (338,908) $ (3,158,954)
Class C:
Shares sold 253,267 $ 2,632,372 210,358 $ 2,121,228
Shares issued on reinvestment 16,838 174,895 13,861 137,883
Shares reacquired (95,257) (992,056) (119,184) (1,169,246)
Net increase 174,848 $ 1,815,211 105,035 $ 1,089,865
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $55,060,012 and $50,457,129, respectively. At May 31, 1996, cost
for federal income tax purposes is $200,080,021 and net unrealized
appreciation aggregated $7,054,046, of which $8,434,574 related to
appreciated securities and $1,380,528 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $1,608,900 to offset future net capital gains expiring on May
31, 2003.
12 F-54 Connecticut
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $636,447 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $17,810. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity
is responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $68,815 and $5,760 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $349,000 for the year ended May 31, 1996, of which
approximately $301,600 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $400 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may
temporarily borrow up to $10 million under the line of credit. Borrowings
are collateralized with pledged securities and are due on demand with
interest at 1% above the federal funds rate. The average daily amount of
borrowings under the line of credit during the year ended May 31, 1996 was
approximately $186,500, at a weighted average annualized interest rate of
6.63%. At May 31, 1996, the Fund had no borrowings outstanding under the
line of credit.
Connecticut F-55 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.38 $ 10.17 $ 10.66 $ 10.05 $ 9.84
Income from investment operations:
Net investment income 0.57 0.58 0.59 0.61 0.63
Net realized and unrealized gain (loss) on
securities (0.14) 0.22 (0.39) 0.61 0.21
Total from investment operations 0.43 0.80 0.20 1.22 0.84
Less distributions:
From net investment income (0.58) (0.59) (0.60) (0.61) (0.63)
From net realized capital gains (0.01)
In excess of net realized capital gains (0.08)
Total distributions (0.58) (0.59) (0.69) (0.61) (0.63)
Net asset value, end of year $ 10.23 $ 10.38 $ 10.17 $ 10.66 $ 10.05
Total return/(a)/ 4.18% 8.21% 1.70% 12.48% 8.81%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses/(b)/ 0.74% 0.73% 0.65% 0.66% 0.65%
Net investment income 5.52% 5.84% 5.52% 5.88% 6.30%
Assuming credits and no
waivers or reimbursements:
Expenses 1.03% 1.03% 1.03% 1.04% 1.05%
Net investment income 5.23% 5.54% 5.14% 5.50% 5.90%
Net assets at end of year (000's) $202,219 $203,210 $202,607 $184,743 $141,215
Portfolio turnover rate 24.22% 25.01% 30.19% 19.31% 18.16%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.73%; prior year numbers have not
been restated to reflect these credits.
14 F-56 Connecticut
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended October 4, 1993 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.36 $10.16 $11.06
Income from investment operations:
Net investment income 0.52 0.53 0.33
Net realized and unrealized gain
(loss) on securities (0.14) 0.20 (0.84)
Total from investment operations 0.38 0.73 (0.51)
Less distributions:
From net investment income (0.52) (0.53) (0.33)
From net realized capital gains (0.01)
In excess of net realized capital gains (0.05)
Total distributions (0.52) (0.53) (0.39)
Net asset value, end of period $10.22 $10.36 $10.16
Total return/(a)/ 3.71% 7.53% (6.48%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.29% 1.28% 1.22%
Net investment income 4.96% 5.27% 4.77%
Assuming credits and no
waivers or reimbursements:
Expenses 1.58% 1.58% 1.77%
Net investment income 4.67% 4.97% 4.22%
Net assets at end of period (000's) $7,243 $5,536 $4,360
Portfolio turnover rate 24.22% 25.01% 30.19%
</TABLE>
(a) The total returns shown do not include the effect of applicable
contingent deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits
from the custodian which reduce service fees incurred. If included, the
ratio of expenses to average net assets would be 1.28%; prior period numbers
have not been restated to reflect these credits.
Connecticut F-57 15
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP CONNECTICUT
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Connecticut Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Connecticut Double Tax Exempt Fund at May 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-58 Connecticut
<PAGE>
[LOGO] Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Florida Intermediate
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
<C> <S> <C> <C> <C>
Health Care
--------------------------------------------------------------------------------------------------------------------------
$ 200 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500% 05/15/05 $ 187,736
Hospitals
--------------------------------------------------------------------------------------------------------------------------
200 Alachua County, FL Health Facilities Authority Revenue - Shands Teaching
Hospital and Clinics, Incorporated Project - Series 1996 A 5.300 12/01/08 197,234
200 Leesburg, FL Hospital Revenue - Leesburg Regional Medical Center
Project - Series 1996 A 5.600 07/01/08 195,126
500 Orange County, FL Health Facilities Authority Revenue - Adventist Health
System/Sunbelt - Series 1995 5.750 11/15/04 523,480
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
180 Florida Housing Finance Agency - Single Family Mortgage Revenue -
Series 1995 A 6.000 01/01/04 182,614
Industrial Developement and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
200 Escambia County, FL Pollution Control Revenue - Champion International
Corporation - Series 1992 6.950 11/01/07 210,578
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
100 Dade County, FL School Board - Certificates of Participation - Series 1994 A 5.375 05/01/04 101,703
290 Levy County, FL School Board - Certificates of Participation - Series 1995 5.500 07/01/06 290,429
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
225 * Gulf Breeze, FL Local Government Loan Program Floating Rate Demand
Revenue - Series 1985 B 5.600 12/01/07 227,282
250 Miami Beach, FL Parking Revenue - Series 1996 A 4.800 09/01/08 231,500
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
350 Dade County, FL Aviation Facilities Revenue - Series 1994 A 6.250 10/01/02 375,235
100 Palm Beach County, FL Airport System Revenue 7.625 10/01/04 113,331
200 Sarasota Manatee, FL Airport Authority - Airport System Revenue - Series 1996 5.250 08/01/08 196,634
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
250 Plant City, FL Utility System Revenue - Series 1995 5.400 10/01/06 253,992
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
140 Auburndale, FL Water and Sewer Revenue - Series 1995 5.100 12/01/05 139,791
485 Auburndale, FL Water and Sewer Revenue - Series 1995 5.375 12/01/08 482,604
250 Lee County, FL Industrial Development Authority - Utility System Revenue -
Bonita Springs Utilities Project - Series 1996 5.450 11/01/07 250,302
100 Port Saint Lucie, FL Utility System Revenue - Series 1994 5.500 09/01/04 103,201
</TABLE>
Florida F-59 5
<PAGE>
[LOGO] Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
MUNICIPAL BONDS--FLORIDA INTERMEDIATE (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
Non-State General Obligations
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 125 Dade County, FL School District - General Obligation - Series 1995 5.100% 08/01/06 $ 123,819
500 Duval County, FL School District Revenue - General Obligation - Series 1992 6.300 08/01/08 531,050
200 New York City, NY General Obligation - Series 1996 H and I 6.500 03/15/06 205,956
85 Palm Beach County, FL General Obligation - Series 1994 A and B 4.600 07/01/07 79,044
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
570 Florida State Department of Transportation - Turnpike Revenue - Series 1992 A 6.350 07/01/22 620,063
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
185 Dade County, FL Guaranteed Entitlement Revenue - Series 1995 0.000 02/01/03 131,983
250 Florida State Division Board Finance Department - General Services Revenue - 5.500 07/01/06 255,422
Department of Environmental - Series 1995
100 Gulf County, FL Gas Tax Revenue - Series 1995 5.000 10/01/07 96,553
150 Indian Trace, FL Community Development District - Water Management
Special Benefit - Series 1995 A 5.500 05/01/06 152,979
125 Lynn Haven, FL Special Project Revenue - Series 1996 5.250 10/01/05 122,732
250 Martin County, FL Tropical Farms Water and Sewer Special Assessment District - 5.600 11/01/05 252,720
Series 1995
125 Pembroke Pines, FL Special Assessment Number 94-1 - Series 1995 5.750 11/01/05 123,299
200 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - 5.200 07/01/03 200,014
Series 1993 X
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
225 Florida State Broward County Expressway Authority - Series 1984 9.875 07/01/09 315,691
200 Florida State Board of Education Capital Outlay - Series 1995 5.625 06/01/05 206,920
100 Florida State Board of Education Capital Outlay - Series 1992 A 6.000 06/01/07 103,813
250 Florida State Board of Education Capital Outlay - Series 1993 5.000 06/01/08 240,398
TOTAL INVESTMENTS IN SECURITIES - MUNICIPAL BONDS (COST $7,933,353) - 99.4% 8,025,228
EXCESS OF OTHER ASSETS OVER LIABILITIES - 0.6% 48,500
TOTAL NET ASSETS - 100.0% $8,073,728
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
</TABLE>
6 F-60 Florida
<PAGE>
[LOGO OF SHIP ART] Florida Intermediate
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $7,933,353) $ 8,025,228
Cash 207,258
Receivable for Fund shares sold 11,007
Interest receivable 121,360
Other 188
Total assets 8,365,041
LIABILITIES:
Payable for investments purchased 225,000
Payable for Fund shares reacquired 14,281
Distributions payable 30,967
Accrued expenses 21,065
Total liabilities 291,313
NET ASSETS 8,073,728
Class A:
Applicable to 505,317 shares of beneficial interest issued and outstanding $ 4,994,849
Net asset value per share $ 9.88
Class C:
Applicable to 311,471 shares of beneficial interest issued and outstanding $ 3,078,879
Net asset value per share $ 9.88
</TABLE>
[LOGO of ship art] Florida Intermediate
Statement of Operations For the year ended May 31, 1996
..............................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 396,965
EXPENSES:
Distribution fees - Class A (Note E) 20,419
Distribution fees - Class C (Note E) 23,475
Investment advisory fees (Note E) 38,041
Custody and accounting fees 33,088
Transfer agent's fees 21,965
Registration fees 106
Legal fees 77
Audit fees 9,045
Trustees' fees 107
Shareholder services fees (Note E) 1,098
Other 338
Advisory fees waived (Note E) (38,041)
Expense subsidy (Note E) (37,757)
Total expenses before credits 71,961
Custodian fee credit (Note B) (6,738)
Net Expenses 65,223
Net investment income 331,742
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 38,343
Change in unrealized appreciation (depreciation) of investments (149,369)
Net loss on investments (111,026)
Net increase in net assets resulting from operations $ 220,716
</TABLE>
See notes to financial statements.
Florida F-61 7
<PAGE>
[LOGO] Florida Intermediate
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 331,742 $ 177,223
Net realized gain (loss) on security transactions 38,343 12,629
Change in unrealized appreciation (depreciation) of investments (149,369) 251,709
Net increase in net assets resulting from operations 220,716 441,561
Distributions to Class A shareholders:
From net investment income (235,102) (102,108)
From net realized capital gains (22,352)
Distributions to Class C shareholders:
From net investment income (100,151) (50,079)
From net realized capital gains (11,661)
Net decrease in net assets from distributions to shareholders (369,266) (152,187)
Fund share transactions (Note C):
Proceeds from shares sold 5,685,452 4,945,153
Net asset value of shares issued in reinvestment of distributions 185,193 78,950
Cost of shares reacquired (3,310,832) (1,673,701)
Net increase in net assets from Fund share transactions 2,559,813 3,350,402
Total increase in net assets 2,411,263 3,639,776
NET ASSETS:
Beginning of year 5,662,465 2,022,689
End of year $ 8,073,728 $ 5,662,465
NET ASSETS CONSIST OF:
Paid-in surplus $ 7,942,376 $ 5,382,563
Undistributed net investment income 22,780 26,291
Accumulated net realized gain (loss) on security transactions 16,697 12,367
Unrealized appreciation (depreciation) of investments 91,875 241,244
$ 8,073,728 $ 5,662,465
</TABLE>
See notes to financial statements.
8 F-62 Florida
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Florida Double Tax Exempt
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Health Care
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$5,500 Cape Coral, FL Health Facilities Authority - First Mortgage Revenue -
Gulf Care, Incorporated - Series 1995 A 6.000% 10/01/25 $5,373,390
540 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500 05/15/02 525,053
570 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500 05/15/03 548,021
855 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500 05/15/01 840,456
600 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500 05/15/04 569,946
1,000 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 6.000 05/15/10 930,280
170 Sarasota County, FL Health Facilities Authority Revenue - Sunnyside
Properties Project - Series 1995 5.500 05/15/05 159,576
Hospitals
-------------------------------------------------------------------------------------------------------------------------
2,735 Dade County, FL Health Facilities Authority Revenue - Catholic Health and
Rehabilitation Inc. 7.125 08/15/09 2,901,507
3,000 Jacksonville, FL Health Facilities Authority Hospital Revenue - St. Luke's
Hospital 7.125 11/15/20 3,236,220
6,000 Lakeland, FL Hospital Revenue - Lakeland Regional Medical Center Project -
Series 1996 5.250 11/15/25 5,427,120
2,320 Martin County, FL Health Facilities Authority Hospital Revenue -
Martin Memorial Hospital - Series A 7.125 11/15/04 2,545,063
1,000 Martin County, FL Health Facilities Authority Hospital Revenue -
Martin Memorial Hospital - Series B 7.100 11/15/20 1,086,830
1,330 North Miami, FL Health Facilities Authority Revenue - Bon Secours Health
System - Villa Maria Nursing Center 7.500 09/01/12 1,442,186
2,500 Orange County, FL Health Facilities Authority Revenue - Adventist Health/
Sunbelt - Series 1991 6.875 11/15/15 2,692,325
2,500 Orange County, FL Health Facilities Authority Revenue - Adventist Health/
Sunbelt - Series 1991 6.750 11/15/21 2,665,600
8,895 Orange County, FL Health Facilities Authority Revenue - Adventist Health
System/Sunbelt - Series 1995 5.250 11/15/20 8,023,735
1,000 Orange County, FL Health Facilities Authority Revenue - Adventist Health
System/Sunbelt - Series 1995 5.750 11/15/25 964,270
1,550 Osceola County, FL Industrial Development Authority Revenue -
Evangelical Lutheran Society Project 6.750 05/01/16 1,653,354
1,650 Polk County, FL Industrial Development Authority Revenue - Winter Haven
Hospital - Series 1985-2 6.250 09/01/15 1,688,164
1,000 Saint Johns County, FL Industrial Development Authority - Hospital Revenue -
Flagler Hospital - Series 1992 6.000 08/01/22 929,120
2,000 St. Petersburg, FL Health Facilities Authority Revenue - Allegheny Health
System - St. Anthony's Health Care Center 6.750 12/01/21 2,137,120
1,610 St. Petersburg, FL Health Facilities Authority Revenue - Allegheny Health
System - St. Mary's Hospital 7.000 12/01/21 1,757,621
</TABLE>
Florida F-63 9
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Florida Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,000 Tampa, FL Allegany Health System Revenue - St. Joseph's Hospital, Incorporated -
Series 1991 6.750% 12/01/17 $1,071,510
2,000 Tampa, FL Allegany Health System Revenue - St. Joseph's Hospital - Series 1994 6.500 12/01/23 2,084,980
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
2,700 Duval County, FL Housing Finance Authority - Multifamily Housing Revenue -
Greentree Place - Series 1995 6.750 04/01/25 2,725,056
1,000 Florida Housing Finance Agency - Multifamily Housing Revenue - Antigua Club
Apartments - Series 1995 A1 6.750 08/01/14 1,053,520
1,115 Florida Housing Finance Agency - Multifamily Housing Revenue - Brittany of
Rosemont Apartments - Series 1995 C1 6.875 08/01/26 1,176,537
1,260 Florida Housing Finance Agency Revenue - Vinyards Project - Series 1995 H 6.400 11/01/15 1,246,127
1,660 Florida Housing Finance Agency Revenue - Vinyards Project - Series 1995 H 6.500 11/01/25 1,649,110
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
5,425 Broward County, FL Housing Finance Authority Revenue - Single Family -
Series 1985 0.000 04/01/16 686,371
1,995 Broward County, FL Housing Finance Authority Revenue - Single Family -
Series 1990 A 7.900 03/01/23 2,100,675
2,500 Clay County, FL Housing Finance Authority Revenue - Single Family Mortgage -
Series 1995 6.550 03/01/28 2,520,775
290 Dade County, FL Housing Finance Authority - Single Family - Series B 7.750 03/01/17 305,298
630 Dade County, FL Housing Finance Authority - Single Family - Series B 7.250 09/01/23 651,578
1,355 Dade County, FL Housing Finance Authority - Single Family - Series D 6.950 12/15/12 1,422,059
40 Dade County, FL Housing Finance Authority - Single Family - Series E 7.000 03/01/24 41,537
1,000 Dade County, FL Housing Finance Authority - Single Family Mortgage Revenue -
Series 1995 6.700 04/01/28 1,007,460
425 Duval County, FL Housing Finance Authority - Single Family - Series B 7.500 06/01/15 448,447
215 Duval County, FL Housing Finance Authority - Single Family - Series A 7.850 12/01/22 226,468
520 Duval County, FL Housing Finance Authority - Single Family - Series C 7.650 09/01/10 549,453
735 Duval County, FL Housing Finance Authority Revenue - Single Family -
Series 1994 6.550 10/01/15 743,048
1,690 Escambia County, FL Housing Finance Authority - Single Family 7.400 10/01/23 1,761,301
1,425 Florida Housing Finance Agency - Single Family Revenue - Series 1994 6.250 07/01/11 1,443,183
715 Florida Housing Finance Agency - Single Family Mortgage Revenue -
Series 1995 A 6.550 07/01/14 724,910
715 Florida Housing Finance Agency - Single Family Mortgage Revenue -
Series 1995 A 6.650 01/01/24 723,609
1,000 Florida Housing Finance Agency - Homeowner Mortgage Revenue -
Series 1995 2B 5.950 07/01/14 998,840
435 Leon County, FL Housing Finance Authority Revenue - Single Family 7.300 04/01/21 450,751
3,000 Leon County, FL Housing Finance Authority Revenue - Single Family -
Series 1995 7.300 01/01/28 3,229,890
1,330 Orange County, FL Housing Finance Authority Revenue - Series B 8.100 11/01/21 1,408,124
280 Orange County, FL Housing Finance Authority Revenue - Series A 7.600 01/01/24 295,778
1,055 Palm Beach County, FL Housing Finance Authority - Single Family Mortgage
Revenue 7.600 03/01/23 1,111,759
</TABLE>
10 F-64 Florida
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Florida Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$2,000 Pinellas County, FL Housing Finance Authority Revenue - Single Family -
Series 1995 A 6.650% 08/01/21 $2,019,840
1,160 Polk County, FL Housing Finance Authority - Single Family Revenue - Series A 7.150 09/01/23 1,208,210
Industrial Development and Pollution Control
-----------------------------------------------------------------------------------------------------------------------
3,000 Alliance Airport Authority, Incorporated, TX - Special Facilities Revenue -
Federal Express Corporation Project - Series 1996 6.375 04/01/21 2,911,380
6,000 Citrus County, FL Pollution Control Revenue - Florida Power Corporation -
Crystal River Power Plant - Series 1992A 6.625 01/01/27 6,255,060
750 Clay County, FL Industrial Development Authority Revenue - Cargill Project -
Series 1992 6.400 03/01/11 780,038
5,500 Escambia County, FL Pollution Control Revenue - Champion International
Corporation - Series 1994 6.900 08/01/22 5,704,655
2,500 Hillsborough County, FL Industrial Development Authority Pollution Control
Revenue - Tampa Electric Company 7.875 08/01/21 2,871,400
600 Jacksonville, FL Industrial Development Revenue - Cargill Project - Series 1992 6.400 03/01/11 623,592
2,000 Martin County, FL Pollution Control Revenue - Florida Power and Light Company -
Series 1990 7.300 07/01/20 2,197,460
1,500 Nassau County, FL Pollution Control Revenue - ITT Rayonier Project -
Series 1993 6.200 07/01/15 1,457,475
4,000 Pinellas County, FL Pollution Control Revenue - Florida Power Corporation -
Anclote and Bartow Power Plants 7.200 12/01/14 4,269,240
3,000 St. Lucie County, FL Solid Waste Disposal Revenue - Florida Power and Light
Company 7.150 02/01/23 3,235,740
2,000 St. Lucie County, FL Solid Waste Disposal Revenue - Florida Power and Light
Company - Series 1992 6.700 05/01/27 2,090,920
3,400 Tulsa, OK Municipal Airport Trustees Trust Revenue - AMR Corporation -
Series 1995 6.250 06/01/20 3,320,780
Municipal Appropriation Obligations
-----------------------------------------------------------------------------------------------------------------------
500 Brevard County, FL School Board - Certificates of Participation - Series 1996 A
and B 5.400 07/01/11 489,085
500 Brevard County, FL School Board - Certificates of Participation - Series 1996 A
and B 5.400 07/01/12 486,055
1,100 Brevard County, FL School Board - Certificates of Participation - Series 1996 A
and B 5.500 07/01/21 1,034,495
3,500 Florida State Department of Correctional Privatization Commission - Certificates
of Participation - 350 Bed Youth - Series 1995 5.000 08/01/17 3,106,285
1,500 Florida State Department of Corrections - Certificates of Participation -
Series 1994 6.000 03/01/14 1,514,160
1,000 Palm Beach County, FL School Board - Certificates of Participation - Series 1994A 6.375 08/01/15 1,033,880
5,050 Palm Beach County, FL School Board - Certificates of Participation - Series 1995 A 5.375 08/01/15 4,742,10
Municipal Revenue/Other
-----------------------------------------------------------------------------------------------------------------------
3,105 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand Revenue -
Series 1985 A through E 7.750 12/01/15 3,439,967
1,000 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand Revenue -
Series 1985 B 5.900 12/01/11 1,017,310
5,000 Hernando County, FL Revenue Criminal Justice Complex 7.650 07/01/16 6,143,150
85 Orange County, FL Capital Improvement Revenue - Series A 7.700 10/01/18 92,189
</TABLE>
Florida F-65 11
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Florida Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Transportation
-----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 Dade County, FL Seaport General Obligation - Series 1996 5.125% 10/01/26 $ 878,350
7,585 Dade County, FL Aviation Revenue - Series 1996 A and B 5.600 10/01/26 7,182,995
4,000 Dade County, FL Aviation Revenue - Series 1995 A, B and C 5.750 10/01/25 3,873,080
530 Florida State Department of Transportation - Turnpike Revenue - Series 1992 A 6.350 07/01/22 543,303
4,000* Jacksonville, FL Port Authority - Port Facilities Revenue - Series 1996 5.625 11/01/18 3,770,160
2,475 Palm Beach County, FL Airport System Revenue 7.500 10/01/00 2,729,356
3,000 Sanford Airport Authority, Florida - Industrial Development Revenue Bonds -
(Central Florida Terminals, Inc. Project) - Series 1995 A and B 7.500 05/01/15 2,765,940
3,270 Sanford Airport Authority, Florida - Industrial Development Revenue Bonds -
(Central Florida Terminals, Inc. Project) - Series 1995 A and B 7.750 05/01/21 2,993,848
Municipal Revenue/Utility
-----------------------------------------------------------------------------------------------------------------------
2,000 Escambia County, FL Utilities Authority - System Revenue - Series 1992 B 0.000 01/01/15 666,680
3,000 Jacksonville, FL Electric Authority - St. Johns River Power System Revenue -
Issue 2 - Series 11 5.250 10/01/20 2,671,620
2,000 Key West, FL Utility Board Electric System Revenue - Series 1991 0.000 10/01/14 676,600
2,500 Key West, FL Utility Board Electric System Revenue - Series 1991 0.000 10/01/17 707,425
1,850 Manatee County, FL Public Utilities Revenue - Series 1991 C 0.000 10/01/08 935,027
2,800 Manatee County, FL Public Utilities Revenue - Series 1991 C 0.000 10/01/09 1,320,032
1,000 Orlando, FL Utilities Commission - Water and Electric Revenue - Series 1989 D 6.750 10/01/17 1,116,630
375 Orlando, FL Utilities Commission - Water and Electric Revenue - Series 1989 D 5.000 10/01/23 317,801
6,500 Southern Minnesota Municipal Power Agency - Power Supply System Revenue -
Series 1994 A 0.000 01/01/21 1,477,840
2,570 Sunrise, FL Utility System Revenue - Capital Appreciation - Series 1992 B 0.000 10/01/13 930,186
Municipal Revenue/Water & Sewer
-----------------------------------------------------------------------------------------------------------------------
3,750 Auburndale, FL Water and Sewer Revenue - Series 1995 5.250 12/01/25 3,396,675
2,500 Dade County, FL Water and Sewer System Revenue - Series 1995 5.500 10/01/25 2,341,275
2,250 Hillsborough County, FL Utility Revenue - Series A 6.500 08/01/16 2,334,398
3,500 Hillsborough County, FL Utility Revenue - Series B 6.500 08/01/16 3,631,285
500 Jacksonville, FL District Water and Sewer Revenue - Series 1996 5.000 10/01/20 436,400
3,500 Miami Beach, FL Water and Sewer Revenue - Series 1995 5.375 09/01/15 3,297,560
2,000 Florida Village Center Community Development District - Water and Sewer
Utility Revenue - Series 1993 5.000 11/01/13 1,785,620
Non-State General Obligations
-----------------------------------------------------------------------------------------------------------------------
2,990 Hillsborough County, FL Environmentally Sensitive Lands Acquisition and
Protection Program - Series 1992 6.250 07/01/08 3,085,381
3,000 Mobile, AL General Obligation Warrants - Series 1996 5.000 02/15/16 2,700,540
5,500 New York City, NY General Obligation - Series 1996 F and G 5.750 02/01/19 4,941,750
3,000 New York City, NY General Obligation - Series 1996 H and I 5.875 03/15/18 2,743,710
5,000 Sunrise Lakes, FL Phase 4 Recreation District - General Obligation and Revenue -
Series 1995 A and B 6.750 08/01/24 5,202,300
</TABLE>
12 F-66 Florida
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds -- Florida Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Pre-refunded or Escrowed
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,925 Boynton Beach, FL Water and Sewer System Utility Revenue - Series 1990 7.400% 11/01/15 $2,167,627
1,500 Broward County, FL School Board - Certificates of Participation 7.125 07/01/10 1,662,600
15,000 Colquitt County, GA Development Authority Revenue - Southern Care Corporation -
Series 1991 A 0.000 12/01/21 2,476,350
1,500 Dade County, FL Health Facilities Authority Revenue - Baptist Hospital of
Miami Project 5.750 05/01/21 1,494,990
2,600 Dade County, FL Health Facilities Authority Revenue - South Miami Hospital -
Series 1991 A 6.750 10/01/20 2,886,624
550 Florida State Jacksonville Transportation Authority - Senior Lien - General
Obligation Unlimited Tax - Series 1990 7.375 07/01/20 614,790
335 Florida State Board of Education Capital Outlay 9.125 06/01/14 458,380
5,000 Florida State Board of Education Capital Outlay - Series 1991 B 6.700 06/01/22 5,475,050
3,000 Florida State Board of Education Capital Outlay - Series 1992 C 6.625 06/01/17 3,305,070
2,500 Florida State Department of Transportation - Turnpike Revenue - Series 1989 A 7.500 07/01/19 2,757,900
55 Greater Orlando Aviation Authority - Airport Facilities Revenue - City of
Orlando, FL 8.000 10/01/18 60,488
1,000 Hillsborough County, FL Port District Revenue - Tampa Port Authority - Series 1990 8.250 06/01/09 1,151,670
1,020 Hillsborough County, FL Capital Improvement Program Revenue - Series 1994 6.400 08/01/09 1,121,510
1,635 Hillsborough County, FL Utility Revenue - Series A 7.000 08/01/14 1,812,986
1,810 Jacksonville, FL Electric Authority - Bulk Power Supply System Revenue - Scherer 4
Project - Series 1991 A 7.000 10/01/12 1,995,036
1,500 Lady Lake, FL Industrial Development Revenue - Sunbelt Utilities 9.625 07/01/15 1,791,585
1,050 Naples, FL Hospital Revenue - Naples Community Hospital 7.200 10/01/19 1,171,989
3,400 North Springs, FL Improvement District Water and Sewer Revenue - Broward County -
Series 1991 8.000 10/01/16 3,971,336
15 Orange County, FL Capital Improvement Revenue - Series A 7.700 10/01/18 16,439
1,750 Orange County, FL Tourist Development Tax Revenue 7.250 10/01/10 1,956,710
420 Orlando-Orange County, FL Expressway Authority Revenue - Series 1990 6.500 07/01/20 455,574
1,750 Palm Beach County, FL Criminal Justice Facilities Revenue 7.250 06/01/11 1,944,828
1,900 Commonwealth of Puerto Rico Electric Power Authority - Series P 7.000 07/01/21 2,125,473
1,000 Sarasota County, FL Utility System Revenue - Series 1994 6.500 10/01/22 1,114,380
2,500 Seminole County, FL School Board - Certificates of Participation - Series
1994 B 6.750 07/01/14 2,808,175
Resource Recovery
-------------------------------------------------------------------------------------------------------------------------
4,565 Broward County, FL Resource Recovery Revenue - SES Broward Company, L.P. South
Project - Series 1984 7.950 12/01/08 5,026,887
2,125 Lee County, FL Solid Waste System Revenue - Series A 7.000 10/01/11 2,294,022
2,700 Palm Beach County, FL Solid Waste Industrial Development Revenue - Okeelanta
Power - Series 1993 A 6.375 02/15/07 2,671,056
2,000 Palm Beach County, FL Solid Waste Industrial Development Revenue - Okeelanta
Power - Series 1993 A 6.700 02/15/15 1,960,100
7,500 Palm Beach County, FL Solid Waste Industrial Development Revenue - Okeelanta
Power - Series 1993 A 6.850 02/15/21 7,358,925
2,000 Sarasota County, FL Solid Waste System Revenue - Series 1996 5.500 10/01/21 1,887,800
</TABLE>
Florida F-67 13
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds -- Florida Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 7,600 Dade County, FL Professional Sports Franchise Facilities Tax Revenue - Series 1995 0.000% 10/01/27 $ 1,178,152
6,730 Dade County, FL Professional Sports Franchise Facilities Tax Revenue - Series 1995 5.250 10/01/30 6,052,424
700 Detroit, MI Downtown Development Authority- Tax Increment - Development Area Number
1 Projects - Series 1996 B, C-1, C-2 and D 6.250 07/01/25 683,466
500 Jacksonville, FL Excise Taxes Revenue - Series 1996 A 5.000 10/01/16 447,070
1,010 Martin County, FL Tropical Farms Water and Sewer Special Assessment District -
Series 1995 5.900 11/01/11 1,023,039
1,000 Metropolitan Atlanta Rapid Transit Authority - Georgia Sales Tax Revenue -
Series 1992 P 6.250 07/01/20 1,049,930
1,000 Palm Beach Gardens, FL Special Obligation Revenue 7.250 07/01/15 1,083,960
4,580 Pembroke Pines, FL Special Assessment Number 94-1 - Series 1995 5.750 11/01/05 4,517,666
10,500 Puerto Rico Highway and Transportation Authority Revenue - Series 1996 Y and Z 5.500 07/01/36 9,530,640
1,000 Puerto Rico Highway and Transportation Authority Revenue - Series 1996 Y and Z 5.000 07/01/36 833,270
400 Wisconsin Center District - Junior Dedicated Tax Revenue - Series 1996 B 5.700 12/15/20 386,320
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
4,000 Florida State Broward County Expressway Authority - Series 1984 9.875 07/01/09 5,612,280
1,000 Florida State Broward County Expressway Authority - Series 1984 10.000 07/01/14 1,465,060
2,165 Florida State Board of Education Capital Outlay - Series 1985 9.125 06/01/14 2,959,663
Total Investments in Securities - Municipal Bonds (cost $307,972,351) - 100.2% 320,272,636
Excess of Liabilities over Other Assets - (0.2)% (641,592)
Total Net Assets - 100.0% $319,631,044
</TABLE>
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
14 F-68 Florida
<PAGE>
[LOGO OF SHIP ART]
Florida Double Tax Exempt
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $307,972,351) $320,272,636
Cash 97,112
Receivable for investments sold 145,000
Receivable for Fund shares sold 177,243
Interest receivable 5,534,307
Other 21,231
Total assets 326,247,529
LIABILITIES:
Payable for investments purchased 4,431,235
Payable for Fund shares reacquired 450,685
Distributions payable 1,475,578
Accrued expenses 258,987
Total liabilities 6,616,485
NET ASSETS 319,631,044
Class A:
Applicable to 30,652,271 shares of beneficial interest issued and outstanding $318,456,444
Net asset value per share $ 10.39
Class C:
Applicable to 113,035 shares of beneficial interest issued and outstanding $ 1,174,600
Net asset value per share $ 10.39
</TABLE>
[LOGO OF SHIP ART]
Florida Double Tax Exempt
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 20,541,373
EXPENSES:
Distribution fees - Class A (Note E) 1,328,070
Distribution fees - Class C (Note E) 3,169
Investment advisory fees (Note E) 1,665,969
Custody and accounting fees 169,744
Transfer agent's fees 144,895
Registration fees 12,994
Legal fees 637
Audit fees 20,862
Reimbursement of organizational expenses (Note F) 56,723
Trustee's fees 8,817
Shareholder services fees (Note E) 21,560
Other 10,642
Advisory fees waived (Note E) (685,218)
Total expenses before credits 2,758,864
Custodian fee credit (Note B) (48,694)
Net expenses 2,710,170
Net investment income 17,831,203
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 4,828,780
Change in unrealized appreciation (depreciation) of investments (12,275,838)
Net loss on investments (7,447,058)
Net increase in net assets resulting from operations $ 10,384,145
</TABLE>
See notes to financial statements.
Florida F-69 15
<PAGE>
[LOGO OF SHIP ART]
Florida Double Tax Exempt
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 17,831,203 $ 19,719,394
Net realized gain (loss) on security transactions 4,828,780 (2,273,532)
Change in unrealized appreciation (depreciation) of investments (12,275,838) 8,667,382
Net increase in net assets resulting from operations 10,384,145 26,113,244
Distributions to Class A shareholders:
From net investment income (17,864,777) (19,846,500)
Distributions to Class C shareholders:
From net investment income (15,706)
Net decrease in net assets from distributions to shareholders (17,880,483) (19,846,500)
Fund share transactions (Note C):
Proceeds from shares sold 6,866,299 45,355,080
Net asset value of shares issued in reinvestment of distributions 6,774,286 7,682,266
Cost of shares reacquired (57,887,168) (90,012,143)
Net decrease in net assets from Fund share transactions (14,246,583) (36,974,797)
Total decrease in net assets (21,742,921) (30,708,053)
NET ASSETS:
Beginning of year 341,373,965 372,082,018
End of year $319,631,044 $341,373,965
NET ASSETS CONSIST OF:
Paid-in surplus $308,648,791 $322,944,654
Accumulated net realized gain (loss) on security transactions (1,318,032) (6,146,812)
Unrealized appreciation (depreciation) of investments 12,300,285 24,576,123
$319,631,044 $341,373,965
</TABLE>
See notes to financial statements.
16 F-70 Florida
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
Flagship's Florida Intermediate Tax Exempt Fund (Florida Intermediate) and
Florida Double Tax Exempt Fund (Florida Double Tax Exempt) are sub-trusts of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The non-diversified Florida Intermediate Fund and
diversified Florida Double Tax Exempt Fund are open-end management investment
companies registered under the Investment Company Act of 1940, as amended.
The Funds commenced investment operations on February 1, 1994 and June 15,
1990, respectively. The Funds began to offer Class C shares to the investing
public on February 2, 1994, and September 14, 1995, respectively. Class A
shares are sold with a front-end sales charge. Class C shares are sold with
no front-end sales charge but are assessed a contingent deferred sales charge
if redeemed within one year from the time of purchase. Both classes of shares
have identical rights and privileges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest
in each Fund, which are registered under the Securities Act of 1933, as
amended, are offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Funds.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Funds must maintain a diversified investment portfolio as a registered
investment company, however, the Funds' investments are primarily in the
securities of their state. Such concentration subjects the Funds to the
effects of economic changes occurring within that state.
Federal Income Taxes: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to their shareholders all of their tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Funds amortize original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Florida F-71 17
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
The Funds have entered into an agreement with the custodian, whereby they earn
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Funds, are based on 80% of the daily
effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Funds may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. At
May 31, 1996, there were $225,000 and $3,730,000 of "when-issued" purchase
commitments included in the Florida Intermediate and the Florida Double Tax
Exempt Fund's statements of investments, respectively.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
FLORIDA INTERMEDIATE
CLASS A:
Shares sold 366,520 $ 3,698,170 390,286 $ 3,690,600
Shares issued on reinvestment 12,299 124,575 5,350 51,575
Shares reacquired (261,357) (2,643,760) (107,593) (1,037,158)
Net increase 117,462 $ 1,178,985 288,043 $ 2,705,017
CLASS C:
Shares sold 195,954 $ 1,987,282 131,121 $ 1,254,553
Shares issued on reinvestment 5,977 60,618 2,844 27,375
Shares reacquired (66,052) (667,072) (67,911) (636,543)
Net increase 135,879 $ 1,380,828 66,054 $ 645,385
FLORIDA DOUBLE TAX EXEMPT
CLASS A:
Shares sold 3,341,801 $ 35,642,289 4,468,523 $ 45,355,080
Shares issued on reinvestment 635,529 6,768,677 753,914 7,682,266
Shares reacquired (5,453,566) (57,862,882) (8,942,409) (90,012,143)
Net decrease (1,476,236) $(15,451,916) (3,719,972) $(36,974,797)
</TABLE>
18 F-72 Florida
<PAGE>
Notes to Financial Statements
................................................................................
<TABLE>
<CAPTION>
Period From
September 14, 1995 to May 31, 1996
----------------------------------
Shares Amount
<S> <C> <C>
Class C:
Shares sold 114,811 $ 1,224,010
Shares issued on reinvestment 526 5,609
Shares reacquired (2,302) (24,286)
Net increase 113,035 $ 1,205,333
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated:
<TABLE>
<CAPTION>
Fund Purchases Sales
<S> <C> <C>
Florida Intermediate $ 7,325,012 $ 4,856,435
Florida Double Tax Exempt $312,473,071 $311,159,076
</TABLE>
At May 31, 1996, cost for federal income tax purposes is $7,933,353 and
$308,060,449 for the Florida Intermediate and Florida Double Tax Exempt
Funds, respectively, and net unrealized appreciation aggregated $91,875 and
$12,212,187, respectively, which includes:
<TABLE>
<CAPTION>
Fund Unrealized Appreciation Unrealized Depreciation
<S> <C> <C>
Florida Intermediate $ 131,687 $ 39,812
Florida Double Tax Exempt $14,230,200 $2,018,013
</TABLE>
At May 31, 1996, Florida Double Tax Exempt has available a capital loss
carryforward of approximately $1,130,500 to offset future net capital gains
through May 31, 2003.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of agreements which
provide for furnishing of investment advice, office space and facilities to
the Funds, receives fees computed monthly on the daily net assets of the
Funds at an annualized rate of 1/2 of 1%. During the year ended May 31, 1996,
the Advisor, at its discretion, permanently waived advisory fees for the
Florida Intermediate and Florida Double Tax Exempt Funds amounting to $38,041
and $685,218, respectively. Included in accrued expenses at May 31, 1996 are
accrued advisory fees of $92,745 for Florida Double Tax Exempt. Also, under
an agreement with the Funds, the Advisor may subsidize certain expenses
excluding advisory and distribution fees.
The Funds have Distribution Agreements with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Funds' Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Funds have adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Funds' shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Funds' average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $1,735, $2,465, $108,740 and $882 for Florida
Intermediate Class A shares and Class C shares, and Florida Double Tax Exempt
Class A shares and Class C shares, respectively. Certain non-promotional
expenses directly attributable to current shareholders are aggregated by the
Distributor and passed through to the Funds as shareholder services fees.
Florida F-73 19
<PAGE>
Notes to Financial Statements
...............................................................................
In its capacity as national wholesale underwriter for the shares of the
Funds, the Distributor received commissions on sales of the Funds' shares for
the year ended May 31, 1996, are approximately as follows:
<TABLE>
<CAPTION>
Fund Gross Commissions Paid to Other Dealers
<S> <C> <C>
Florida Intermediate $ 22,700 $ 18,500
Florida Double Tax Exempt $608,800 $525,800
</TABLE>
For the year ended May 31, 1996, the Distributor received approximately
$3,600 and $200 of contingent deferred sales charges on redemptions of shares
in Florida Intermediate and Florida Double Tax Exempt, respectively. Certain
officers and trustees of the Trust are also officers and/or directors of the
Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Florida Intermediate
Fund (approximately $27,400) will be reimbursed to the Advisor on a straight-
line basis over a period of three years beginning June 1, 1996. In the event
that the Advisor's current investment in the Trust falls below $100,000 prior
to the full reimbursement of the organizational expenses, then it will forego
any further reimbursement. The organizational expenses incurred on behalf of
the Florida Double Tax Exempt Fund (approximately $284,600) have been
reimbursed to the Advisor as of May 31, 1996.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. Florida Double Tax
Exempt may temporarily borrow up to $17 million under the line of credit.
Borrowings are collateralized with pledged securities and are due on demand
with interest at 1% above the federal funds rate. The average daily amount of
borrowings under the line of credit during the year ended May 31, 1996 was
approximately $906,300, at a weighted average annualized interest rate of
6.63%. At May 31, 1996, the Fund had no borrowings outstanding under the line
of credit.
20 F-74 Florida
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Florida Intermediate Tax Exempt Fund
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 1, 1994 to
Class A May 31, 1996 May 31, 1995 May 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.05 $ 9.66 $ 9.70
Income from investment operations:
Net investment income 0.46 0.46 0.12
Net realized and unrealized gain (loss)
on securities (0.12) 0.33 (0.04)
Total from investment operations 0.34 0.79 0.08
Less distributions:
From net investment income (0.46) (0.40) (0.12)
From net realized capital gains (0.05)
Total distributions (0.51) (0.40) (0.12)
Net asset value, end of period $ 9.88 $ 10.05 $ 9.66
Total return/(a)/ 3.41% 8.42% 1.75%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.76% 0.67% 0.29%
Net investment income 4.48% 4.74% 3.79%
Assuming credits and no
waivers or reimbursements:
Expenses 1.67% 3.54% 6.70%
Net investment income 3.57% 1.87% (2.62%)
Net assets at end of period (000's) $4,995 $ 3,898 $ 964
Portfolio turnover rate 66.18% 105.01% 28.15%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.67%; prior year numbers have not
been restated to reflect these credits.
Florida F-75 21
<PAGE>
[LOGO OF SHIP ART]
Florida Intermediate Tax Exempt Fund Selected data for each share of
Financial Highlights beneficial interest outstanding
throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 2, 1994 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.05 $ 9.66 $ 9.70
Income from investment operations:
Net investment income 0.40 0.40 0.11
Net realized and unrealized gain
(loss) on securities (0.11) 0.33 (0.06)
Total from investment operations 0.29 0.73 0.05
Less distributions:
From net investment income (0.41) (0.34) (0.09)
From net realized capital gains (0.05)
Total distributions (0.46) (0.34) (0.09)
Net asset value, end of period $ 9.88 $ 10.05 $ 9.66
Total return/(a)/ 2.88% 7.80% 1.33%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.34% 1.19% 0.68%
Net investment income 3.88% 4.19% 3.42%
Assuming credits and no waivers
or reimbursements:
Expenses 2.25% 4.53% 7.38%
Net investment income 2.97% 0.85% (3.28%)
Net assets at end of period (000's) $3,079 $ 1,765 $1,058
Portfolio turnover rate 66.18% 105.01% 28.15%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.25%; prior period numbers have not
been restated to reflect these credits.
22 F-76 Florida
<PAGE>
[LOGO OF SHIP ART]
Florida Double Tax Exempt Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.63 $10.38 $10.76 $10.18 $ 9.87
Income from investment operations:
Net investment income 0.57 0.58 0.60 0.63 0.66
Net realized and unrealized gain (loss) on
securities (0.24) 0.26 (0.38) 0.61 0.33
Total from investment operations 0.33 0.84 0.22 1.24 0.99
Less distributions:
From net investment income (0.57) (0.59) (0.60) (0.64) (0.67)
From net realized capital gains (0.02) (0.01)
Total distributions (0.57) (0.59) (0.60) (0.66) (0.68)
Net asset value, end of year $10.39 $10.63 $10.38 $10.76 $10.18
Total return(a) 3.14% 8.43% 2.00% 12.49% 10.32%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.83% 0.73% 0.58% 0.45% 0.26%
Net investment income 5.36% 5.71% 5.51% 6.01% 6.59%
Assuming credits and no waivers or
reimbursements:
Expenses 1.02% 1.04% 1.00% 0.99% 1.03%
Net investment income 5.17% 5.40% 5.09% 5.47% 5.82%
Net assets at end of year (000's) $318,456 $341,374 $372,082 $369,123 $276,811
Portfolio turnover rate 93.93% 52.67% 31.92% 22.60% 49.72%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.82%; prior year numbers have not
been restated to reflect these credits.
Florida F-77 23
<PAGE>
[LOGO OF SHIP ART]
Florida Double Tax Exempt Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
September 14, 1995 to
Class C May 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $10.65
Income from investment operations:
Net investment income 0.35
Net realized and unrealized gain
(loss) on securities (0.26)
Total from investment operations 0.09
Less distributions:
From net investment income (0.35)
Total distributions (0.35)
Net asset value, end of period $10.39
Total return(a) 1.30%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 1.38%
Net investment income 4.59%
Assuming credits and no
waivers or reimbursements:
Expenses 1.55%
Net investment income 4.42%
Net assets at end of year (000's) $1,175
Portfolio turnover rate 93.93%
</TABLE>
(a) The total return shown does not include the effect of applicable contingent
deferred sales charge and is annualized.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.37%.
24 F-78 Florida
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP FLORIDA TAX EXEMPT FUNDS
We have audited the accompanying statements of assets and liabilities, including
the statements of investments in securities and net assets, of the Flagship
Florida Intermediate Tax Exempt Fund and the Flagship Florida Double Tax Exempt
Fund as of May 31, 1996, the related statements of operations for the year then
ended, and the statements of changes in net assets and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the FundsAE management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Funds' custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Florida
Intermediate Tax Exempt Fund and the Flagship Florida Double Tax Exempt Fund at
May 31, 1996, the results of their operations, the changes in their net assets
and the financial highlights for the respective stated periods, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Florida F-79 25
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 Private Colleges and Universities
Facilities Authority Georgia Revenue -
Mercer University Project 6.500% 11/01/15 $1,084,530
500 Private Colleges and Universities
Facilities Authority Georgia Revenue -
Spelman College - Series 1994 6.200 06/01/14 515,015
Hospitals
------------------------------------------------------------------------------------------------------
100 Chatham County, GA Hospital Authority
Revenue - Memorial Medical Center - Series 1990 7.000 01/01/10 108,704
1,130 Chatham County, GA Hospital Authority
Revenue - Memorial Medical Center - Series 1990 7.000 01/01/21 1,227,383
500 Cherokee County, GA Hospital Authority Revenue 7.250 12/01/15 547,750
500 Colquitt County, GA Hospital Authority
Revenue - Series 1992 6.700 03/01/12 531,235
3,000 Fulco, GA Hospital Authority Revenue - 6.250 09/01/13 2,871,630
Georgia Baptist Health Care System - Series 1992A
1,000 Fulco, GA Hospital Authority Revenue -
Georgia Baptist Health Care System - Series 1992B 6.250 09/01/13 957,210
2,600 Fulco, GA Hospital Authority Revenue -
Georgia Baptist Health Care System - Series 1992A 6.375 09/01/22 2,489,734
2,250 Fulco, GA Hospital Authority Revenue -
Georgia Baptist Health Care System - Series 1992A 6.375 09/01/22 2,154,578
1,000 Gainesville and Hall County, GA Hospital
Authority - Revenue Anticipation
Certificates - Northeast Georgia Healthcare - Series 1995 6.000 10/01/20 988,550
2,250 Gainesville and Hall County, GA Hospital
Authority - Revenue Anticipation
Certificates - Northeast Georgia Healthcare - Series 1995 6.000 10/01/25 2,222,258
1,250 Ware County, GA Hospital Authority
Revenue - Series 1992A 6.625 03/01/15 1,313,500
Housing/Multifamily
------------------------------------------------------------------------------------------------------
1,840 Augusta, GA Housing Authority -
Multifamily Mortgage Revenue - River Glen Apartments - Series 1995 6.500 05/01/27 1,849,862
755 Clayton County, GA Housing Authority
Revenue - Multifamily - Advantages Project - Series 1995 5.700 12/01/16 730,213
1,145 Clayton County, GA Housing Authority
Revenue - Multifamily - Advantages Project - Series 1995 5.800 12/01/20 1,104,421
1,000 DeKalb County, GA Housing Authority
Revenue - Multifamily - Lakes at Indian Creek - Series 1994 7.150 01/01/25 1,038,250
2,470 DeKalb County, GA Housing Authority
Revenue - Multifamily - Regency Woods Project - Series 1996 A 6.500 01/01/26 2,456,958
1,470 Decatur, GA Housing Authority Mortgage
Revenue - Park Trace Apartments - Series 1992A 6.450 07/01/25 1,485,553
545 Hinesville, GA Leased Housing Corporation 7.125 03/01/12 564,064
Revenue - Baytree Apartments - Series 1992
1,300 Macon, GA Housing Authority Revenue - 6.450 04/01/26 1,315,483
Multifamily - The Vistas - Series 1994
500 Summerville, GA Housing Corporation Revenue 8.000 12/01/10 516,505
</TABLE>
4 F-80 Georgia
<PAGE>
Ship art
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Housing/Single Family
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$2,000 Fulton County, GA Housing Authority - Single Family Mortgage Revenue -
Series 1995 A 6.550% 03/01/18 $2,016,160
665 Fulton County, GA Housing Authority - Single Family Mortgage Revenue -
Series 1995 A 6.600 03/01/28 669,848
240 Georgia Housing and Finance Authority Home Ownership Opportunity -
Series 1992A 6.700 12/01/12 249,780
1,355 Georgia Housing and Finance Authority Home Ownership Opportunity -
Series 1992A 6.750 06/01/17 1,402,317
1,805 Georgia Housing and Finance Authority Home Ownership Opportunity -
Series 1992 C 6.500 12/01/11 1,842,743
1,215 Georgia Housing and Finance Authority Revenue - Single Family -
Series 1994 A 6.500 12/01/17 1,222,983
750 Georgia Housing and Finance Authority Revenue - Single Family -
Series 1994 A 6.600 12/01/23 758,745
1,000 Georgia Housing and Finance Authority Revenue - Single Family -
Subseries 1995 A-2 6.400 12/01/15 1,010,710
2,500 Georgia Housing and Finance Authority Revenue - Single Family -
Subseries 1995 B-2 6.550 12/01/27 2,527,325
390 Georgia State Residential Finance Authority - Series 1989 D 7.800 06/01/21 407,932
350 Georgia State Residential Finance Authority - Series 1990 A and B 7.750 06/01/18 365,470
1,640 Georgia State Residential Finance Authority - Series 1991 A 7.250 12/01/21 1,694,530
750 Georgia State Residential Finance Authority - Series B-1 8.000 12/01/16 792,645
Industrial Development and Pollution Control
------------------------------------------------------------------------------------------------------------------------
500 Bartow County, GA Development Authority Pollution Control Revenue -
Georgia Power Company 7.250 07/01/21 510,610
750 Burke County, GA Development Authority Pollution Control Revenue -
Georgia Power Company - Vogtle Project 8.375 07/01/17 789,232
1,000 Cartersville, GA Development Authority Water and Wastewater Facilities -
Anheuser-Busch - Series 1992 6.750 02/01/12 1,061,520
500 Savannah, GA Economic Development Authority Revenue - Hershey Foods -
Series 1992 6.600 06/01/12 538,280
1,000 Savannah, GA Economic Development Authority Revenue - Pollution Control
Revenue - Union Camp Corporation - Series 1993 6.050 05/01/21 984,520
1,000 Savannah, GA Economic Development Authority - Pollution Control Revenue -
Union Camp - Series 1995 6.150 03/01/17 1,011,620
500 Wayne County, GA Development Authority Solid Waste Disposal Revenue - ITT
Rayonier Inc. Project 8.000 07/01/15 530,265
3,105 Wayne County, GA Development Authority Pollution Control Revenue -
ITT Rayonier Project - Series 1993 6.100 11/01/07 3,119,190
500 White County, GA Industrial Development Authority Revenue -
Clark-Schwebel Fiber Glass Corporation - Series 1992 6.850 06/01/10 513,855
Municipal Appropriation Obligations
------------------------------------------------------------------------------------------------------------------------
1,750 Butts County, GA Association County Commissioners - Certificates of
Participation - Series 1994 6.750 12/01/14 1,883,665
</TABLE>
GEORGIA F-81 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,800 Appling County, GA Development Authority - Pollution Control Revenue -
Oglethorpe Power Corporation Hatch - Series 1994 7.150% 01/01/21 $1,970,532
1,500 Georgia Municipal Electric Authority Power Revenue - Series 1992 B 6.375 01/01/16 1,555,395
150 Georgia Municipal Electric Authority Power Revenue - Series 1995 O 7.800 01/01/20 159,914
500 Monroe County, GA Development Authority Pollution Control Revenue -
Oglethorpe Power Corporation - Scherer Project - Series 1992A 6.750 01/01/10 535,430
1,000 Monroe County, GA Development Authority Pollution Control Revenue -
Oglethorpe Power Corporation - Scherer Project - Series 1992A 6.800 01/01/12 1,068,650
1,000 Commonwealth of Puerto Rico Electric Power Authority - Series O 5.000 07/01/12 884,480
1,250 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 5.500 07/01/20 1,141,225
1,400 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 1,280,888
2,200 Commonwealth of Puerto Rico Electric Power Authority Revenue - Series 1995 Z 5.250 07/01/21 1,958,660
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
500 Brunswick, GA Water and Sewer Improvement Revenue - Series 1992 6.000 10/01/11 522,985
400 Brunswick, GA Water and Sewer Improvement Revenue - Series 1992 6.100 10/01/19 413,120
3,000 Cherokee County, GA Water and Sewerage Authority Revenue - Series 1995 5.200 08/01/25 2,724,540
750 Columbia County, GA Water and Sewer Revenue 6.900 06/01/11 810,562
1,000 Conyers, GA Water and Sewerage Revenue - Series 1994 A 6.600 07/01/15 1,063,510
750 Hinesville, GA Water and Sewer Revenue 7.750 10/01/13 773,902
85 Savannah, GA Water and Sewer Revenue - Series 1989 7.500 12/01/10 90,326
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
500 Albany-Dougherty County, GA Inner City Authority Revenue - Series 1992 6.000 02/01/11 507,615
1,215 Clayton County, GA Solid Waste Management Authority - Series 1992A 6.500 02/01/12 1,262,191
800 Downtown Marietta, Georgia Development Authority Revenue - Cobb County
Lease 6.600 01/01/19 853,184
1,000 Downtown Smyrna, GA Development Authority Revenue - Series 1994 6.600 02/01/17 1,057,980
725 Fulton County, GA Building Authority Revenue - Judicial Center Facilities
Project - Series 1991 6.500 01/01/15 768,014
1,015 Peach County, GA School District - General Obligation - Series 1994 6.300 02/01/14 1,048,322
3,810 Peach County, GA School District - General Obligation - Series 1994 6.400 02/01/19 3,968,039
1,500 Washington County, GA School District - General Obligation - Series 1994 6.875 01/01/14 1,639,965
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
1,500 Albany-Dougherty County, GA Hospital Authority Revenue -
Phoebe Putney Memorial Hospital - Series B 7.500 09/01/20 1,685,805
500 Atlanta, GA Board of Education - Certificates of Participation 7.125 06/01/12 552,245
270 Atlanta, GA Urban Residential Finance Authority - Dormitory Facility
Revenue - Morehouse College 7.300 12/01/14 293,884
505 Cherokee County, GA Water and Sewer Authority Revenue 9.750 08/01/09 655,894
6,765 Colquitt County, GA Development Authority Revenue - Southern Care
Corporation - Series 1991 A 0.000 12/01/21 1,116,834
10,275 Colquitt County, GA Development Authority Revenue - Southern Care
Corporation - Series 1991 A 0.000 12/01/21 1,696,300
500 Dade County, GA Water and Sewer Authority Revenue 7.600 07/01/15 552,975
</TABLE>
6 F-82 Georgia
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 300 Douglasville-Douglas County, GA Water and Sewer Authority Revenue 7.700% 06/01/13 $ 325,743
500 Gainesville, GA Water and Sewer Revenue 7.200 11/15/10 558,055
1,855 Marietta, GA Development Authority Revenue - Life College, Inc. - Series 1989 7.250 12/01/19 2,047,697
1,200 Metropolitan Atlanta Rapid Transit Authority - Georgia Sales Tax Revenue -
Series L 7.200 07/01/20 1,312,812
2,100 Richmond County, GA Development Authority Revenue - Series C 0.000 12/01/21 346,689
19,890 Richmond County, GA Development Authority Revenue - Series C 0.000 12/01/21 3,283,640
500 Ware County, GA Hospital Authority Revenue 7.125 03/01/15 550,140
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
570 Burke County, GA Development Authority Revenue - Georgia Safe Corporation 7.500 02/01/11 610,721
1,150 Burke County, GA Economic Development Authority Industrial Development
Revenue - Ritz Instrument Transformers 7.250 12/01/11 1,208,558
575 Metropolitan Atlanta Rapid Transit Authority - Georgia Sales Tax Revenue -
Series 1989 K 7.250 07/01/10 617,159
2,815 Metropolitan Atlanta Rapid Transit Authority - Georgia Sales Tax Revenue -
Series 1992 N 6.250 07/01/18 2,932,020
2,000 Metropolitan Atlanta Rapid Transit Authority - Georgia Sales Tax Revenue -
Series 1994 A 6.900 07/01/20 2,169,500
1,200 Commonwealth of Puerto Rico Highway and Transportation Authority
Revenue - Series 1993 X 5.000 07/01/22 1,016,280
8,000 Puerto Rico Highway and Transportation Authority Revenue - Series 1996 Y
and Z 5.500 07/01/36 7,261,440
550 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 593,906
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
450 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 472,068
1,700 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/15 1,494,232
Total Investments in Securities - Municipal Bonds (cost $112,431,775) - 98.4% 115,391,357
Excess of Other Assets over Liabilities - 1.6% 1,903,104
Total Net Assets - 100.0% $117,294,461
</TABLE>
See notes to financial statements.
Georgia F-83 7
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $112,431,775) $115,391,357
Receivable for Fund shares sold 282,205
Interest receivable 2,461,890
Other 7,406
Total assets 118,142,858
LIABILITIES:
Bank overdraft 201,364
Payable for Fund shares reacquired 10,727
Distributions payable 554,441
Accrued expenses 81,865
Total liabilities 848,397
NET ASSETS 117,294,461
Class A:
Applicable to 10,570,864 shares of beneficial interest
issued and outstanding $107,861,876
Net asset value per share $ 10.20
Class C:
Applicable to 926,282 shares of beneficial interest
issued and outstanding $ 9,432,585
Net asset value per share $ 10.18
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 7,510,137
EXPENSES:
Distribution fees - Class A (Note E) 448,491
Distribution fees - Class C (Note E) 75,046
Investment advisory fees (Note E) 601,755
Custodian's fees 108,134
Transfer agent's fees 83,410
Registration fees 3,411
Legal fees 3,220
Audit fees 16,470
Trustees' fees 3,660
Shareholder services fees (Note E) 12,360
Other 3,939
Advisory fees waived (Note E) (366,193)
Total expenses before credits 993,703
Custodian fee credit (Note B) (20,164)
Net expenses 973,539
Net investment income 6,536,598
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
ON INVESTMENTS:
Net realized gain (loss) on security transactions 600,909
Change in unrealized appreciation (depreciation) oF investments (3,544,803)
Net loss on investments (2,943,894)
Net increase in net assets resulting from operations $ 3,592,704
</TABLE>
See notes to financial statements.
8 F-84 Georgia
<PAGE>
[LOGO OF SHIP ART]
Statement of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 6,536,598 $ 7,018,455
Net realized gain (loss) on security transactions 600,909 (503,259)
Change in unrealized appreciation (depreciation) of
investments (3,544,803) 2,459,199
Net increase in net assets resulting from operations 3,592,704 8,974,395
Distributions to Class A shareholders:
From net investment income (6,196,741) (6,723,768)
Distributions to Class C shareholders:
From net investment income (392,640) (294,712)
Net decrease in net assets from distributions to shareholders (6,589,381) (7,018,480)
Fund share transactions (Note C):
Proceeds from shares sold 14,972,667 15,191,704
Net asset value of shares issued in reinvestment of distributions 3,853,135 4,028,200
Cost of shares reacquired (18,861,782) (28,264,876)
Net decrease in net assets from Fund share transactions (35,980) (9,044,972)
Total decrease in net assets (3,032,657) (7,089,057)
NET ASSETS:
Beginning of year 120,327,118 127,416,175
End of year $117,294,461 $120,327,118
NET ASSETS CONSIST OF:
Paid-in surplus $117,759,807 $117,988,119
Accumulated net realized gain (loss) on security transactions (3,424,928) (4,165,386)
Unrealized appreciation (depreciation) of investments 2,959,582 6,504,385
$117,294,461 $120,327,118
</TABLE>
See notes to financial statements.
Georgia F-85 9
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
Flagship Georgia Double Tax Exempt Fund (Fund) is a sub-trust of the Flagship
Tax Exempt Funds Trust (Trust), a Massachusetts business trust organized on
March 8, 1985. The Fund is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended. The
Fund commenced investment operations on March 27, 1986. On January 4, 1994,
the Fund began to offer Class C shares to the investing public. Class A
shares are sold with a front-end sales charge. Class C shares are sold with
no front-end sales charge but are assessed a contingent deferred sales charge
if redeemed within one year from the time of purchase. Both classes of shares
have identical rights and privileges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest
in the Fund, which are registered under the Securities Act of 1933, as
amended, are offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
10 F-86 Georgia
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
--------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,076,625 $ 11,247,191 1,172,988 $ 11,821,769
Shares issued on reinvestment 343,594 3,593,871 383,032 3,840,891
Shares reacquired (1,686,034) (17,598,671) (2,752,961) (27,143,426)
Net decrease (265,815) $ (2,757,609) (1,196,941) $(11,480,766)
Class C:
Shares sold 355,608 $ 3,725,476 335,379 $ 3,369,935
Shares issued on reinvestment 24,841 259,264 18,740 187,309
Shares reacquired (122,108) (1,263,111) (112,088) (1,121,450)
Net increase 258,341 $ 2,721,629 242,031 $ 2,435,794
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $70,684,159 and $73,598,429, respectively. At May 31, 1996, cost
for federal income tax purposes is $112,431,775 and net unrealized
appreciation aggregated $2,959,582, of which $3,921,462 related to
appreciated securities and $961,880 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $3,425,000 to offset future net capital gains in the amounts of
$366,000 through May 31,1997, $109,600 through May 31,1999, $1,046,000
through May 31, 2001, $1,400,200 through May 31, 2002, and $503,200 through
May 31, 2003.
Georgia F-87 11
<PAGE>
Notes to Financial Statements
................................................................................
At May 31, 1996, the Fund reclassified $139,549 of expired capital loss
carryforward from accumulated net realized loss on security transactions to
paid-in surplus. Net investment income, net realized gains, and net assets
were not affected by this reclassification.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly, on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $366,193 of its
advisory fees. Also, under an agreement with the Fund, the Advisor may
subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc. (Distributor).
The Distributor serves as the exclusive selling agent and distributor of the
Fund's Class A and Class C shares and in that capacity is responsible for
all sales and promotional efforts including printing of prospectuses and
reports used for sales purposes. Pursuant to Rule 12b-1 under the Investment
Company Act of 1940, the Fund has adopted a plan to reimburse the Distributor
for its actual expenses incurred in the distribution and promotion of all
classes of the Fund's shares. The maximum amount payable for these expenses
on an annual basis is .40% and .95% of the Fund's average daily net assets
for Class A and Class C shares, respectively. Included in accrued expenses at
May 31, 1996 are accrued distribution fees of $36,783 and $7,422 for Class A
and Class C shares, respectively. Certain non-promotional expenses directly
attributable to current shareholders are aggregated by the Distributor and
passed through to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the Fund,
the Distributor received commissions on sales of the Fund's Class A shares
of approximately $292,900 for the year ended May 31, 1996, of which
approximately $254,300 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $2,000 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Line of Credit
The Trust participates in a line of credit in which a maximum amount of
$30 million is provided by State Street Bank & Trust Co. The Fund may
temporarily borrow up to $6 million under the line of credit. Borrowings
are collateralized with pledged securities and are due on demand with
interest at 1% above the federal funds rate. The average daily amount of
borrowings under the line of credit during the year ended May 31, 1996
was approximately $451,600, at a weighted average annualized interest
rate of 6.71%. At May 31, 1996, the Fund had no borrowings outstanding
under the line of credit.
12 F-88 Georgia
<PAGE>
[LOGO OF SHIP ART]
Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.46 $10.23 $10.62 $10.16 $ 9.95
Income from investment operations:
Net investment income 0.57 0.58 0.59 0.62 0.63
Net realized and unrealized gain (loss)
on securities (0.25) 0.23 (0.39) 0.45 0.21
Total from investment operations 0.32 0.81 0.20 1.07 0.84
Less distributions:
From net investment income (0.58) (0.58) (0.59) (0.61) (0.63)
Total distributions (0.58) (0.58) (0.59) (0.61) (0.63)
Net asset value, end of year $10.20 $10.46 $10.23 $10.62 $10.16
Total return(a) 3.05% 8.31% 1.83% 10.84% 8.81%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.80% 0.83% 0.70% 0.62% 0.57%
Net investment income 5.46% 5.79% 5.47% 5.88% 6.31%
Assuming credits and no waivers or
reimbursements:
Expenses 1.08% 1.09% 1.06% 1.08% 1.14%
Net investment income 5.18% 5.53% 5.11% 5.42% 5.74%
Net assets at end of year (000's) $107,862 $113,354 $123,068 $101,196 $70,650
Portfolio turnover rate 59.41% 39.94% 39.48% 29.51% 21.19%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.78%; prior year numbers have not
been restated to reflect these credits.
Georgia F-89 13
<PAGE>
[LOGO OF SHIP ART]
Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended January 14, 1994 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.44 $10.21 $10.91
Income from investment operations:
Net investment income 0.51 0.52 0.19
Net realized and unrealized gain
(loss) on securities (0.25) 0.23 (0.69)
Total from investment operations 0.26 0.75 (0.50)
Less distributions:
From net investment income (0.52) (0.52) (0.20)
Total distributions (0.52) (0.52) (0.20)
Net asset value, end of period $10.18 $10.44 $10.21
Total return(a) 2.48% 7.72% (10.96%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 1.34% 1.38% 1.27%
Net investment income 4.90% 5.18% 4.55%
Assuming credits and no
waivers or reimbursements:
Expenses 1.63% 1.64% 1.60%
Net investment incme 4.61% 4.92% 4.22%
Net assets at end of year (000's) $9,433 $6,973 $4,348
Portfolio turnover rate 59.41% 39.94% 39.48%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.32%; prior period numbers have not
been restated to reflect these credits.
14 F-90 Georgia
<PAGE>
[logo of Ship art]
Independent Auditors' Report
...............................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP GEORGIA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Georgia Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Georgia Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Georgia F-91 15
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
Arizona
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,790 Maricopa County, AZ Unified School
District Number 41 - Gilbert - Series 1994 0.000% 07/01/05 $ 1,101,262
500 Pinal County, AZ Industrial Development
Authority Solid Waste Disposal Revenue -
Browning-Ferris Industries, Incorporated
Product - Series 1996 5.000 02/01/06 468,565
California
--------------------------------------------------------------------------------------
100 Beverly Hills, CA Unified School District
- General Obligation - Series 1995 5.300 05/01/06 100,948
1,000 Sacramento, CA Cogeneration Authority
Revenue - Procter & Gamble - Series 1995 6.200 07/01/06 990,200
Colorado
--------------------------------------------------------------------------------------
2,300 Arapahoe County, CO E-470 Public Highway
Authority Revenue - E-470 Project - Series 1986 0.000 08/31/06 1,184,500
500 Colorado Health Facilities Authority
Revenue - Covenant Retirement Communities,
Incorporated - Series 1995 6.200 12/01/07 494,505
1,000 Denver, CO City and County Airport System
Revenue - Series 1995 5.400 11/15/06 983,370
Connecticut
--------------------------------------------------------------------------------------
550 Bridgeport, CT General Obligation - Series 1995 5.150 09/01/06 555,819
1,000 Connecticut State Health and Educational
Facilities Authority Revenue - Quinnipiac
College - Series D 5.625 07/01/03 982,510
100 Connecticut State Health and Educational
Facilities Authority Revenue - Hartford
University - Series 1992 D 6.100 07/01/00 99,815
335 Eastern Connecticut Resource Recovery
Authority - Solid Waste Revenue -
Wheelabrator Lisbon Project - Series 1993 A 5.150 01/01/05 321,690
District of Columbia
--------------------------------------------------------------------------------------
1,000 District of Columbia General Obligation -
Series 1993 A-1 4.850 06/01/04 958,010
Florida
--------------------------------------------------------------------------------------
275 Florida State Broward County Expressway
Authority - Series 1984 9.875 07/01/09 385,844
180* Gulf Breeze, FL Local Government Loan
Program Floating Rate Demand Revenue -
Series 1985 B 5.600 12/01/07 181,825
200 Hillsborough County, FL Capital
Improvement Program Revenue - County
Center Project - Series 1996 B 4.800 08/01/08 186,106
1,000 Orange County, FL Health Facilities
Authority Revenue - Adventist Health
System/Sunbelt - Series 1995 5.400 11/15/07 1,000,730
1,000 Palm Beach County, FL School Board -
Certificates of Participation - Series 1994A 5.800 08/01/04 1,051,650
1,000 Sanford Airport Authority, Florida -
Industrial Development Revenue Bonds -
(Central Florida Terminals, Inc. Project)
- Series 1995 A and B 7.500 05/01/06 970,880
Guam
--------------------------------------------------------------------------------------
600 Guam Government General Obligation -
Series 1993 A 4.900 11/15/04 551,700
Illinois
--------------------------------------------------------------------------------------
770 Illinois Health Facilities Authority
Revenue - Fairview Obligated Group -
Series 1995 A, B and C 6.500 08/15/06 751,990
1,000 Illinois Health Facilities Authority
Revenue - Mercy Hospital and Medical
Center Project - Series 1996 6.000 01/01/06 994,910
Kansas
--------------------------------------------------------------------------------------
420 Lenexa, KS Multifamily Housing Revenue -
Barrington Park Apartments Project -
Series 1993A 6.200 02/01/08 429,841
Kentucky
--------------------------------------------------------------------------------------
1,165 Kentucky Infrastructure Authority Revenue 5.600 08/01/06 1,173,703
- Governmental Agencies - Series 1995 H
</TABLE>
4 F-92 Intermediate
<PAGE>
[LOGO]
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000* Louisville and Jefferson County, KY Regional Airport Authority System Revenue
- Series 1997 A 5.750% 07/01/01 $ 1,012,940
1,000 McCracken County, KY Hospital Facilities Revenue - Mercy Health System - Series
1994 A 6.100 11/01/04 1,062,070
Louisiana
--------------------------------------------------------------------------------------------------------------------------
345 Louisiana Public Facilities Authority Revenue - Student Loan - Series 1992A-2 6.600 03/01/03 365,721
Massachusetts
--------------------------------------------------------------------------------------------------------------------------
500 Massachusetts State Health and Educational Facilities Authority Revenue -
Dana-Farber Cancer Institute - Series G-1 and G-2 6.500 12/01/05 534,325
750 Massachusetts State Health and Educational Facilities Authority Revenue -
Dana-Farber Cancer Institute - Series G-1 and G-2 6.500 12/01/06 799,365
1,500 Massachusetts Water Pollution Abatement Trust Revenue - SESD Loan -
Series 1994 A 5.700 02/01/05 1,550,610
Michigan
--------------------------------------------------------------------------------------------------------------------------
25 Holly, MI Area School District - General Obligation - Series 1995 5.150 05/01/07 24,650
100* Jenison, MI Public Schools - Ottawa County, Michigan - Building and Site -
General Obligation - Series 1996 5.300 05/01/07 99,390
750 Michigan Municipal Bond Authority Revenue - State Revolving Fund - Series 1994 7.000 10/01/04 842,445
750 Michigan State Hospital Finance Authority Revenue - Detroit Medical Center
Obligated Group - Series 1993 B 5.100 08/15/07 720,720
530 Michigan State Hospital Finance Authority Revenue - Port Huron Hospital -
Series 1995 5.250 07/01/06 522,644
1,000 Michigan State Hospital Finance Authority Revenue - Gratiot Community Hospital,
Alma, Michigan - Series 1995 6.100 10/01/07 978,330
1,000 Monroe County, MI Pollution Control Revenue - Detroit Edison Company - Series
1994 A 6.350 12/01/04 1,079,630
Missouri
--------------------------------------------------------------------------------------------------------------------------
1,000 Branson, MO Tax Increment Allocation - Branson Meadows - Series 1995 6.400 11/01/05 981,950
1,000 Missouri State Health and Educational Facilities Authority Revenue - SSM Health
Care - Series 1992AA 5.800 06/01/02 1,044,190
350 St. Louis County, MO Industrial Development Revenue Authority - Kiel
Center Multipurpose Arena - Series 1992 7.625 12/01/09 368,179
300 St. Louis, MO Airport and Improvement Revenue - Lambert-St. Louis International
Airport - Series 1992 5.900 07/01/03 312,294
600 Sikeston, MO Electric Revenue - Series 1992 6.000 06/01/04 635,922
Nevada
--------------------------------------------------------------------------------------------------------------------------
1,000 Las Vegas, NV Downtown Redevelopment Agency - Tax Increment Revenue - Series
1995 A 5.300 06/01/06 986,430
New Hampshire
--------------------------------------------------------------------------------------------------------------------------
1,000 New Hampshire State Turnpike System Revenue - Series 1994 4.800 02/01/07 934,650
New Jersey
--------------------------------------------------------------------------------------------------------------------------
1,000 New Jersey Health Care Facilities Financing Authority Revenue - Dover
Medical Center - Series 1994 7.000 07/01/03 1,113,600
500 New Jersey Economic Development Authority Revenue - Educational Testing Services - 5.500 05/15/05 507,755
Series 1995 B
New Mexico
--------------------------------------------------------------------------------------------------------------------------
100 New Mexico Educational Assistance Foundation - Student Loan Revenue - Series 1A 6.300 12/01/02 105,102
</TABLE>
Intermediate F-93 5
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
New York
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.700% 10/01/06 $ 488,750
385 Herkimer County, NY Industrial Development Agency Revenue - Burrows Paper Recycling 7.250 01/01/01 389,089
700 New York City, NY General Obligation - Series 1995 F 6.375 02/15/06 709,772
200 New York City, NY General Obligation - Series 1996 F and G 5.750 02/01/06 194,358
500 New York City, NY General Obligation Municipal Receipts Series 1996 0.000 02/01/04 316,840
300 New York City, NY General Obligation - Series 1996 H and I 6.500 03/15/06 308,934
250 New York State Energy Research and Development Authority Revenue - State
Service Contract - Western New York Nuclear Service Center - Series 1995 B 5.500 04/01/05 241,502
750 New York State Housing Finance Agency - Health Facilities Revenue - New York City -
Series 1996 A 6.000 05/01/06 738,420
500 New York State Thruway Authority Revenue - Local Highway and Bridge Service
Contract - Series 1995 5.750 04/01/06 497,730
Ohio
--------------------------------------------------------------------------------------------------------------------------
1,000 Franklin County, OH Hospital Refunding and Improvement Revenue - The
Children's Hospital Project - Series 1996 A 5.550 11/01/07 988,140
1,000 Hamilton County, OH Hospital Facilities Revenue - Children's Hospital 5.200 05/15/09 971,260
Medical Center - Series 1993
1,000 Ohio State Building Authority Facilities - Administrative Building Fund
Projects - Series 1994 A 5.650 10/01/05 1,033,610
1,000 Ohio State Public Facilities Commission Higher Education - Capital Facilities
Revenue - Series II-B 5.750 11/01/04 1,044,680
Pennsylvania
--------------------------------------------------------------------------------------------------------------------------
500 Allegheny County, PA Airport Revenue - Greater Pittsburgh International
Airport - Series 1993C 5.500 01/01/04 506,775
1,010 Lehigh County, PA General Purpose Authority Hospital Revenue - Lehigh Valley
Hospital, Incorporated - Series 1995 A 5.400 07/01/06 1,008,859
1,000 Philadelphia, PA General Obligation - Series 1995 4.900 05/15/06 955,630
500 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 7.000 07/01/02 532,725
1,500 Westmoreland County, PA Municipal Service Authority Revenue - Series 1995 0.000 08/15/07 810,465
South Carolina
--------------------------------------------------------------------------------------------------------------------------
250 Myrtle Beach, SC Public Facilities Corporation - Certificates of
Participation - Convention Center Project - Series 1992 6.750 07/01/02 261,882
South Dakota
--------------------------------------------------------------------------------------------------------------------------
550 South Dakota Student Loan Finance Corporation Revenue - Series 1994 A 5.850 08/01/00 560,104
Tennessee
--------------------------------------------------------------------------------------------------------------------------
500 Clarksville, TN Hospital and Improvement Revenue - Clarksville Memorial
Project - Series 1993 6.000 07/01/03 495,150
1,000 Jackson, TN Hospital Revenue - Jackson-Madison County General Hospital -
Series 1995 5.300 04/01/06 968,880
500 Metropolitan Nashville and Davidson County - Tennessee Industrial Development
Board Revenue - OSCO Treatment - Series 1993 6.000 05/01/03 499,915
Texas
--------------------------------------------------------------------------------------------------------------------------
400 Brazos, TX Higher Education Authority - Student Loan Revenue - Series 1993 A-1 6.200 12/01/02 418,236
Washington
--------------------------------------------------------------------------------------------------------------------------
1,000 Washington State Public Power Supply System - Nuclear Project Number 2
Revenue - Series 1993 B 5.100 07/01/04 981,660
6 F-94 Intermediate
</TABLE>
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face
(000) Description Rate Maturity** Value
Wyoming
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$200 Wyoming State Farm Loan Board Facilities Revenue - Series 1992 6.100% 10/01/06 $ 208,459
Total Investments in Securities - Municipal Bonds (cost $48,058,757) - 101.5% 48,635,110
Excess of Liabilities over Other Assets - (1.5)% (706,347)
Total Net Assets - 100.0% $ 47,938,763
</TABLE>
*Securities purchased on a "when-issued" basis.
**Maturity date represents actual maturity or earlier put date.
See notes to financial statements.
Intermediate F-95 7
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $48,058,757) $ 48,635,110
Cash 14,980
Receivable for Fund shares sold 78,889
Interest receivable 741,197
Other 2,531
Total assets 49,472,707
LIABILITIES:
Payable for investments purchased 1,279,556
Payable for Fund shares reacquired 13,543
Distributions payable 201,625
Accrued expenses 49,220
Total liabilities 1,543,944
NET ASSETS: 47,928,763
Class A:
Applicable to 4,551,635 shares of beneficial interest
issued and outstanding $ 46,741,939
Net asset value per share $ 10.27
Class C:
Applicable to 115,505 shares of beneficial interest issued
and outstanding $ 1,186,824
Net asset value per share $ 10.28
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 2,498,611
EXPENSES:
Distribution fees - Class A (Note E) 180,903
Distribution fees - Class C (Note E) 3,450
Investment advisory fees (Note E) 228,684
Custody and accounting fees 59,169
Transfer agent's fees 31,750
Registration fees 24,660
Legal fees 1,727
Audit fees 12,060
Reimbursement of organizational expenses (Note F) 7,174
Trustees' fees 1,250
Shareholder services fees (Note E) 5,124
Other 1,623
Advisory fees waived (Note E) (228,684)
Expense subsidy (Note E) (41,246)
Total expenses before credits 287,644
Custodian fee credit (Note B) (20,269)
Net expenses 267,375
Net investment income 2,231,236
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 1,178,381
Change in unrealized appreciation (depreciation) of
investments (1,349,675)
Net loss on investments (171,294)
Net increase in net assets resulting from operations $ 2,059,942
</TABLE>
See notes to financial statements.
8 F-96 Intermediate
<PAGE>
[LOGO OF SHIP ART]
Statement of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income $ 2,231,236 $ 1,933,025
Net realized gain (loss) on security transactions 1,178,381 (1,050,609)
Change in unrealized appreciation (depreciation)
of investments (1,349,675) 1,746,430
Net increase in net assets resulting from operations 2,059,942 2,628,846
Distributions to Class A shareholders:
From net investment income (2,230,105) (1,935,697)
Distributions to Class C shareholders:
From net investment income (15,633)
Net decrease in net assets from distributions to
shareholders (2,245,738) (1,935,697)
Fund share transactions (Note C):
Proceeds from shares sold 16,566,991 17,981,764
Net asset value of shares issued in reinvestment of
distributions 1,433,834 1,182,047
Cost of shares reacquired (11,954,767) (13,679,012)
Net increase in net assets from Fund share transactions 6,046,058 5,484,799
Total increase in net assets 5,860,262 6,177,948
NET ASSETS:
Beginning of year 42,068,501 35,890,553
End of year $ 47,928,763 $ 42,068,501
NET ASSETS CONSIST OF:
Paid-in surplus $ 47,795,155 $ 41,762,900
Undistributed net investment income 699
Accumulated net realized gain (loss) on security
transactions (442,745) (1,621,126)
Unrealized appreciation (depreciation) of investments 576,353 1,926,028
$ 47,928,763 $ 42,068,501
</TABLE>
See notes to financial statements.
Intermediate F-97 9
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Intermediate Tax Exempt Fund is a sub-trust of the Flagship Tax
Exempt Funds Trust (Trust), a Massachusetts business trust organized on March
8, 1985. The Fund is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended. The Fund
commenced investment operations on September 15, 1992. On December 1, 1995,
the Fund began to offer Class C shares to the investing public. Class A
shares are sold with a front-end sales charge. Class C shares are sold with
no front-end sales charge but are assessed a contingent deferred sales charge
if redeemed within one year from the time of purchase. Both classes of shares
have identical rights and privileges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest
in the Fund, which are registered under the Securities Act of 1933, as
amended, are offered to the public on a continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
Federal Income Taxes: It is the Funds policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trusts ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
10 F-98 Intermediate
<PAGE>
Notes to Financial Statements
The Fund has entered into an agreement with the custodian, whereby it
earns custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of the
daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were $1,279,178 "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,461,305 $ 15,332,025 1,816,050 $ 17,981,764
Shares issued on reinvestment 136,334 1,423,816 118,748 1,182,047
Shares reacquired (1,134,391) (11,928,052) (1,379,633) (13,679,012)
Net increase 463,248 $ 4,827,789 555,165 $ 5,484,799
Period From
December 1, 1995 to May 31, 1996
Shares Amount
Class C:
Shares sold 117,137 $ 1,234,966
Shares issued on reinvestment 957 10,018
Shares reacquired (2,589) (26,715)
Net increase 115,505 $ 1,218,269
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31,
1996, aggregated $44,245,674 and $37,043,728, respectively. At May 31, 1996,
cost for federal income tax purposes is $48,058,757 and net unrealized
appreciation aggregated $576,353, of which $842,464 related to appreciated
securities and $266,111 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $442,700 to offset future net capital gains expiring on May 31,
2003.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to the
Fund, receives fees computed monthly on the average daily net assets of the Fund
at an annualized rate of 1/2 of 1%. During the year ended May 31, 1996, the
Advisor, at its discretion, permanently waived all of its advisory fees
amounting to $228,684. Also, under an agreement with the Fund, the Advisor may
subsidize certain expenses excluding advisory and distribution fees.
Intermediate F-99 11
<PAGE>
Notes to Financial Statements
................................................................................
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $15,954 and $899 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $136,700 for the year ended May 31, 1996, of which
approximately $108,800 was paid to other dealers. For the year ended May 31,
1996, the Distributor received no contingent deferred sales charges on
redemptions of shares. Certain officers and trustees of the Trust are also
officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$35,700) will be reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $14,328 has been reimbursed. In the
event that the Advisor's current investment in the Trust falls below
$100,000 prior to the full reimbursement of the organizational expenses, then
it will forego any further reimbursement.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$92,000, at a weighted average annualized interest rate of 6.62%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
12 F-100 INTERMEDIATE
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended September 15, 1992 to
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
Class A
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.29 $ 10.16 $ 10.35 $ 9.70
Income from investment operations:
Net investment income 0.51 0.51 0.52 0.36
Net realized and unrealized gain
(loss) on securities (0.02) 0.13 (0.13) 0.64
Total from investment operations 0.49 0.64 0.39 1.00
Less distributions:
From net investment income (0.51) (0.51) (0.52) (0.35)
From net realized capital gains (0.05)
In excess of net realized capital gains (0.01)
Total distributions (0.51) (0.51) (0.58) (0.35)
Net asset value, end of period $ 10.27 $ 10.29 $ 10.16 $ 10.35
Total return(a) 4.84% 6.63% 3.72% 14.06%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b) 0.62% 0.54% 0.40% 0.39%
Net investment income 4.86% 5.15% 4.93% 4.98%
Assuming credits and no
waivers or reimbursements:
Expenses 1.17% 1.24% 1.29% 1.59%
Net investment income 4.31% 4.45% 4.04% 3.78%
Net assets at end of period (000's) $ 46,742 $ 42,069 $ 35,891 $ 18,971
Portfolio turnover rate 80.90% 102.06% 69.14% 102.38%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits
from the custodian which reduce service fees incurred. If
included, the ratio of expenses to average net assets would be
0.58%; prior year numbers have not been restated to reflect these
credits.
Intermediate F-101 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
December 1, 1995 to
May 31, 1996
Class C
- -----------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $ 10.57
Income from investment operations:
Net investment income 0.23
Net realized and unrealized gain (loss) on securities (0.30)
Total from investment operations (0.07)
Less distributions:
From net investment income (0.22)
Total distributions (0.22)
Net asset value, end of period $ 10.28
Total return(a) (1.78%)
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b) 1.13%
Net investment income 4.28%
Assuming credits and no waivers or reimbursements:
Expenses 1.73%
Net investment income 3.68%
Net assets at end of period (000's) $ 1,187
Portfolio turnover rate 80.90%
</TABLE>
(a) The total return shown does not include the effect of applicable contingent
deferred sales charge and is annualized.
(b) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.09%.
14 F-102 Intermediate
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
...............................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP INTERMEDIATE
TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Intermediate Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Intermediate Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Intermediate F-103 15
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Hospitals
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,075 Lawrence, KS Hospital Revenue - Lawrence Memorial Hospital - Series 1994 6.200% 07/01/14 $ 1,075,602
400 Lawrence, KS Hospital Revenue - Lawrence Memorial Hospital - Series 1994 6.200 07/01/19 395,620
1,000 Olathe, KS Health Facilities Revenue - Olathe Medical Center - Miami County
Medical Center Project - Series 1996 A and B 5.500 09/01/24 941,300
100 Commonwealth of Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority Revenue -
Hospital Auxilio Mutuo - Series 1995 6.250 07/01/24 102,799
1,400 Wichita, KS Hospital Facilities Improvement Revenue - St. Francis Regional
Medical Center, Incorporated - Series III-A-3 6.250 10/01/10 1,442,896
2,250 Wichita, KS Revenue - CSJ Health System - Series XXV 7.200 10/01/15 2,375,752
450 Wichita, KS Revenue - CSJ Health Systems -Series X 7.000 11/15/18 464,445
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
995 Kansas City, KS Multifamily Housing Revenue - Rainbow Towers - Series 1994 6.700 07/01/23 1,009,428
1,000 Lenexa, KS Multifamily Housing Revenue - Barrington Park Apartments
Project - Series 1993 A 6.500 02/01/23 1,011,090
445 Lenexa, KS Multifamily Housing Revenue - Barrington Park Apartments
Project - Series 1993A 6.300 02/01/09 455,079
475 Lenexa, KS Multifamily Housing Revenue - Barrington Park Apartments
Project - Series 1993A 6.400 02/01/10 484,752
2,000 Lenexa, KS Multifamily Housing Revenue - Barrington Park Apartments
Project - Series 1993A 6.450 02/01/18 2,028,900
1,000 Olathe, KS Multifamily Housing Revenue - Deerfield Apartments - Series 1994 A 6.450 06/01/19 1,011,000
1,500 Wichita, KS Multifamily Housing Revenue - Shores Apartments - Series 1994 6.700 04/01/19 1,543,965
2,000 Wichita, KS Multifamily Housing Revenue - Shores Apartments - Series 1994 6.800 04/01/24 2,065,960
900 Wichita, Kansas Multifamily Housing Revenue - Brentwood Apartments -
Series 1995 IX-A and IX-B 5.850 12/01/25 871,056
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
230 Hutchinson, KS Single Family Mortgage Revenue - Series 1992 6.500 12/01/09 234,230
3,800 Kansas City, KS GNMA Collateralized Mortgage Revenue - Series 1995 5.900 11/01/27 3,708,572
710 Olathe-Labette County, KS Single Family Mortgage Revenue - Series 1994 C-I 7.800 02/01/25 776,761
2,275 Sedgwick County, KS Mortgage Loan Revenue - GNMA Collateralized Local
or Guaranteed Housing - Series 1989 7.875 12/01/21 2,418,575
1,425 Sedgwick and Shawnee County, KS Single Family Mortgage Revenue - Series 1994 A-III 8.125 05/01/24 1,573,514
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
4,550 Clearwater, KS Pollution Control Refunding Revenue - Vulcan Materials
Company - Series 1992 6.375 02/01/12 4,675,080
1,000 Dodge City, KS Pollution Control Revenue - Excel Corporation Project -
Series 1992 6.625 05/01/05 1,083,710
1,500 Puerto Rico Ports Authority - Special Facilities Revenue - American Airlines,
Incorporated Project - Series 1996 A 6.250 06/01/26 1,468,200
650 Wichita, KS Airport Authority - Wichita Airport Hotel Associates - Series 1992 7.000 03/01/05 699,933
</TABLE>
4 F-104 Kansas
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 275 Cowley County, KS Community College - Series 1992 7.000% 03/01/12 $ 288,164
500 Kansas State Development Finance Authority Revenue - Department of Corrections -
El Dorado and Larned Projects - Series 1992 L 6.000 02/01/09 510,280
455 Kansas State Development Finance Authority Revenue - Department of Corrections -
El Dorado and Larned Projects - Series 1992 L 6.000 08/01/09 464,355
1,050 Kansas State Development Finance Authority Revenue - Highway Patrol Central
Training Facility - Series 1992 T 6.600 12/01/07 1,116,706
Muicipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
1,500 Gardner, KS Electric Utility Revenue - Series 1992 7.000 11/01/09 1,594,995
2,500 Kansas City, KS Utility System Revenue - Series 1994 6.250 09/01/14 2,572,125
2,900 Kansas City, KS Utility System Revenue - Series 1994 6.375 09/01/23 3,004,487
215 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.125 07/01/08 221,424
150 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.000 07/01/16 147,926
11,380 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 10,411,790
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
1,205 Junction City, KS Water and Sewer System Revenue - Series 1996 A 5.400 09/01/16 1,146,509
3,000 Kansas State Development Finance Authority - Water Pollution Control Revenue -
Series 1993 II 6.000 11/01/14 3,016,950
350 Newton, KS Wastewater Treatment System - Series 1992 7.125 03/01/12 373,670
200 Olathe, KS Water and Sewer System Revenue - Johnson County - Series 1990 6.875 02/01/09 205,442
200 Olathe, KS Water and Sewer System Revenue - Johnson County - Series 1990 6.875 08/01/09 205,442
750 Salina, KS Water and Sewer Improvement Revenue 6.250 10/01/12 789,038
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
170 Derby, KS General Obligation - Series II 6.500 12/01/12 175,129
440 Jefferson County, KS Unified School District Number 340 -
General Obligation - Series 1994 6.350 09/01/14 459,743
625 Johnson County, KS Unified School District Number 512 -
Shawnee Mission - Series 1992 C 6.000 10/01/09 636,244
1,750 Kansas City, KS General Obligation - Series 1995 5.375 09/01/10 1,716,575
860 Lyon County, KS Unified School District Number 253 - General Obligation -
Emporia - Series 1993 5.650 10/01/11 859,923
605 Lyon County, KS Unified School District Number 253 - General Obligation -
Emporia - Series 1993 5.700 10/01/12 604,946
800 Miami County, KS Unified School District Number 368 - Series 1992 6.600 12/01/08 855,400
250 Commonwealth of Puerto Rico Municipal Finance Agency - Series A 8.250 07/01/08 272,465
1,000 Shawnee County, KS Unified School District Number 437 - Seaman - Series 1994 5.700 09/01/14 989,840
350 Shawnee County, KS Unified School District Number 437 - Auburn-Washburn -
Series 1992 6.600 09/01/09 370,664
</TABLE>
Kansas F-105 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
Face
Amount Face Market
(000) Description Rate Maturity Value
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 325 Hays, KS Sales Tax Revenue - Series 1992 6.875% 09/01/12 $ 348,231
355 Jackson County, KS General Obligation - Unified School District Number 336 -
Holton 6.600 10/01/12 390,809
380 Jackson County, KS General Obligation - Unified School District Number 336 -
Denison-Holton - Series 1992 6.650 10/01/13 419,585
12,475 Johnson County, KS Residual Revenue - Series 1992 0.000 05/01/12 4,756,967
2,000 Kansas City, KS Single Family Mortgage Revenue - Verex - Series 1983 A 0.000 12/01/14 649,020
350 Kansas State Department of Transportation - Highway Revenue - Series 1992 6.500 03/01/12 383,218
150 Leawood, KS Public Building Commission - Leawood City Hall - Series 1992 6.600 09/01/12 163,892
975 Olathe-Labette County, KS Single Family Mortgage Revenue - Series 1984 A 0.000 02/01/16 294,548
2,120 Reno and Labette County, KS Single Family Mortgage Revenue - Series 1983 A 0.000 12/01/15 646,982
2,095 Reno/Sedgwick/Finney County, KS Single Family Mortgage Revenue - Series 1984 A 0.000 04/01/16 625,316
1,320 Saline County, KS Single Family Mortgage Revenue - Series 1983 0.000 12/01/15 402,838
80 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 88,653
900 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 994,833
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
4,450 Kansas State Department of Transportation - Highway Revenue - Series 1992A 6.000 09/01/12 4,501,398
1,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/13 952,090
750 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 X 5.500 07/01/13 712,530
3,500 Puerto Rico Highway and Transportation Authority Revenue -
Series 1996 Y and Z 5.500 07/01/36 3,176,880
1,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/15 972,330
100 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 107,983
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
1,000 Commonwealth of Puerto Rico - General Obligation - Series 1992 A 6.000 07/01/14 993,400
1,500 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 1,544,700
1,000 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 1,049,040
2,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/15 1,757,920
3,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series M 5.000 07/01/21 2,795,550
Total Investments in Securities - Municipal Bonds (cost $94,411,159) - 98.9% 95,657,164
Excess of Other Assets over Liabilities - 1.1% 1,036,604
Total Net Assets - 100.0% $96,693,768
See notes to financial statements.
</TABLE>
6 F-106 Kansas
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $94,411,159) $95,657,164
Receivable for investments sold 140,130
Receivable for Fund shares sold 24,583
Interest receivable 1,607,802
Other 6,053
Total assets 97,435,732
LIABILITIES:
Bank borrowings (Note G) 150,989
Payable for Fund shares reacquired 83,964
Distributions payable 437,875
Accrued expenses 69,136
Total liabilities 741,964
NET ASSETS:
Applicable to 9,837,930 shares of beneficial interest issued
and outstanding $96,693,768
Net asset value per share $ 9.83
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 5,491,517
EXPENSES:
Distribution fees (Note E) 373,114
Investment advisory fees (Note E) 468,046
Custody and accounting fees 78,087
Transfer agent's fees 66,085
Registration fees 11,150
Legal fees 2,389
Audit fees 13,400
Reimbursement of organizational expenses (Note F) 8,601
Trustees' fees 2,562
Shareholder services fees (Note E) 10,490
Other 2,898
Expense subsidy (Note E) (66,694)
Advisory fees waived (Note E) (429,494)
Total expenses before credits 540,634
Custodian fee credit (Note B) (31,897)
Net expenses 508,737
Net investment income 4,982,780
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 355,041
Change in unrealized appreciation (depreciation) of investments (2,413,598)
Net loss on investments (2,058,557)
Net increase in net assets resulting from operations $ 2,924,223
</TABLE>
See notes to financial statements.
Kansas F-107 7
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 4,982,780 $ 4,581,886
Net realized gain (loss) on security transactions 355,041 (3,110,652)
Change in unrealized appreciation (depreciation) of investments (2,413,598) 4,329,711
Net increase in net assets resulting from operations 2,924,223 5,800,945
Distributions to shareholders:
From net investment income (5,023,868) (4,609,298)
Net decrease in net assets from distributions to shareholders (5,023,868) (4,609,298)
Net increase in net assets from Fund share transactions (Note C) 15,110,128 2,431,796
Total increase in net assets 13,010,483 3,623,443
NET ASSETS:
Beginning of year 83,683,285 80,059,842
End of year $ 96,693,768 $83,683,285
NET ASSETS CONSIST OF:
Paid-in surplus $100,520,594 $85,451,554
Accumulated net realized gain (loss) on security transactions (5,072,831) (5,427,872)
Unrealized appreciation (depreciation) of investments 1,246,005 3,659,603
$ 96,693,768 $83,683,285
</TABLE>
See notes to financial statements.
8 F-108 Kansas
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Kansas Triple Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced investment operations on January 9,
1992. Shares of beneficial interest in the Fund, which are registered under
the Securities Act of 1933, as amended, are offered to the public on a
continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ. Security Valuations: Portfolio securities for
which market quotations are readily available are valued on the basis of
prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining the values. If market quotations are not readily available from
such pricing service, securities are valued at fair value as determined under
procedures established by the Trustees. Short-term securities are stated at
amortized cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to
each sub-trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Kansas F-109 9
<PAGE>
Notes to Financial Statements
................................................................................
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 2,552,505 $ 25,844,692 1,847,956 $ 17,915,184
Shares issued on reinvestment 257,842 2,591,397 257,537 2,474,272
Shares reacquired (1,330,464) (13,325,961) (1,894,256) (17,957,660)
Net increase 1,479,883 $ 15,110,128 211,237 $ 2,431,796
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $65,698,113 and $50,774,443, respectively. At May 31, 1996, cost
for federal income tax purposes is $94,411,159 and net unrealized
appreciation aggregated $1,246,005, of which $2,050,045 related to
appreciated securities and $804,040 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $5,072,800 to offset future net capital gains expiring on May
31, 2003.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly, on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $429,494 of its
advisory fees. Also, under an agreement with the Fund, the Advisor may
subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's shares. The maximum amount payable for these expenses on an annual
basis is .40% of the Fund's average daily net assets. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $32,803. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $251,000 for the year ended May 31, 1996, of which
approximately $216,000 was paid to other dealers. Certain officers and
trustees of the Trust are also officers and/or directors of the Distributor
and/or Advisor.
10 F-110 Kansas
<PAGE>
Notes to Financial Statements
................................................................................
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$42,800) are being reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $25,757 has been reimbursed. In the
event that the Advisor's current investment in the Trust falls below
$100,000 prior to the full reimbursement of the organizational expenses, then
it will forego any further reimbursement.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $4 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$251,700, at a weighted average annualized interest rate of 6.52%. At May 31,
1996, the Fund had $150,989 outstanding under the line of credit.
Kansas F-111 11
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended Year Ended January 9, 1992 to
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.01 $ 9.83 $ 10.38 $ 9.65 $ 9.58
Income from investment operations:
Net investment income 0.54 0.55 0.56 0.58 0.19
Net realized and unrealized gain (loss) on
securities (0.18) 0.18 (0.47) 0.73 0.07
Total from investment operations 0.36 0.73 0.09 1.31 0.26
Less distributions:
From net investment income (0.54) (0.55) (0.57) (0.58) (0.19)
From net realized capital gains (0.02)
In excess of net realized capital gains (0.05)
Total distributions (0.54) (0.55) (0.64) (0.58) (0.19)
Net asset value, end of period $ 9.83 $ 10.01 $ 9.83 $ 10.38 $ 9.65
Total return/a/ 3.63% 7.80% 0.62% 14.15% 5.95%
Ratios to average net assets (annualized where
appropriate):
Actual net of waivers and reimbursements:
Expenses/b/ 0.57% 0.54% 0.26% 0.11% 0.40%
Net investment income 5.31% 5.67% 5.37% 5.74% 5.11%
Assuming credits and no waivers or
reimbursements:
Expenses 1.08% 1.10% 1.06% 1.22% 2.01%
Net investment income 4.80% 5.11% 4.57% 4.63% 3.50%
Net assets at end of period (000's) $ 96,694 $83,683 $80,060 $62,585 $9,552
Portfolio turnover rate 54.90% 71.50% 93.45% 55.70% 59.26%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.54%; prior period numbers have not
been restated to reflect these credits.
12 F-112 Kansas
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP KANSAS
TRIPLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Kansas Triple Tax Exempt Fund as of May 31, 1996, the related statement
of operations for the year then ended, and the statements of changes in net
assets and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Kansas Triple Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Kansas F-113 13
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Limited Term
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 50 Murray State University, KY Revenue - Consolidated Educational Buildings -
Series 1993 G 4.900% 05/01/00 $ 50,122
250 University of Kentucky Revenue - Consolidated Educational Buildings -
Series 1995 O 5.000 05/01/03 250,135
50 University of Louisville Kentucky Revenue - Housing Systems - Series 1994 D 5.400 11/01/02 51,250
Hospitals
--------------------------------------------------------------------------------------------------------------------------
75 Boyle County, KY Hospital Authority Revenue - Ephraim McDowell Regional
Medical Center - Series 1994 5.500 04/01/03 77,186
150 Kentucky Development Finance Authority Revenue - Sisters of Charity -
Nazareth Health Corporation - Serice 1991 5.750 11/01/98 153,448
380 Kentucky Development Finance Authority Revenue - Sisters of Charity -
Nazareth Health Corporation - Series 1991 6.000 11/01/01 393,083
300 Kentucky Development Finance Authority Revenue - Sisters of Charity -
Nazareth Health Corporation - Series 1991 6.600 11/01/06 316,869
270 Kentucky Economic Development Finance Authority Medical Center
Improvement Revenue - Ashland Hospital - Series 1993A 5.100 02/01/99 274,012
200 Kentucky Economic Development Finance Authority Hospital Facilities
Revenue - Green River Regional Mental Health/Mental Retardation Board,
Incorporated - Series 1996 5.200 11/01/01 197,580
325 McCracken County, KY Hospital Facilities Revenue - Mercy Health System -
Series 1994 A 6.300 11/01/06 348,588
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
410 Martin County, KY Mortgage Revenue - FHA Insured Mortgage Loan -
Series 1995 5.375 07/01/05 412,198
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
100 Kentucky Housing Corporation Revenue - Series 1993 B 5.150 07/01/07 98,586
100 Kentucky Housing Corporation - Housing Revenue - Series 1995 F 4.650 01/01/02 98,922
100 Kentucky Housing Corporation - Housing Revenue - Series 1995 F 4.800 07/01/03 99,221
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
325 Ashland, KY Pollution Control Revenue - Ashland Oil Inc. - Series 1988 7.375 07/01/09 345,995
635 Newport, KY Industrial Building Revenue - Louis Trauth Dairy, Incorporated
Project - Series 1996 A and B 4.800 06/01/99 631,888
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
265 Hardin County, KY School District Finance Corporation - Building Revenue 6.800 06/01/08 285,339
300 Jefferson County, KY Capital Projects Corporation - Lease Revenue -
Series 1996 A 5.500 04/01/03 308,745
150 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 4.850 11/01/04 147,192
100 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 5.000 11/01/05 98,594
</TABLE>
Kentucky F-114 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds-Kentucky Limited Term (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 430 Kentucky Infrastructure Authority Revenue - Wastewater Revolving Fund -
Series 1995 C 5.300% 06/01/03 $ 435,010
200 Kentucky State Property and Buildings Commission Revenue -
Project Number 55 - Series 1993 4.500 09/01/02 194,988
120 Kentucky State Turnpike Authority - Economic Development Road Revenue -
Series 1995 5.000 07/01/02 121,060
125 Kentucky State Turnpike Authority - Resource Recovery Road Revenue
Refunding - Series 1985 A 6.000 07/01/09 125,128
675 Mt. Sterling, KY League of Cities Funding Trust Lease Program Revenue -
Series 1993 A 5.625 03/01/03 680,400
275 Commonwealth of Puerto Rico Urban Renewal and Housing - Series 1989 0.000 10/01/98 244,233
Municipal Revenue/Transportation
---------------------------------------------------------------------------------------------------------------------------
300 Kenton County, KY Airport Board Cincinnati/Northern Kentucky International
Airport Revenue - Series 1996 5.000 03/01/02 297,468
200* Louisville and Jefferson County, KY Regional Airport Authority System Revenue -
Revenue - Series 1997 A 5.750 07/01/98 200,232
Municipal Revenue/Utility
---------------------------------------------------------------------------------------------------------------------------
400 Owensboro, KY Electric Light and Power System Revenue - Series 1993A 0.000 01/01/04 270,612
Municipal Revenue/Water & Sewer
---------------------------------------------------------------------------------------------------------------------------
50 Kenton County, KY Water District Number 1 Revenue - Series 1995 A 5.700 02/01/04 52,106
250 Kenton County, KY Water District Number 1 Revenue - Series 1995 B 5.600 02/01/03 259,400
50 Kentucky Infrastructure Authority Revenue - Governmental Agencies
Program - Series 1993 F 4.500 02/01/01 49,049
25 Louisville, KY Water Works Board - Louisville Water Company -
Water System Revenue Bonds - Series 1992 5.100 11/15/01 25,368
Non-State General Obligations
---------------------------------------------------------------------------------------------------------------------------
50 Kentucky Interlocal School Transportation Association - Equipment Lease
Revenue - Series 1993 5.200 03/01/02 50,565
165 Lexington-Fayette Urban County Government Public Facilities Corporation -
Mortgage Revenue - Series 1995 5.000 11/01/01 167,100
175 Lexington-Fayette Urban County Government Public Facilities Corporation -
Mortgage Revenue - Series 1995 5.000 11/01/02 176,617
160 Lexington-Fayette Urban County Government Public Facilities Corporation -
Mortgage Revenue - Series 1995 5.000 11/01/03 160,682
50 Pike County, Ky School District Finance Corporation - School Building Revenue -
Second Series 1993 4.300 10/01/98 49,954
Pre-refunded or Escrowed
---------------------------------------------------------------------------------------------------------------------------
150 Hardin County, KY Hospital Revenue - Hardin Memorial Hospital 7.875 10/01/14 166,110
250 Jefferson County, KY Capital Projects Corporation Revenue - Municipal Lease -
Series B 0.000 08/15/19 49,008
245 Kentucky State Property and Buildings Commission Revenue -
Project Number 48 8.000 08/01/08 268,277
</TABLE>
6 F-115 Kentucky
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Limited Term (continued)
<TABLE>
<CAPTION>
Face Face Market
Amount Description Rate Maturity Value
(000)
<C> <S> <C> <C> <C>
$ 325 Commonwealth of Puerto Rico Electric Power Authority - Series P 7.000 07/01/11 $ 363,568
100 Western Kentucky University Revenue - Series 1990 J 7.400 05/01/10 112,346
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
450 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 4.600 07/01/04 436,792
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
500 Kentucky Higher Education Student Loan Corporation Revenue - Series B 6.800 06/01/03 539,755
50 Kentucky Higher Education Student Loan Corporation Revenue - Series 1993 B 5.000 06/01/02 49,338
75 Kentucky Higher Education Student Loan Corporation Review - Series 1994 6.050 06/01/00 77,906
Total Investments in Securities - Municipal Bonds (cost $10,350,766) - 101.0% 10,262,025
Excess of Liabilities over Other Assets - (1.0)% (105,247)
Total Net Assets - 100.0% $10,156,778
*Securities purchased on a "when issued" basis.
See notes to financial statements.
</TABLE>
Kentucky F-116 7
<PAGE>
[LOGO OF SHIP ART]
Kentucky Limited Term
Statement of Assets and Liabilities May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
ASSETS: <C>
Investments, at market value (cost $10,350,766) $10,262,025
Receivable for Fund shares sold 4,000
Interest receivable 146,387
Other 90
Total assets 10,412,502
LIABILITIES:
Bank overdraft 1,116
Payable for investments purchased 202,417
Distributions payable 38,299
Accrued expenses 13,892
Total liabilities 255,724
NET ASSETS 10,156,778
Class A:
Applicable to 856,612 shares of beneficial interest
issued and outstanding $ 8,389,307
Net asset value per share $ $9.79
Class C:
Applicable to 180,501 shares of beneficial interest
issued and outstanding $ 1,767,471
Net asset value per share $ 9.79
</TABLE>
[LOGO OF SHIP ART]
Kentucky Limited Term For the period from September 14, 1995 to
Statement of Operations May 31, 1996
...............................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 198,793
EXPENSES:
Distribution fees - Class A (Note E) 14,089
Distribution fees - Class C (Note E) 4,734
Investment advisory fees (Note E) 12,596
Custody and accounting fees 31,407
Transfer agent's fees 2,140
Registration fees 3,389
Legal fees 644
Audit fees 5,164
Trustee's fees 138
Shareholder services fees (Note E) 417
Other 34
Distribution and advisory fees waived (Note E) (16,941)
Expense subsidy (Note E) (40,302)
Total expenses before credit 17,509
Custodian fee credit (Note B) (2,592)
Net expenses 14,917
Net investment income 183,876
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions (32,692)
Change in unrealized appreciation (depreciation) of investments (88,741)
Net loss on investments (121,433)
Net increase in net assets resulting from operations $ 62,443
</TABLE>
See notes to financial statements.
8 F-117 Kentucky
<PAGE>
[LOGO OF SHIP ART]
Kentucky Limited Term
Statement of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Period From
September 14, 1995 to
May 31, 1996
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 183,876
Net realized gain (loss) on security transactions (32,692)
Change in unrealized appreciation (depreciation) of investments (88,741)
Net increase in net assets resulting from operations 62,443
Distributions to Class A shareholders:
From net investment income (156,882)
Distributions to Class C shareholders:
From net investment income (27,984)
Net decrease in net assets from distributions to shareholders (184,866)
Fund share transactions (Note C):
Proceeds from shares sold 11,638,666
Net asset value of shares issued in reinvestment of distributions 111,313
Cost of shares reacquired (1,470,778)
Net increase in net assets from Fund share transactions 10,279,201
Total increase in net assets 10,156,778
NET ASSETS:
Beginning of period --
End of period $10,156,778
NET ASSETS CONSIST OF:
Paid-in surplus $10,278,211
Accumulated net realized gain (loss) on security transactions (32,692)
Unrealized appreciation (depreciation) of investments (88,741)
$10,156,778
</TABLE>
See notes to financial statements.
Kentucky F-118 9
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000 Kentucky State University Revenue - Consolidated Educational Buildings -
Series 1991 G 6.250% 05/01/10 $ 1,047,170
1,000 Kentucky State University Revenue - Consolidated Educational Buildings -
Series 1991 G 6.250 05/01/11 1,044,780
3,195 Lexington-Fayette Urban County Government - University of Kentucky Alumni
Association - Series 1994 6.750 11/01/17 3,463,156
4,320 Lexington-Fayette Urban County Government - University of Kentucky Alumni
Association - Series 1994 6.750 11/01/24 4,647,758
1,410 Morgan County, KY School District Building Revenue - Series 1994 6.000 09/01/14 1,424,312
700 Northern Kentucky University Revenue - Consolidated Educational Buildings 7.000 05/01/10 765,520
525 Western Kentucky University Revenue - Series 1992 K 6.100 05/01/10 539,112
560 Western Kentucky University Revenue - Series 1992 K 6.100 05/01/11 572,925
600 Western Kentucky University Revenue - Series 1992 K 6.100 05/01/12 611,580
Health Care
------------------------------------------------------------------------------------------------------------------------
715 Jefferson County, KY First Mortgage Revenue - Christian Church Homes -
Series 1994 6.125 11/15/13 665,393
3,210 Jefferson County, KY First Mortgage Revenue - Christian Church Homes -
Series 1994 6.125 11/15/18 2,880,879
1,240 Jefferson County, KY First Mortgage Revenue - Christian Church Homes -
Series 1994 6.000 11/15/09 1,204,350
Hospitals
------------------------------------------------------------------------------------------------------------------------
3,300 Daviess County, KY Hospital Revenue - Owensboro Daviess County Hospital -
Series 1992 A 6.250 08/01/22 3,362,964
3,280 Floyd County, KY Hospital Revenue - Highlands Hospital Corporation 7.500 08/01/10 3,485,722
4,000 Hopkins County, KY Hospital Revenue - Trover Clinic 6.625 11/15/11 4,290,520
1,190 Jefferson County, KY Health Facilities Revenue - Jewish Hospital Health Care
Services 6.500 05/01/15 1,232,293
12,785 Jefferson County, KY Health Facilities Revenue - Jewish Hospital Health Care
Services 6.550 05/01/22 13,320,180
7,800 Jefferson County, KY Insured Hospital Revenue - Alliant Health System,
Incorporated - Series 1992 6.436 10/23/14 8,112,624
900 Kentucky Development Finance Authority Hospital Revenue - Ashland Kings
Daughters Hospital 9.750 08/01/05 974,934
3,000 Kentucky Development Finance Authority Hospital Revenue - St. Luke Hospital -
Series 1989 A 7.500 10/01/12 3,175,560
1,750 Kentucky Development Finance Authority Hospital Revenue - Sisters of Charity -
Nazareth Health Corporation 7.375 11/01/16 1,872,552
500 Kentucky Development Finance Authority Hospital Revenue - Sisters of Charity -
Nazareth Health Corporation 7.375 11/01/16 545,290
2,000 Kentucky Development Finance Authority Hospital Revenue - St. Luke Hospital -
Series 1991 A 7.000 10/01/11 2,192,100
9,070 Kentucky Development Finance Authority Hospital Revenue - St. Luke Hospital -
Series 1991 A 7.000 10/01/21 9,848,387
1,000 Kentucky Development Finance Authority Hospital Revenue - St. Elizabeth
Medical Center 6.000 11/01/10 1,013,290
</TABLE>
10 F-119 Kentucky
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 610 Kentucky Development Finance Authority Hospital Revenue - Ashland Kings
Daughters Hospital 9.750% 08/01/11 $ 662,320
1,660 Kentucky Economic Development Finance Authority Medical Center
Improvement Revenue - Ashland Hospital - Series 1993A 6.125 02/01/12 1,713,286
5,000 Kentucky Economic Development Finance Authority Hospital Facilities Revenue -
St. Elizabeth Medical Center - Series 1993A 6.000 12/01/22 4,986,850
4,000 Kentucky Economic Development Finance Authority Hospital Facilities Revenue -
Baptist Health Care System - Series 1994 5.000 08/15/24 3,434,680
3,200 Lexington-Fayette Urban County Government - Kentucky Residential Facilities
Revenue - USHCSO Richmond Place Project 7.750 05/15/15 3,436,160
2,110 McCracken County, KY Hospital Facilities Revenue - Mercy Health System -
Series 1994 A 6.300 11/01/06 2,263,144
1,750 Winchester, KY Hospital Revenue - Clark County Hospital Project 7.750 04/01/13 1,811,842
Housing/Multifamily
-------------------------------------------------------------------------------------------------------------------------
2,500 Greater Kentucky Housing Assistance Corporation - Multifamily Mortgage
Revenue - FHA Insured Section 8 Assisted Project - Series 1993 6.250 07/01/24 2,507,850
1,000 Greater Kentucky Housing Assistance Corporation - Multifamily Revenue 7.125 01/01/24 1,036,490
Housing/Single Family
-------------------------------------------------------------------------------------------------------------------------
620 Kentucky Housing Corporation - Housing Revenue - Series A 7.625 01/01/09 649,066
2,525 Kentucky Housing Corporation - Housing Revenue - Series C 7.900 01/01/21 2,652,336
2,615 Kentucky Housing Corporation - Housing Revenue - Series B 7.800 01/01/21 2,734,035
1,000 Kentucky Housing Corporation - Housing Revenue - Series 1992 B 6.625 07/01/14 1,031,760
465 Kentucky Housing Corporation - Housing Revenue - Series 1991 C 6.600 01/01/11 481,898
805 Kentucky Housing Corporation - Housing Revenue - Series 1991 C 6.650 01/01/17 830,398
985 Kentucky Housing Corporation - Single Family Revenue - Series 1994 A 6.500 07/01/17 1,010,334
2,350 Kentucky Housing Corporation Revenue - Series 1994 C 6.400 01/01/17 2,414,836
2,000 Kentucky Housing Corporation - Housing Revenue - Series 1995 B 6.625 07/01/26 2,037,140
Industrial Development and Pollution Control
-------------------------------------------------------------------------------------------------------------------------
4,675 Ashland, KY Pollution Control Revenue - Ashland Oil Inc. - Series 1988 7.375 07/01/09 4,977,005
5,000 Ashland, KY Pollution Control Revenue - Ashland Oil Inc. - Series 1992 6.650 08/01/09 5,189,900
9,000 Ashland, KY Sewage and Solid Waste Revenue - Ashland Oil Inc. - Series 1995 7.125 02/01/22 9,374,130
4,360 Ashland, KY Solid Waste Revenue - Ashland Oil Inc. 7.200 10/01/20 4,532,656
10,985 Boone County, KY Pollution Control Revenue - Dayton Power and Light
Company - Series 1992 A 6.500 11/15/22 11,515,246
10,000 Boone County, KY Pollution Control Revenue - Cincinnati Gas and Electric -
Series 1994 A 5.500 01/01/24 9,406,100
5,030 Carroll County, KY Pollution Control Revenue - Kentucky Utilities Company -
Series 1992 B 6.250 02/01/18 5,115,108
1,700 Carroll County, KY Solid Waste Disposal Facilities Revenue - Kentucky Utility
Company Project - Series 1993 A 5.750 12/01/23 1,603,899
2,370 Hancock County, KY Solid Waste Disposal Facilities Revenue -
Willamette Industries, Incorporated Project - Series 1996 6.600 05/01/26 2,376,612
8,000 Henderson County, KY Solid Waste Disposal Revenue - MacMillan Bloedel -
Series 1995 7.000 03/01/25 8,230,080
</TABLE>
Kentucky F-120 11
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,000 Jefferson County, KY Pollution Control Revenue - Louisville Gas and Electric
Company 7.450% 06/15/15 $ 1,091,430
1,000 Jefferson County, KY Pollution Control Revenue - Du Pont Nemours Company -
Series 1982 A 6.300 07/01/12 1,035,870
8,750 Jefferson County, KY Pollution Control Revenue - Louisville Gas and Electric
Company - Series 1993 B 5.625 08/15/19 8,319,938
1,000 Jefferson County, KY Pollution Control Revenue - Louisville Gas and Electric
Company - Series 1993 C 5.450 10/15/20 943,130
1,750 Jefferson County, KY Pollution Control Revenue - Louisville Gas and Electric
Company - Series 1995 A 5.900 04/15/23 1,698,498
1,500 Maysville, KY Industrial Development Revenue - Crystal Tissue Project 8.000 02/01/09 1,569,840
1,250 Mercer County, KY Collateralized Pollution Control Revenue - Kentucky
Utilities Company Project - Series 1992 A 6.250 02/01/18 1,263,500
1,500 Nicholasville, KY Industrial Development Revenue - Hoover Project 8.000 09/01/04 1,554,900
3,750 Perry County, KY Solid Waste Disposal Revenue - TJ International - Series 1994 7.000 06/01/24 3,796,988
4,240 Perry County, KY Solid Waste Disposal Revenue - TJ International - Series 1996 6.800 05/01/26 4,262,006
3,880 Trimble County, KY Pollution Control Revenue - Louisville Gas and Electric
Company - Series 1990 B 6.550 11/01/20 4,005,557
4,795 Trimble County, KY Pollution Control Revenue - Louisville Gas and Electric
Company - Series 1990 A 7.625 11/01/20 5,235,852
2,820 Wickliffe, KY Solid Waste Disposal Facility Revenue - Westvaco Corporation
Project - Series 1996 6.375 04/01/26 2,820,141
Municipal Appropriation Obligations
------------------------------------------------------------------------------------------------------------------------
430 Bardstown, KY Independent School District - School Building Revenue - Series 1992 6.375 05/01/17 447,144
725 Bell County, KY School District Finance Corporation 6.875 09/01/11 773,894
1,000 Boone County, KY School District Finance Corporation - Building Revenue -
Series C 6.750 09/01/11 1,080,220
1,215 Boone County, KY School District Finance Corporation - Building Revenue -
Series 1992 6.125 12/01/17 1,234,634
615 Boone County, KY School District Finance Corporation - Building Revenue -
Series 1993 A 6.000 02/01/18 614,200
1,595 Bowling Green, KY Municipal Corporation - Lease Revenue - Series 1994 6.500 12/01/14 1,696,075
565 Christian County, KY School District Finance Corporation - Building Revenue 6.750 06/01/10 598,776
600 Christian County, KY School District Finance Corporation - Building Revenue 6.750 06/01/11 634,524
505 Daviess County, KY School Building Finance Corporation District Revenue -
Series 1994 5.800 05/01/11 507,086
535 Daviess County, KY School Building Finance Corporation District Revenue -
Series 1994 5.800 05/01/12 535,134
570 Daviess County, KY School Building Finance Corporation District Revenue -
Series 1994 5.800 05/01/13 567,173
600 Daviess County, KY School Building Finance Corporation District Revenue -
Series 1994 5.800 05/01/14 593,646
1,645 Edgewood, KY Public Properties 6.700 12/01/21 1,761,203
465 Floyd County, KY Public Properties Corporation - First Mortgage Revenue -
Justice Center - Series 1995 A 5.500 09/01/17 443,131
1,260 Floyd County, KY Public Properties Corporation - First Mortgage Revenue -
Justice Center - Series 1995 A 5.550 09/01/23 1,181,036
</TABLE>
12 F-121 Kentucky
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,200 Floyd County, KY School District Finance Corporation - School Building
Revenue - Series 1995 5.500% 05/01/15 $1,114,692
360 Glasgow, KY Independent School District Finance Corporation - Series 1992 6.100 05/01/10 370,890
385 Glasgow, KY Independent School District Finance Corporation - Series 1992 6.100 05/01/11 395,126
405 Glasgow, KY Independent School District Finance Corporation - Series 1992 6.100 05/01/12 413,740
525 Hardin County, KY Buildings Commission Revenue - Detention Facility - Series 1994 6.200 12/01/11 547,108
1,775 Hardin County, KY Buildings Commission Revenue - Detention Facility - Series 1994 6.250 12/01/14 1,834,906
300 Hardin County, KY School District Finance Corporation - Building Revenue 6.800 06/01/10 320,787
1,250 Jefferson County, KY Economic Development Corporation - Lease Revenue - Series 1986 7.750 07/01/16 1,278,050
4,195 Jefferson County, KY School District Finance Corporation - School Building
Revenue - Series 1996 A 5.125 02/01/16 3,842,033
1,585 Jefferson County, KY Equipment Lease Purchase Revenue - Energy Systems
Project - Series 1987 9.000 06/01/03 1,609,556
291 Jefferson County, KY Equipment Lease Purchase Revenue - Energy Systems
Project - Series 1988 9.500 06/01/03 298,220
2,500 Jefferson County, KY Capital Projects Corporation Revenue - Municipal Lease -
Series B 0.000 08/15/08 1,051,250
1,000 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 5.750 11/01/15 983,870
510 Jessamine County, KY School District Finance Corporation - Building Revenue 6.750 06/01/10 545,955
545 Jessamine County, KY School District Finance Corporation - Building Revenue 6.750 06/01/11 582,185
2,500 Jessamine County, KY School District Finance Corporation Revenue - Series 1994 6.125 06/01/19 2,543,025
5,650 Jessamine County, KY School Finance Corporation - School Building Revenue - Series 1996 5.500 01/01/21 5,309,588
1,290 Kenton County, KY Public Parks Corporation Revenue 7.000 03/01/08 1,391,949
1,070 Kenton County, KY Public Parks Corporation Revenue 7.100 03/01/10 1,158,179
815 Kenton County, KY School District Finance Corporation - Building Revenue 6.800 12/01/11 866,247
560 Kentucky Infrastructure Authority Revenue - Revolving Fund - Series D 7.200 06/01/11 614,309
500 Kentucky Infrastructure Authority Revenue - Revolving Fund - Series E 6.500 06/01/11 529,620
875 Kentucky Infrastructure Authority Revenue - Revolving Fund - Series H 6.500 06/01/12 911,496
1,000 Kentucky State Property and Buildings Commission Revenue - Project Number 59 -
Series 1995 5.625 11/01/15 958,380
400 Kentucky State Property and Buildings Commission Revenue - Project Number 40 -
Series 1991 6.875 11/01/07 435,132
250 Kentucky State Property and Buildings Commission Revenue - Project Number 53 -
Series 1991 6.625 10/01/07 271,040
2,075 Kentucky State Property and Buildings Commission Revenue - Project Number 56 -
Series 1994 6.000 09/01/14 2,087,388
1,000 Kentucky State Turnpike Authority - Economic Development Road Revenue - Series 1995 5.625 07/01/15 978,780
575 Kentucky State Turnpike Authority - Resource Recovery Road Revenue Refunding -
Series 1985 A 6.000 07/01/09 575,586
500 Kentucky State Turnpike Authority - Resource Recovery Road Revenue Refunding -
Series 1987 A 5.000 07/01/08 474,310
250 Laurel County, KY School District Finance Corporation - Building Revenue 7.000 03/01/10 266,510
</TABLE>
Kentucky F-122 13
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,000 Lawrence County, KY School District Finance Corporation Revenue - Series 1994 6.750% 11/01/14 $ 1,109,530
2,600 Lexington, KY Center Corporation Refunding and Improvement Mortgage Revenue -
Series 1993 A 0.000 10/01/11 1,034,748
2,550 Lexington, KY Center Corporation Refunding and Improvement Mortgage Revenue -
Series 1993 A 0.000 10/01/12 948,116
390 Lincoln County, KY School District Finance Corporation - Series 1992 6.200 05/01/10 406,446
410 Lincoln County, KY School District Finance Corporation - Series 1992 6.200 05/01/11 426,240
435 Lincoln County, KY School District Finance Corporation - Series 1992 6.200 05/01/12 439,289
6,165 Louisville, KY Airport Lease Revenue - Series A 7.875 02/01/19 6,726,447
1,525 McCracken County, KY Public Property Corporation Revenue - Court Facilities -
Series 1995 5.900 09/01/26 1,495,324
2,365 McCreary County, KY School DIstrict Finance Corporation - School Building Revenue -
Series 1995 5.600 08/01/16 2,262,974
305 Montgomery County, KY School District Finance Corporation - Building Revenue 6.800 06/01/09 325,069
325 Montgomery County, KY School District Finance Corporation - Building Revenue 6.800 06/01/10 345,361
350 Montgomery County, KY School District Finance Corporation - Building Revenue 6.800 06/01/11 371,140
10,500 Mt. Sterling, KY League of Cities Funding Trust Lease Program Revenue - Series 1993 A 6.200 03/01/18 10,449,180
2,000 Northern Kentucky University Certificates of Participation - Student Housing Facilities 7.250 01/01/12 2,194,220
12,960 Pendleton County, KY Multi-County Lease Revenue Program - Series 1993 A 6.500 03/01/19 13,430,318
1,230 Perry County, KY School Building Revenue - School District Finance Corporation -
Series 1992 6.250 07/01/11 1,277,896
Municipal Revenue/Other
----------------------------------------------------------------------------------------------------------------------------
2,790 Louisville, KY Parking Authority of River City, Inc. - First Mortgage Revenue -
Series 1991 6.875 12/01/20 3,004,244
Municipal Revenue/Transportation
----------------------------------------------------------------------------------------------------------------------------
5,250 Kenton County, KY Airport Revenue - Cincinnati/Northern Kentucky International Airport -
Series 1992 A 6.300 03/01/15 5,342,610
1,320 Kenton County, KY Airport Revenue - Cincinnati/Northern Kentucky International Airport -
Series 1987 8.750 03/01/15 1,385,380
1,250 Kenton County, KY Airport Board Cincinnati/Northern Kentucky International Airport
Revenue - Series 1996 5.750 03/01/13 1,204,362
2,550 Louisville and Jefferson County, KY Regional Airport Authority System Revenue - Series
1993 A, B and C 5.600 07/01/13 2,492,344
5,000 Louisville and Jefferson County, KY Regional Airport Authority System Revenue -
Series 1995 A 5.625 07/01/25 4,678,200
Municipal Revenue/Utility
----------------------------------------------------------------------------------------------------------------------------
7,100 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/11 3,062,443
6,475 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/12 2,616,483
7,900 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/17 2,344,404
13,300 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/18 3,681,839
5,100 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/19 1,330,284
4,725 Owensboro, KY Electric Light and Power System Revenue - Series 1991 B 0.000 01/01/20 1,161,263
</TABLE>
14 F-123 Kentucky
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 6,515 Commonwealth of Puerto Rico Electric Power Authority - Series 1992 R 6.250% 07/01/17 $6,563,797
5,000 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.000 07/01/16 4,930,850
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
965 Campbell and Kenton Counties, KY Sanitation District Revenue - Series A 7.700 08/15/04 1,022,389
500 Campbell and Kenton Counties, KY Sanitation District Revenue - Series A 7.750 08/15/05 529,505
625 Danville, KY Multi-City Lease Revenue - Sewer System 6.875 12/01/10 673,331
1,750 Henderson, KY Water and Sewer Revenue - Series 1994 A 6.100 11/01/14 1,786,978
1,700 Kenton County, KY Water District Number 1 - Water District Refunding and Revenue -
Series 1992 6.375 02/01/12 1,796,084
1,000 Kenton County, KY Water District Number 1 - Water District Refunding and Revenue -
Series 1992 6.375 02/01/17 1,044,570
1,530 Kenton County, KY Water District Number 1 - Water District Refunding and Revenue -
Series 1992 B 6.000 02/01/17 1,557,035
2,040 Kenton County, KY Water District Number 1 Revenue - Series 1995 B 5.700 02/01/20 1,995,752
1,000 Kentucky Infrastructure Authority Revenue - Governmental Agencies Program - Series 1993 E 5.750 08/01/18 967,100
5,000 Kentucky Infrastructure Authority Revenue - Governmental Agencies Program - Series 1993 F 5.375 02/01/18 4,572,550
440 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.300 06/01/10 461,723
360 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.350 06/01/11 377,730
600 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.375 06/01/14 630,762
420 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.300 08/01/10 440,920
445 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.350 08/01/11 467,108
825 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1995 G 6.375 08/01/14 867,669
405 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1989 A 7.800 08/01/08 436,278
830 Lexington-Fayette Urban County Government - Kentucky Sewer System Revenue 7.600 07/01/07 892,258
900 Lexington-Fayette Urban County Government - Kentucky Sewer System Revenue 7.600 07/01/08 967,509
6,035 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1993 B 5.500 05/15/21 5,684,065
3,840 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1993 B 5.500 05/15/23 3,619,046
2,720 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1994 A 6.750 05/15/19 2,926,992
2,070 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1994 A 6.500 05/15/24 2,169,112
2,500 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1994 A 6.750 05/15/25 2,690,250
3,865 Louisville and Jefferson County, KY Metropolitan Sewer District Revenue -
Sewer and Drainage System - Series 1996 A 5.400 05/15/22 3,604,886
500 Paducah, KY Waterworks Revenue 6.700 07/01/09 536,390
</TABLE>
Kentucky F-124 15
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
$ 1,005 Casey County, KY School District Finance Corporation - School Building Revenue -
Series 1995 5.750% 03/01/15 $ 999,201
1,070 Fleming County, KY School District Finance Corporation - School Building Revenue -
Series 1995 5.875 03/01/15 1,076,720
3,465 Hopkins County, KY School District Finance Corporation Revenue - Series 1994 6.200 06/01/19 3,513,025
500 Rockcastle County, KY School District Financing Corporation - School Building Revenue -
Series 1993 5.700 04/01/16 473,275
530 Rockcastle County, KY School District Financing Corporation - School Building Revenue -
Series 1993 5.700 04/01/17 500,961
560 Rockcastle County, KY School District Financing Corporation - School Building Revenue -
Series 1993 5.700 04/01/18 527,968
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
500 Covington, KY Municipal Properties Corporation - First Mortgage City Hall, Parking and
Park Revenue - Series 1988 A 8.250 08/01/10 554,630
1,370 Daviess County, KY Hospital Revenue - Mercy Health Care System 7.625 01/01/15 1,468,996
100 Florence, KY Public Properties Corporation Revenue - Recreational Facilities 7.000 03/01/10 111,177
320 Florence, KY Public Properties Corporation Revenue - Recreational Facilities 7.000 03/01/14 357,072
345 Florence, KY Public Properties Corporation Revenue - Recreational Facilities 7.000 03/01/15 384,968
360 Florence, KY Public Properties Corporation Revenue - Recreational Facilities 7.000 03/01/16 401,706
2,750 Hardin County, KY Hospital Revenue - Hardin Memorial Hospital 7.875 10/01/14 3,045,350
16,750 Jefferson County, KY Capital Projects Corporation Revenue - Municipal Lease - Series B 0.000 08/15/19 3,283,502
680 Kenton County, KY Airport Revenue - Cincinnati/Northern Kentucky International Airport -
Series 1987 8.750 03/01/15 718,128
990 Kentucky Development Finance Authority Hospital Revenue - King Daughter 9.750 08/01/11 1,093,029
2,795 Kentucky Infrastructure Authority Revenue - Community Loan Program - Series B 7.850 09/01/18 3,063,516
1,595 Kentucky Infrastructure Authority Revenue - Governmental Agencies - Series 1989 A 7.800 08/01/08 1,774,182
985 Kentucky Local Correctional Facilities Construction Authority Revenue 7.000 11/01/14 1,043,391
1,955 Kentucky State Property and Buildings Commission Revenue - Project Number 48 8.000 08/01/08 2,140,745
4,875 Kentucky State Turnpike Authority - Economic Development Road Revenue -
Revitalization Project 7.250 05/15/10 5,353,725
410 Powell County, KY School Building Revenue 7.600 06/01/07 437,060
500 Richmond, KY Water, Gas and Sewer Revenue - Series B 7.400 07/01/15 540,700
955 Trimble County, KY Pollution Control Revenue - Louisville Gas and Electric Company -
Series 1990 A 7.625 11/01/20 1,079,522
1,990 Western Kentucky University Revenue - Housing and Dining System - Series 1990 L 7.400 12/01/10 2,239,327
940 Western Kentucky University Revenue - Series 1990 J 7.400 05/01/10 1,056,071
160 Whitley County, KY Public Properties Corporation Revenue - Series A 9.000 05/01/99 171,752
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
700 Commonwealth of Puerto Rico Highway Authority Revenue - Series 1990 Q 6.000 07/01/20 690,312
500 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 539,915
</TABLE>
16 F-125 Kentucky
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds--Kentucky Triple Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
$ 4,000 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400% 07/01/25 $ 3,605,720
1,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/15 878,960
Total Investments in Securities - Municipal Bonds (cost $412,495,458) - 99.2% 428,017,344
Excess of Other Assets over Liabilities - 0.8% 3,438,032
Total Net Assets - 100.0% $431,455,376
See notes to financial statements.
</TABLE>
Kentucky F-126 17
<PAGE>
[LOGO OF SHIP ART]
Kentucky Triple Tax Exempt
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at market value (cost $412,495,458) $428,017,344
Cash 2,552,061
Receivable for Fund shares sold 539,641
Interest receivable 6,813,789
Other 22,842
Total assets 437,945,677
LIABILITIES:
Payable for investments purchased 3,741,553
Payable for Fund shares reacquired 435,838
Distributions payable 2,005,312
Accrued expenses 307,598
Total liabilities 6,490,301
NET ASSETS 431,455,376
Class A:
Applicable to 37,970,215 shares of beneficial interest issued and outstanding $410,808,311
Net asset value per share $ 10.82
Class C:
Applicable to 1,909,156 shares of beneficial interest issued and outstanding $ 20,647,065
Net asset value per share $ 10.81
</TABLE>
[LOGO OF SHIP ART]
Kentucky Triple Tax Exempt
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 26,394,174
EXPENSES:
Distribution fees - Class A (Note E) 1,621,314
Distribution fees - Class C (Note E) 181,774
Investment advisory fees (Note E) 2,128,617
Custody and accounting fees 135,817
Transfer agent's fees 295,650
Registration fees 17,922
Legal fees 11,090
Audit fees 20,494
Trustees' fees 11,217
Shareholder services fees (Note E) 36,720
Other 12,317
Advisory fees waived (Note E) (1,328,971)
Total expenses before credits 3,143,961
Custodian fee credit (Note B) (47,192)
Net expenses 3,096,769
Net investment income 23,297,405
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 746,629
Change in unrealized appreciation (depreciation) of investments (7,775,753)
Net loss on investments (7,029,124)
Net increase in net assets resulting from operations $ 16,268,281
</TABLE>
See notes to financial statements.
18 F-127 Kentucky
<PAGE>
[LOGO OF SHIP ART]
Kentucky Triple Tax Exempt
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 23,297,405 $ 22,363,910
Net realized gain (loss) on security transactions 746,629 (802,146)
Change in unrealized appreciation (depreciation) of investments (7,775,753) 13,519,149
Net increase in net assets resulting from operations 16,268,281 35,080,913
Distributions to Class A shareholders:
From net investment income (22,405,836) (21,764,714)
Distributions to Class C shareholders:
From net investment income (950,670) (681,058)
Net decrease in net assets from distributions to shareholders (23,356,506) (22,445,772)
Fund share transactions (Note C):
Proceeds from shares sold 56,317,737 49,151,991
Net asset value of shares issued in reinvestment of distributions 13,719,431 13,372,844
Cost of shares reacquired (41,781,814) (45,538,335)
Net increase in net assets from Fund share transactions 28,255,354 16,986,500
Total increase in net assets 21,167,129 29,621,641
NET ASSETS:
Beginning of year 410,288,247 380,666,606
End of year $431,455,376 $410,288,247
NET ASSETS CONSIST OF:
Paid-in surplus $416,299,668 $388,103,415
Accumulated net realized gain (loss) on security transactions (366,178) (1,112,807)
Unrealized appreciation (depreciation) of investments 15,521,886 23,297,639
$431,455,376 $410,288,247
</TABLE>
See notes to financial statements.
Kentucky F-128 19
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship Kentucky Limited Term Municipal Bond Fund (Kentucky Limited
Term) and Kentucky Triple Tax Exempt Fund (Kentucky Triple Tax Exempt) are
sub-trusts of the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts
business trust organized on March 8, 1985. The non-diversified Kentucky
Limited Term Fund and diversified Kentucky Triple Tax Exempt Fund are open-
end management investment companies registered under the Investment Company
Act of 1940, as amended. The Funds commenced investment operations on
September 14, 1995 and May 4, 1987, respectively. The Funds began to offer
Class C shares to the investing public on September 14, 1995 and October 4,
1993, respectively. Class A shares are sold with a front-end sales charge.
Class C shares are sold with no front-end sales charge but are assessed a
contingent deferred sales charge if redeemed within one year from the time of
purchase. Both classes of shares have identical rights and privileges except
with respect to the effect of sales charges, the distribution and/or service
fees borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in each Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Funds must maintain a diversified investment portfolio as a registered
investment company, however, the Funds' investments are primarily in the
securities of their state. Such concentration subjects the Funds to the
effects of economic changes occurring within that state.
Federal Income Taxes: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Funds amortize original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
20 F-129 Kentucky
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Funds have entered into an agreement with the custodian, whereby they
earn custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Funds, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When Issued" Basis: The Funds may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were $202,321 and $0, respectively "when issued"
purchase commitments included in the Kentucky Limited Term and Kentucky
Triple Tax Exempt Fund's statements of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Period From
September 14, 1995 to May 31, 1996
-----------------------------------
Shares Amount
<S> <C> <C>
Kentucky Limited Term
Class A:
Shares sold 993,553 $ 9,842,618
Shares issued on reinvestment 9,926 98,135
Shares reacquired (146,867) (1,455,747)
Net increase 856,612 $ 8,485,006
Class C:
Shares sold 180,695 $ 1,796,048
Shares issued on reinvestment 1,332 13,178
Shares reacquired (1,526) (15,031)
Net increase 180,501 $ 1,794,195
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------------- -----------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Kentucky Triple Tax Exempt
Class A:
Shares sold 4,371,220 $ 48,186,156 4,074,794 $ 42,757,696
Shares issued on reinvestment 1,186,665 13,067,258 1,232,683 12,914,472
Shares reacquired (3,468,274) (38,150,351) (4,121,541) (42,839,225)
Net increase 2,089,611 $ 23,103,063 1,185,936 $ 12,832,943
</TABLE>
Kentucky F-130 21
<PAGE>
Notes to Financial Statements
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------------- -----------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Kentucky Triple Tax Exempt
Class C:
Shares sold 739,589 $ 8,131,581 608,002 $ 6,394,295
Shares issued on reinvestment 59,216 652,173 43,768 458,372
Shares reacquired (330,172) (3,631,463) (260,606) (2,699,110)
Net increase 468,633 $ 5,152,291 391,164 $ 4,153,557
</TABLE>
<TABLE>
<CAPTION>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996, aggregated:
<S> <C> <C>
Fund Purchases Sales
Kentucky Limited Term $ 13,069,962 $ 2,672,149
Kentucky Triple Tax Exempt $ 96,208,089 $70,107,181
</TABLE>
At May 31, 1996, cost for federal income tax purposes is $10,356,307 and
$412,278,231 for the Kentucky Limited Term and Kentucky Triple Tax Exempt
Funds, respectively, and net unrealized appreciation (depreciation)
aggregated ($94,282) and $15,739,113, respectively, which includes:
<TABLE>
<CAPTION>
Fund Unrealized Appreciation Unrealized Depreciation
<S> <C> <C>
Kentucky Limited Term $ 9,724 $ 104,006
Kentucky Triple Tax Exempt $18,409,520 $2,670,407
</TABLE>
At May 31, 1996, Kentucky Limited Term has available a capital loss
carryforward of approximately $27,200 to offset future net capital gains
expiring on May 31, 2004 and Kentucky Triple Tax Exempt has available
approximately $359,900 expiring May 31, 2003.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Funds, receives fees computed monthly on the average daily net assets of
the Funds at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived advisory fees for
the Kentucky Limited Term and Kentucky Triple Tax Exempt Funds amounting to
$10,100 and $1,328,971, respectively. Included in accrued expenses at May 31,
1996 are accrued advisory fees of $91,552 for Kentucky Triple Tax Exempt.
Also, under an agreement with the Funds, the Advisor may subsidize certain
expenses excluding advisory and distribution fees.
The Funds have Distribution Agreements with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Funds' Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Funds have adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Funds' shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Funds' average daily net assets for Class A and Class C shares,
respectively. During the year ended May 31, 1996, the Distributor, at its
discretion, permanently waived distribution fees for Kentucky Limited Term
amounting to $6,841. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $444, $139,372 and $16,889 for Kentucky
22 F-131 Kentucky
<PAGE>
Notes to Financial Statements
................................................................................
Limited Term Class C shares, and Kentucky Triple Tax Exempt Class A shares
and Class C shares, respectively. Certain non-promotional expenses directly
attributable to current shareholders are aggregated by the Distributor and
passed through to the Funds as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Funds, the Distributor received commissions on sales of the Funds' shares
for the year ended May 31, 1996, as follows:
<TABLE>
<CAPTION>
Fund Gross Commissions Paid to Other Dealers
<S> <C> <C>
Kentucky Limited Term $ 23,400 $ 19,200
Kentucky Triple Tax Exempt $1,057,100 $912,400
</TABLE>
For the year ended May 31, 1996, the Distributor received approximately
$200 and $7,300 of contingent deferred sales charges on redemptions for the
Kentucky Limited Term and Kentucky Triple Tax Exempt Funds, respectively.
Certain officers and trustees of the Trust are also officers and/or directors
of the Distributor and/or Advisor.
F. Organizational Expenses
The organizational expenses incurred on behalf of Kentucky Limited Term
(approximately $29,400) will be reimbursed to the Advisor on a straight-line
basis over a period of three years beginning June 1, 1996. In the event that
the Advisor's current investment in the Trust falls below $100,000 prior to
the full reimbursement of the organizational expenses, then it will forego
any further reimbursement.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. Kentucky Triple Tax
Exempt may temporarily borrow up to $20 million under the line of credit.
Borrowings are collateralized with pledged securities and are due on demand
with interest at 1% above the federal funds rate. The average daily amount of
borrowings under the line of credit during the year ended May 31, 1996 was
approximately $285,600, at a weighted average annualized interest rate of
6.61%. At May 31, 1996, the Fund had no borrowings outstanding under the line
of credit.
Kentucky F-132 23
<PAGE>
[LOGO OF SHIP ART]
Kentucky Limited Term Selected data for each share of beneficial
Financial Highlights interest outstanding thoughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
September 14, 1995 to
CLASS A May 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $ 9.75
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain (loss) on securities 0.04
Total from investment operations 0.35
Less distributions:
From net investment income (0.31)
Total distributions (0.31)
Net asset value, end of period $ 9.79
Total return/(a)/ 5.45%
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.37
Net investment income 4.37%
Assuming credits and no waivers and reimbursements:
Expenses 1.67
Net investment income 3.07%
Net assets at end of period (000's) $8,389
Portfolio turnover rate 47.52%
</TABLE>
(a) The total return shown does not include the effect of applicable front-
end sales charge and is annualized.
(b) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.31%.
24 F-133 Kentucky
<PAGE>
[LOGO OF SHIP ART]
Kentucky Limited Term Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
September 14, 1995 to
Class C May 31, 1996
- -------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $ 9.75
Income from investment operations:
Net investment income 0.29
Net realized and unrealized gain
(loss) on securities 0.04
Total from investment operations 0.33
Less distributions:
From net investment income (0.29)
Total distributions (0.29)
Net asset value, end of period $ 9.79
Total return(a) 5.12%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 0.64%
Net investment income 4.12%
Assuming credits and no
waivers or reimbursements:
Expenses
Net investment income 2.78%
Net assets at end of period (000AEs) $1,767
Portfolio turnover rate 47.52%
</TABLE>
(a) The total return shown does not include the effect of applicable contingent
deferred sales charge and is annualized.
(b) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.58%.
Kentucky F-134 25
<PAGE>
[LOGO OF SHIP ART]
Kentucky Triple Tax Exempt Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
...............................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.99 $ 10.65 $ 11.06 $ 10.45 $ 10.19
Income from investment operations:
Net investment income 0.61 0.61 0.62 0.64 0.66
Net realized and unrealized gain (loss) on
Securities (0.17) 0.35 (0.40) 0.62 0.27
Total from investment operations 0.44 0.96 0.22 1.26 0.93
Less distributions:
From net investment income (0.61) (0.62) (0.63) (0.65) (0.66)
From net realized capital gains (0.01)
Total distributions (0.61) (0.62) (0.63) (0.65) (0.67)
Net asset value, end of year $ 10.82 $ 10.99 $ 10.65 $ 11.06 $ 10.45
Total return(a) 4.04% 9.42% 1.90% 12.41% 9.46%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.71% 0.68% 0.58% 0.61% 0.62%
Net investment income 5.50% 5.85% 5.60% 5.96% 6.39%
Assuming credits and no waivers or
reimbursements:
Expenses 1.02% 1.04% 1.03% 1.05% 1.05%
Net investment income 5.19% 5.49% 5.15% 5.52% 5.96%
Net assets at end of year (000's) $410,808 $394,457 $369,495 $309,223 $207,395
Portfolio turnover rate 16.69% 28.28% 12.26% 14.74% 5.07%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits
from the custodian which reduce service fees incurred. If included, the
ratio of expenses to average net assets would be 0.70%; prior year numbers
have not been restated to reflect these credits.
26 F-135 Kentucky
<PAGE>
[logo] Kentucky Triple Tax Exempt Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended October 4, 1993 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.99 $ 10.65 $ 11.46
Income from investment operations:
Net investment income 0.54 0.55 0.36
Net realized and unrealized gain
(loss) on securities (0.17) 0.35 (0.81)
Total from investment operations 0.37 0.90 (0.45)
Less distributions:
From net investment income (0.55) (0.56) (0.36)
Total distributions (0.55) (0.56) (0.36)
Net asset value, end of period $ 10.81 $ 10.99 $ 10.65
Total return(a) 3.38% 8.82% (5.88%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 1.27% 1.23% 1.08%
Net investment income 4.93% 5.27% 4.96%
Assuming credits and no
waivers or reimbursements:
Expenses 1.57% 1.58% 1.65%
Net investment income 4.63% 4.92% 4.39%
Net assets at end of period (000's) $20,647 $15,831 $11,172
Portfolio turnover rate 16.69% 28.28% 12.26%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.26%; prior period numbers have not
been restated to reflect these credits.
Kentucky F-136 27
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
...............................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP KENTUCKY TAX EXEMPT FUNDS
We have audited the accompanying statements of assets and liabilities, including
the statements of investments in securities and net assets, of the Flagship
Kentucky Limited Term Municipal Bond Fund and the Flagship Kentucky Triple Tax
Exempt Fund as of May 31, 1996, the related statements of operations for the
period then ended, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Kentucky Limited Term Municipal Bond Fund and the Flagship Kentucky Triple Tax
Exempt Fund at May 31, 1996, the results of their operations, the changes in
their net assets and the financial highlights for the respective stated periods,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
28 F-137 Kentucky
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Alabama
$ 895 Alabama Housing Finance Authority - Multifamily 6.000% 10/01/97 $ 906,859
1,900 Alabama Mental Health Finance Authority - Special Tax Revenue 7.375 05/01/00 2,080,196
Alaska
945 Alaska Industrial Development and Export Authority - Series 1992 A 5.700 04/01/99 969,476
185 Alaska Industrial Development and Export Authority - Series 1993 A Lots 1-42 5.000 04/01/99 184,254
1,000 Alaska Student Loan Corporation - Series A 6.250 07/01/97 1,022,290
Arizona
1,000 Arizona Educational Loan Revenue - Series 1992 5.550 09/01/98 1,021,720
250 Arizona Educational Loan Revenue - Series 1992 6.125 09/01/02 259,348
1,250 Maricopa County, AZ School District Number 97 - Deer Valley - Series 1992 0.000 07/01/98 1,137,188
1,000 Salt River Pima-Maricopa Indian Community - Arizona Special Obligation Revenue -
Phoenix Cement Company 7.750 02/15/97 1,023,330
2,000 Tucson, AZ General Obligation - Series 1995 5.375 07/01/05 2,039,500
Arkansas
4,000 Arkansas Student Loan Authority Revenue - Series 1992 A 5.500 12/01/98 4,085,040
California
200 California Health Facilities Financing Authority Revenue - Insured
Health Facility - Insured Variable Rate Demand Revenue - Catholic Healthcare
West - Series 1996 A, B, C and D 5.000 07/01/03 200,228
1,250 Long Beach, CA Aquarium of the Pacific Revenue - Series 1995 A 5.750 07/01/05 1,213,825
1,000 Sacramento, CA Cogeneration Authority Revenue - Procter & Gamble - Series 1995 5.900 07/01/02 1,004,500
500 Sacramento, CA Cogeneration Authority Revenue - Procter & Gamble - Series 1995 6.000 07/01/03 500,770
500 Sacramento, CA Cogeneration Authority Revenue - Procter & Gamble - Series 1995 7.000 07/01/04 533,205
Colorado
6,000 Arapahoe County, CO E-470 Public Highway Authority Revenue - E-470
Project - Series 1986 0.000 08/31/06 3,090,000
500 Arvada, CO Limited Sales and Use Tax Revenue 6.200 06/01/98 517,730
500 Arvada, CO Limited Sales and Use Tax Revenue 6.300 06/01/99 523,280
400 Arvada, CO Limited Sales and Use Tax Revenue 6.400 06/01/00 422,300
2,225 Boulder, CO Urban Renewal Authority - Tax Increment - Series 1992 5.300 03/01/98 2,269,500
3,135 Colorado Health Facilities Authority Revenue - Covenant Retirement
Communities, Incorporated - Series 1995 5.650 12/01/04 3,086,063
1,515 Colorado Housing Finance Authority - Single Family - Series 1991 A 0.000 11/01/01 1,110,919
3,515 Colorado Housing Finance Authority - Single Family - Series 1991 A 0.000 11/01/02 2,411,360
2,120 Colorado Student Obligation Bond Authority - Student Loan Revenue 6.625 06/01/99 2,219,089
6,475 Denver, CO City and County Department of Aviation - Airport System
Revenue - Series 1996 A and B 5.750 11/15/04 6,640,307
620 Denver, CO City and County Industrial Development Revenue -
University of Denver 6.600 03/01/97 632,381
415 Denver, CO City and County Industrial Development Revenue -
University of Denver 6.800 03/01/98 431,206
535 Hyland Hills Park and Recreation District - Special Revenue - Series 1996 A 4.750 12/15/97 540,366
500 Hyland Hills Park and Recreation District - Special Revenue - Series 1996 A 5.000 12/15/98 505,445
500 Hyland Hills Park and Recreation District - Special Revenue - Series 1996 A 5.400 12/15/00 508,630
200 University of Colorado - Certificates of Participation - Series D 7.100 12/01/00 213,414
</TABLE>
4 F-138 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
Connecticut
$4,650 Bridgeport, CT General Obligation - Series 1996 A and B 5.250% 09/01/04 $4,671,250
1,000 Bridgeport, CT General Obligation - Series 1996 A and B 6.000 09/01/05 1,052,060
2,800 Connecticut State Health and Educational Facilities Authority Revenue -
Quinnipiac College - Series D 5.625 07/01/03 2,751,028
1,000 Connecticut State Health and Educational Facilities Authority Revenue -
Hartford University - Series 1992 D 5.700 07/01/98 1,004,810
730 Connecticut State Health and Educational Facilities Authority Revenue -
Hartford University - Series 1992 D 5.900 07/01/99 728,737
435 Connecticut State Health and Educational Facilities Authority Revenue -
Hartford University - Series 1992 D 6.100 07/01/00 434,195
500 New Haven, CT General Obligation - Series 1992 A 7.100 03/01/97 511,140
1,025 New Haven, CT General Obligation - Series 1992 A 9.250 03/01/02 1,195,652
625 New Haven, CT General Obligation - Series 1992 B 5.900 12/01/98 636,600
625 Stratford, CT General Obligation 6.500 03/01/97 637,131
610 Stratford, CT General Obligation 6.750 03/01/98 635,901
650 Stratford, CT General Obligation 6.900 03/01/99 688,038
Delaware
1,000 Delaware State Solid Waste Authority - Series 1992 5.250 07/01/98 1,015,510
District of Columbia
1,870 District of Columbia Hospital Revenue - Medlantic Healthcare - Series 1993A 4.800 08/15/99 1,882,005
500 District of Columbia Redevelopment Land Agency - Washington, D.C. -
Sports Arena Special Tax Revenue - Series 1996 4.850 11/01/97 500,050
500 District of Columbia Redevelopment Land Agency - Washington, D.C. -
Sports Arena Special Tax Revenue - Series 1996 5.300 11/01/99 495,215
2,000 Metropolitan Airport of Washington D.C. - General Revenue - Series 1992 A 6.000 10/01/00 2,097,520
Florida
1,000 Dade County, FL Aviation Revenue - Series U 6.400 10/01/98 1,041,560
880 Florida School Boards Association - Certificates of Participation - Hendry County 7.500 07/01/97 915,015
1,110 Florida State Certificates of Participation - Equipment Financing Program -
Series 1991 6.050 05/15/97 1,132,644
625 North Springs, FL Improvement District Water and Sewer Revenue -
Broward County - Series 1991 7.900 10/01/01 662,669
2,625 Sanford Airport Authority, Florida - Industrial Development Revenue Bonds -
(Central Florida Terminals, Inc. Project) - Series 1995 A and B 7.300 05/01/04 2,559,139
Georgia
1,000 Georgia Municipal Electric Authority Power Revenue - Series B 6.800 01/01/98 1,037,670
Idaho
1,825 Idaho Fund Marketing Association - Student Loan Revenue - Series 1992 6.000 10/01/97 1,833,413
Illinois
490 DeKalb, IL Home Rule Units - Single Family Mortgage Revenue -
GNMA Mortgage-Backed Securities Program - Series 1991 6.700 12/01/99 502,451
800 Evergreen Park, IL Hospital Facility Revenue - Little Company Mary Hospital 5.750 08/15/97 817,816
875 Illinois Health Facilities Authority Revenue - Galesburg Cottage Hospital -
Series 1992 5.000 05/01/98 881,956
925 Illinois Health Facilities Authority Revenue - Galesburg Cottage Hospital -
Series 1992 5.250 05/01/99 935,915
970 Illinois Health Facilities Authority Revenue - Galesburg Cottage Hospital -
Series 1992 5.400 05/01/00 983,260
</TABLE>
Limited Term F-139 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
Connecticut
<C> <S> <C> <C> <C>
$1,105 Illinois Health Facilities Authority Revenue - Fairview Obligated Group -
Series 1995 A, B and C 6.250% 08/15/01 $1,104,867
1,245 Illinois Health Facilities Authority Revenue - Fairview Obligated Group -
Series 1995 A, B and C 6.250 08/15/03 1,225,765
1,550 Illinois Health Facilities Authority Revenue - ServantCor - Series B 7.500 08/15/01 1,706,256
325 Illinois Health Facilities Authority Revenue - Carle Foundation - Series 1989 C 6.700 01/01/99 341,510
3,000 Illinois State General Obligation - Series 1992 6.200 10/01/04 3,204,720
590 Metropolitan Pier and Exposition Authority of Illinois - State Tax Revenue -
Series 1993 0.000 06/15/98 536,587
2,945 Metropolitan Pier and Exposition Authority of Illinois - State Tax Revenue -
Series 1993 0.000 12/15/98 2,614,483
405 Romeoville, IL General Obligation - Series B 7.700 01/01/97 411,091
1,975 Romeoville, IL General Obligation - Series B 7.850 01/01/01 2,077,463
Indiana
1,000 Indiana State Secondary Market Education Loans, Incorporated Education
Loan Revenue - Series A 6.750 12/01/97 1,033,900
560 Valparaiso, IN Multi-Schools Building Corporation - Porter County - 1992 6.100 07/01/01 592,620
690 Valparaiso, IN Multi-Schools Building Corporation - Porter County - Series 1992 6.100 07/01/01 725,873
Iowa
1,785 Iowa State Higher Educational Loan Authority Revenue - Private College
Facilities - Series 1992 5.125 08/01/98 1,787,338
2,145 Iowa State Certificates of Participation - Series 1992A 5.750 07/01/98 2,204,116
1,775 Iowa State Certificates of Participation - Series 1992A 6.000 07/01/99 1,843,533
1,500 Iowa Student Loan Liquidity Corporation - Student Loan Revenue - Series 1992 A 6.000 03/01/98 1,539,885
3,000 Iowa Student Loan Liquidity Corporation - Student Loan Revenue - Series 1992 C 6.300 03/01/99 3,108,120
1,000 Iowa Student Loan Liquidity Corporation - Student Loan Revenue - Series 1992 C 6.375 03/01/00 1,042,920
220 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 5.400 07/01/97 222,944
250 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 5.600 07/01/98 255,100
600 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 5.850 07/01/99 613,692
325 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 6.000 07/01/00 333,596
600 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 6.100 07/01/01 617,886
650 Iowa Student Loan Liquidity Corporation - Student Loan Revenue -
Iowa Partnership - Series 1992 6.200 07/01/02 670,846
4,560 Muscatine, IA Electric Revenue - Series 1992 5.200 01/01/99 4,643,539
Kentucky
535 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 4.650 11/01/02 527,633
520 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 4.750 11/01/03 511,373
355 Jeffersontown, KY Public Projects Refunding and Improvements -
Certificates of Participation - Series 1996 4.850 11/01/04 348,354
225 Kenton County, KY Water District Number 1 Revenue - Series 1995 B 5.600 02/01/03 233,460
500 Kenton County, KY Water District Number 1 Revenue - Series 1995 B 5.600 02/01/04 517,905
500 Kenton County, KY Water District Number 1 Revenue - Series 1995 B 5.600 02/01/05 516,235
</TABLE>
6 F-140 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$1,280 Kentucky Development Finance Authority Revenue - Sisters of Charity
- Nazareth Health Corporation - Series 1991 5.750% 11/01/98 $1,309,427
950 Kentucky Development Finance Authority Revenue - Sisters of Charity
- Nazareth Health Corporation - Series 1991 6.000 11/01/01 982,708
3,000 Kentucky Development Finance Authority Revenue - Sisters of Charity
- Nazareth Health Corporation - Series 1991 6.600 11/01/06 3,168,690
335 Kentucky Economic Development Finance Authority Medical Center
Improvement Revenue - Ashland Hospital - Series 1993A 5.250 02/01/00 340,665
1,460 Kentucky Higher Education Student Loan Corporation Revenue - Series B 6.800 06/01/03 1,576,085
245 Kentucky Infrastructure Authority Revenue - Wastewater Revolving
Fund - Series 1995 C 5.400 06/01/04 248,173
200 Kentucky Infrastructure Authority Revenue - Wastewater Revolving
Fund - Series 1995 C 5.500 06/01/05 202,834
2,500 Kentucky Infrastructure Authority Revenue - Governmental Agencies -
Series 1995 H 5.200 08/01/02 2,522,125
1,945 Kentucky Infrastructure Authority Revenue - Governmental Agencies -
Series 1995 H 5.300 08/01/03 1,963,322
730 Kentucky Infrastructure Authority Revenue - Governmental Agencies -
Series 1995 H 5.400 08/01/04 736,658
1,000 Kentucky Infrastructure Authority Revenue - Governmental Agencies -
Series 1995 H 5.500 08/01/05 1,009,950
500 Kentucky State Property and Buildings Commission Revenue - Project
Number 59 - Series 1995 6.000 11/01/05 527,935
2,000 Kentucky State Property and Buildings Commission Revenue - Project
Number 50 - Series 1991 6.500 02/01/99 2,097,760
6,575 Kentucky State Property and Buildings Commission Revenue - Project
Number 55 - Series 1993 4.500 09/01/02 6,410,230
50 Kentucky State Turnpike Authority - Economic Development Road
Revenue - Revitalization Project - Series 1994 4.800 07/01/99 50,512
2,000 Kentucky State Turnpike Authority - Economic Development Road
Revenue - Revitalization Project - Series 1993 5.300 07/01/04 2,035,420
3,360 Kentucky State Turnpike Authority - Economic Development Road
Revenue - Revitalization Project - Series 1993 5.400 07/01/05 3,425,050
4,880 Kentucky State Turnpike Authority - Economic Development Road
Revenue - Series 1995 5.000 07/01/02 4,923,090
3,025 Kentucky State Turnpike Authority - Economic Development Road
Revenue - Series 1995 5.100 07/01/03 3,055,310
1,000 Kentucky State Turnpike Authority - Resource Recovery Road Revenue -
Series 1985 A 0.000 07/01/05 1,180,360
1,030* Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1997 A 5.750 07/01/98 1,031,195
1,300* Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1997 A 5.750 07/01/99 1,315,119
1,375* Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1997 A 5.750 07/01/00 1,391,376
455* Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1997 A 5.750 07/01/01 460,888
1,535* Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1997 A 5.750 07/01/02 1,554,249
</TABLE>
Limited Term F-141 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$ 1,125 Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1995 A 4.800% 07/01/03 $1,082,959
1,030 Louisville and Jefferson County, KY Regional Airport Authority
System Revenue - Series 1995 A 4.900 07/01/04 991,746
3,325 Mt. Sterling, KY League of Cities Funding Trust Lease Program
Revenue - Series 1993 A 5.625 03/01/03 3,351,600
10,800 Owensboro, KY Electric Light and Power System Revenue - Series 1993 A 0.000 01/01/04 7,306,524
255 University of Kentucky Revenue - Consolidated Educational Buildings
- Series 1995 O 5.000 05/01/03 255,138
Louisiana
6,000 East Baton Rouge Parish, LA Pollution Control Revenue - Hoechst
Celanese Corporation Project - Series 1993 5.400 12/01/02 6,071,400
1,000 Illinois Health Facilities Authority Revenue - Mercy Hospital and
Medical Center Project - Series 1996 5.600 01/01/02 997,110
3,000 Jefferson Parish, LA Sales Tax District - Special Sales Tax Revenue
- Series A 6.125 12/01/97 3,099,000
1,285 Louisiana Public Facilities Authority Hospital Revenue - Our Lady of
Lourdes Regional Medical Center 4.700 02/01/99 1,289,395
1,215 Louisiana Public Facilities Authority Hospital Revenue - Our Lady of
Lourdes Regional Medical Center 4.900 02/01/00 1,218,961
1,170 Louisiana Public Facilities Authority Hospital Revenue - Woman's
Hospital Foundation - Series 1992 6.750 10/01/02 1,211,816
3,685 Louisiana Public Facilities Authority Hospital Revenue - Southern
Baptist Hospital - Series 1992 6.100 05/15/01 3,894,934
3,080 Louisiana Public Facilities Authority Hospital Revenue - Southern
Baptist Hospital - Series 1992 6.200 05/15/02 3,289,810
2,500 Louisiana State Offshore Terminal Authority - Deepwater Port Revenue
- LOOP Incorporated Project - Series 1992 B 6.100 09/01/02 2,610,375
2,000 Louisiana State Recovery District Sales Tax Revenue - Series 1992 5.500 07/01/97 2,032,280
400 Office Facilities Corporation A Louisiana Non-Profit Corporation -
Capital Facilities 7.250 12/01/99 430,392
770 Office Facilities Corporation A Louisiana Non-Profit Corporation -
Capital Facilities 7.350 12/01/00 841,240
405 Ouachita Parish, LA Hospital Service District Number 1 Revenue -
Glenwood Regional Medical Center - Series 1991 6.800 07/01/97 416,494
440 Ouachita Parish, LA Hospital Service District Number 1 Revenue -
Glenwood Regional Medical Center - Series 1991 7.000 07/01/98 460,816
425 Ouachita Parish, LA Hospital Service District Number 1 Revenue -
Glenwood Regional Medical Center - Series 1991 7.000 07/01/99 448,490
300 Ouachita Parish, LA Hospital Service District Number 1 Revenue -
Glenwood Regional Medical Center - Series 1991 7.250 07/01/00 321,777
Maine
1,775 Maine Educational Loan Authority Revenue - Series 1992A-1 5.750 12/01/97 1,805,033
3,000 Maine Educational Loan Marketing Corporation - Student Loan Revenue 6.500 11/01/97 3,093,390
Maryland
2,400 Northeast Maryland Waste Disposal Authority - Resources Recovery
Revenue Refunding - Southwest Resource Recovery Facility - Series 1993 7.150 01/01/04 2,676,216
</TABLE>
8 F-142 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Massachusetts
$ 265 Brockton, MA General Obligation - Municipal Purpose Loan - Series 1993 5.150% 06/15/99 $ 267,960
265 Brockton, MA General Obligation - Municipal Purpose Loan - Series 1993 5.350 06/15/00 268,832
1,000 Massachusetts Educational Financing Authority - Education Loan Revenue -
Series 1995 B 5.500 07/01/01 1,028,020
3,075 Massachusetts Educational Financing Authority - Education Loan Revenue -
Series 1995 B 5.700 07/01/04 3,179,366
2,635 Massachusetts Municipal Wholesale Electric Company - Power Supply System
Revenue - Series 1992 A 6.300 07/01/00 2,787,856
3,800 Massachusetts Municipal Wholesale Electric Company - Power Supply System
Revenue - Series 1992 B 6.300 07/01/00 4,020,438
1,000 Massachusetts State General Obligation - Series 1992 A 6.100 08/01/99 1,046,060
1,000 Massachusetts State General Obligation - Series 1988 C 7.000 12/01/97 1,045,340
975 Massachusetts State General Obligation - Series 1988 C 7.000 12/01/98 1,036,532
1,265 Massachusetts State General Obligation - Series 1990 A 7.875 06/01/97 1,317,257
5,000 Massachusetts State General Obligation - Series 1990 A 0.000 06/01/97 4,800,200
1,000 Massachusetts State Convention Center Authority Revenue - Hynes Convention
Center - Series 1992 5.900 09/01/98 1,033,670
505 Massachusetts Health and Educational Facilities Authority Revenue -
Emerson Hospital - Series 1995 D 5.100 08/15/05 495,087
1,100 Massachusetts State Industrial Finance Agency - Resource Recovery Revenue -
Refusetech Project - Series 1993 A 5.250 07/01/99 1,119,030
600 New Bedford, MA General Obligation 5.100 03/01/99 602,544
600 New Bedford, MA General Obligation 5.250 03/01/00 600,960
600 New Bedford, MA General Obligation 5.400 03/01/01 600,792
600 New Bedford, MA General Obligation 5.500 03/01/02 599,652
2,500 New England Educational Loan Marketing Corporation - Massachusetts Student
Loan Revenue - Series 1993 F 5.625 07/01/04 2,505,500
1,000 New England Educational Loan Marketing Corporation - Massachusetts Student
Loan Revenue - Series 1992 A 6.000 09/01/98 1,031,460
500 Springfield, MA General Obligation - Series 1992 A 5.300 09/01/97 506,850
860 Springfield, MA General Obligation - Series 1992 A 5.600 09/01/98 878,120
770 Springfield, MA General Obligation School Project Loan - Series 1992 B 5.600 09/01/98 786,224
415 Springfield, MA General Obligation - Series 1992 A 5.800 09/01/99 423,437
815 Springfield, MA General Obligation School Project Loan - Series 1992 B 5.800 09/01/99 827,918
250 Springfield, MA General Obligation School Project Loan - Series 1992 B 6.100 09/01/02 255,698
Michigan
3,315 Detroit, MI Economic Development Corporation - Resource Recovery Revenue -
Series 1991 6.350 05/01/00 3,475,844
3,000 Greater Detroit, MI Resource Recovery Authority Revenue - Series 1996 A and B 5.500 12/13/04 3,048,930
975 Madison Heights, MI Tax Increment Finance Authority Revenue, Tax Increment
Bonds, Series 1991 8.500 03/15/01 1,023,516
900 Michigan Higher Education Facilities Authority Revenue - Series XII-E 6.375 10/01/00 940,482
2,000 Michigan Higher Education Student Loan Authority Revenue - Series XV-A 5.400 09/01/00 2,022,500
2,700 Michigan State Hospital Finance Authority Revenue - St. John Hospital -
Series 1993A 5.400 05/15/00 2,768,418
3,075 Michigan State Hospital Finance Authority Revenue - Gratiot Community
Hospital, Alma, Michigan - Series 1995 5.300 10/01/01 3,021,341
</TABLE>
Limited Term F-143 9
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$3,085 Michigan State Housing Development Authority Revenue - Rental Housing -
Series 1995 A and B 5.450% 04/01/05 $3,056,649
3,325 Michigan State Housing Development Authority Revenue - Rental Housing -
Series 1995 A and B 5.450 10/01/05 3,293,113
4,095 Pontiac, MI Hospital Finance Authority Revenue - NOMC Group - Series 1993 5.800 08/01/03 3,971,085
2,000 Wayne Charter County, MI Airport Revenue - Detroit Metropolitan Airport -
Series 1994 A 4.950 12/01/99 2,019,820
3,000 Wayne Charter County, MI Airport Revenue - Detroit Metropolitan Airport -
Series 1994 A 5.150 12/01/00 3,040,830
Minnesota
615 Brainerd, MN Benedictine Health System - St. Joseph's Medical Center -
Series 1993 E 5.000 02/15/00 619,711
1,045 Duluth, MN Economic Development Authority - Health Care Facilities Revenue -
Benedictine Health System - Saint Mary's Medical Center - Series 1993 C 5.000 02/15/00 1,050,883
Mississippi
1,155 Hinds County, MS Methodist Hospital and Rehabilitation Center - Series 1993 4.900 05/01/00 1,160,255
60 Mississippi Hospital Equipment and Facilities Authority Revenue - Mississippi
Baptist Medical Center - Series 1994 5.300 05/01/02 60,817
1,690 Mississippi Hospital Equipment and Facilities Authority Revenue - Mississippi
Baptist Medical Center - Series 1995 5.350 05/01/03 1,716,263
1,000 Mississippi Hospital Equipment and Facilities Authority Revenue - Mississippi
Baptist Medical Center - Series 1995 5.400 05/01/04 1,014,090
Missouri
1,850 Branson, MO Tax Increment Allocation - Branson Meadows - Series 1995 5.850 11/01/01 1,816,312
810 Branson, MO Tax Increment Allocation - Branson Meadows - Series 1995 6.400 11/01/05 795,380
730 Missouri State Health and Educational Facilities Authority Revenue -
Heartland Health Systems - Series 1992 5.750 11/15/96 731,548
770 Missouri State Health and Educational Facilities Authority Revenue -
Heartland Health Systems - Series 1992 6.000 11/15/97 782,282
795 St. Louis, MO Regional Convention and Sports Complex Authority - Series C 7.750 08/15/01 818,079
Nevada
985 Washoe County, NV Airport Authority - System Improvement Revenue -
Series 1993 A 5.250 07/01/00 995,756
New Hampshire
505 New Hampshire Higher Educational and Health Facilities Authority Revenue -
St. Joseph Hospital 7.250 01/01/01 536,148
385 New Hampshire Higher Educational and Health Facilities Authority Revenue -
St. Joseph Hospital 6.600 01/01/97 390,621
470 New Hampshire Housing Finance Authority - Single Family - Series D 5.900 01/01/97 473,389
290 New Hampshire Housing Finance Authority - Single Family - Series D 6.050 01/01/98 294,927
375 New Hampshire Housing Finance Authority - Single Family - Series D 6.200 01/01/99 384,409
370 New Hampshire Housing Finance Authority - Single Family - Series D 6.350 01/01/00 381,936
375 New Hampshire Housing Finance Authority - Single Family - Series D 6.450 01/01/01 391,241
865 New Hampshire Housing Finance Authority - Multifamily - Series 1 6.300 01/01/98 880,708
890 New Hampshire Housing Finance Authority - Multifamily - Series 1 6.300 07/01/98 911,022
New Jersey
1,800 Atlantic City, NJ General Obligation - Series 1994 5.650 08/15/99 1,837,314
3,800 New Jersey Economic Development Authority - Electric Energy Facility Revenue -
Vineland Cogeneration Project - Series 1992 6.750 06/01/99 3,957,928
</TABLE>
10 F-144 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$ 570 New Jersey Economic Development Authority Revenue - Series 1992 R-1 5.800% 06/01/01 $ 596,100
765 New Jersey Health Care Facilities Financing Authority Revenue - St.
Clares Riverside Medical Center - Series D 6.900 07/01/98 804,879
860 New Jersey Health Care Facilities Financing Authority Revenue -
Bayonne Hospital - Series 1994 5.750 07/01/00 890,900
1,000 New Jersey Health Care Facilities Financing Authority Revenue -
Bayonne Hospital - Series 1994 5.800 07/01/01 1,043,670
1,000 New Jersey Health Care Facilities Financing Authority Revenue -
Bayonne Hospital - Series 1994 5.900 07/01/02 1,050,940
4,300 New Jersey Economic Development Authority Revenue - Educational
Testing Services - Series 1995 B 5.500 05/15/05 4,366,693
1,155 New Jersey Educational Facilities Authority - Stevens Institute of
Technology - Series 1992 A 6.000 07/01/99 1,197,573
295 New Jersey Educational Facilities Authority - St. Peter's College -
Series 1992 B 6.100 07/01/00 307,169
1,275 New Jersey Educational Facilities Authority - Stevens Institute of
Technology - Series 1992 A 6.100 07/01/00 1,329,506
355 New Jersey Educational Facilities Authority - St. Peter's College -
Series 1992 B 6.200 07/01/01 371,951
995 New Jersey Educational Facilities Authority - Stevens Institute of
Technology - Series 1992 B 6.200 07/01/01 1,043,874
1,165 New Jersey Educational Facilities Authority - Stevens Institute of
Technology - Series 1992 A 6.300 07/01/02 1,231,032
390 New Jersey State Higher Education Assistance Authority - Student
Loan Revenue - NJ Class Loan Program - Series 1992 A 5.200 07/01/98 392,044
800 New Jersey Transportation Trust Fund Authority - Transportation
System - Series 1992 A 6.000 06/15/02 846,360
New Mexico
245 Farmington, NM Municipal School District Number 5 - General
Obligation - Series 1996 4.900 09/01/04 242,851
1,955 New Mexico Educational Assistance Foundation - Student Loan Revenue
- Series A 6.050 04/01/97 1,988,939
New York
250 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 4.900 10/01/99 249,360
500 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.100 10/01/01 492,775
700 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.250 10/01/02 689,591
750 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.400 10/01/03 738,368
750 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.500 10/01/04 734,265
1,000 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.600 10/01/05 977,490
1,925 Herkimer County, NY Industrial Development Agency Revenue - Burrows
Paper Recycling 7.250 01/01/01 1,945,444
150 Jamestown, NY General Obligation - Series A 7.000 03/15/04 164,481
750 Jamestown, NY General Obligation - Series A 7.000 03/15/05 823,658
1,000 Metropolitan Transit Authority of New York - Transit Facilities
Revenue - Series N 6.625 07/01/02 1,057,440
795 New York City, NY General Obligation - Series 1991 D 7.875 08/01/97 828,279
2,000 New York City, NY General Obligation - Series 1991 B 7.100 02/01/97 2,041,740
1,280 New York City General Obligation - Series A 8.250 11/01/99 1,428,659
4,000 New York City, NY General Obligation - Series 1995 F 6.100 02/15/02 4,090,240
575 New York City, NY General Obligation - Series 1991 F 8.000 11/15/97 607,970
425 New York City, NY General Obligation - Series 1991 F 8.000 11/15/97 447,312
</TABLE>
Limited Term F-145 11
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$7,000 New York City, NY General Obligation - Series 1996 F and G 5.700% 02/01/03 $6,982,500
500 New York City, NY General Obligation - Series 1996 F and G 5.750 02/01/06 485,895
1,000 New York State Dormitory Authority Revenue - State University -
Series 1990 A 7.400 05/15/01 1,078,260
4,155 New York State Dormitory Authority Revenue - City University -
Series U 5.875 07/01/00 4,258,293
2,900 New York State Dormitory Authority Revenue - Department of Health 6.750 07/01/01 3,109,061
7,500 New York State Dormitory Authority Revenue - State University
Educational Facilities - Series 1995 A 5.250 05/15/01 7,506,300
2,000 New York State Dormitory Authority Revenue - State University
Educational Facilities - Series 1995 A 6.500 05/15/05 2,116,680
2,000 New York State Dormitory Authority Revenue - State University
Educational Facilities - Series 1995 A 6.500 05/15/06 2,110,880
770 New York State Dormitory Authority Revenue - State University -
Series 1989 A 7.000 05/15/02 836,644
230 New York State Dormitory Authority Revenue - State University -
Series 1989 A 7.000 05/15/02 243,851
1,000 New York State Dormitory Authority Revenue - Nyack Hospital - Series 1996 5.500 07/01/00 989,530
1,000 New York State Dormitory Authority Revenue - Nyack Hospital - Series 1996 6.000 07/01/06 984,370
5,000 New York State Housing Finance Agency - Health Facilities Revenue -
New York City - Series 1996 A 5.875 05/01/04 4,957,650
4,000 New York State Medical Care Facilities Finance Agency Revenue -
Mental Health Services Facilities - Series A 8.150 02/15/98 4,237,720
1,500 New York State Medical Care Facilities Finance Agency Revenue -
Mental Health Services Facilities - Series A 8.250 02/15/99 1,583,925
2,405 New York State Urban Development Corporation Revenue - Center for
Industrial Innovation - Series 1995 5.300 01/01/04 2,339,103
1,265 New York State Urban Development Corporation Revenue - Center for
Industrial Innovation - Series 1995 6.250 01/01/05 1,302,128
700 New York State Urban Development Corporation Revenue - Correctional
Facilities - Series G 7.000 01/01/98 726,852
695 New York State Urban Development Corporation Revenue - Correctional
Facilities - Series G 6.500 01/01/99 721,299
1,000 New York State Urban Development Corporation Revenue - Correctional
Capital Facilities - Series 1993 5.250 01/01/02 986,190
450 Niagara County, NY General Obligation - Niagara Falls 5.550 06/15/99 453,861
520 Onondaga County, NY Resource Recovery Agency System Revenue -
Development Costs - Series 1992 5.600 05/01/97 518,497
570 Onondaga County, NY Resource Recovery Agency System Revenue -
Development Costs - Series 1992 5.900 05/01/98 569,134
480 Onondaga County, NY Resource Recovery Agency System Revenue -
Development Costs - Series 1992 6.100 05/01/99 482,611
630 Onondaga County, NY Resource Recovery Agency System Revenue -
Development Costs - Series 1992 6.200 05/01/00 633,824
1,565 Port Authority of New York and New Jersey - Series 101 5.000 09/15/01 1,577,896
850 Ulster County, NY Resource Recovery Agency - Solid Waste System
Revenue - Series 1993 4.875 03/01/98 853,544
Ohio
500 Barberton, OH Hospital Facilities - Barberton Citizens Hospital -
Series 1992 6.250 01/01/99 516,410
750 Barberton, OH Hospital Facilities - Barberton Citizens Hospital -
Series 1992 6.400 01/01/00 781,522
500 Barberton, OH Hospital Facilities - Barberton Citizens Hospital -
Series 1992 6.550 01/01/01 526,145
545 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial
Hospital 7.500 12/01/98 574,686
595 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial
Hospital 7.650 12/01/99 633,092
</TABLE>
12 F-146 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$ 640 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial Hospital 7.750% 12/01/00 $ 687,507
680 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial Hospital 7.850 12/01/01 739,854
915 Cleveland, OH General Obligation - Certificates of Participation -
Motor Vehicle and Communications Equipment 6.200 07/01/96 916,583
900 Cleveland, OH General Obligation - Certificates of Participation -
Motor Vehicle and Communications Equipment 6.350 01/01/97 911,862
990 Cleveland, OH General Obligation - Certificates of Participation -
Motor Vehicle and Communications Equipment 6.350 07/01/97 1,011,206
500 Cleveland, OH City School District - General Obligation -
Library Improvement Revenue - Series 1992 A 5.000 12/01/99 508,175
650 Cleveland, OH City School District - General Obligation -
Library Improvement Revenue - Series 1992 A 5.200 12/01/00 664,098
375 Cuyahoga County, OH Health Care Facilities Revenue - Altenheim Nursing Home 8.750 06/01/99 409,770
500 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 5.750 08/15/00 514,980
795 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 5.850 08/15/01 823,358
735 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 5.950 08/15/02 765,436
85 East Cleveland, OH Local Government Revenue 7.900 12/01/97 88,658
1,110 Erie County, OH Hospital Improvement Revenue - Firelands Community
Hospital - Series 1992 6.000 01/01/98 1,136,485
1,175 Erie County, OH Hospital Improvement Revenue - Firelands Community
Hospital - Series 1992 6.100 01/01/99 1,207,900
1,320 Hamilton County, OH Hospital Facilities Revenue - Christ Hospital - Series 1993 5.000 01/01/00 1,331,999
610 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series A 6.850 12/01/96 616,320
700 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series A 7.200 12/01/98 726,621
575 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 5.300 12/01/98 574,201
685 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 5.500 12/01/99 683,061
370 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 5.800 12/01/01 371,898
790 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 5.900 12/01/02 795,925
435 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 6.000 12/01/03 442,077
400 Mahoning Valley, OH Sanitary District - Series 1991 6.800 12/15/98 418,800
400 Mahoning Valley, OH Sanitary District - Series 1991 6.950 12/15/99 421,032
400 Mahoning Valley, OH Sanitary District - Series 1991 7.100 12/15/00 424,564
400 Mahoning Valley, OH Sanitary District - Series 1991 7.250 12/15/01 429,084
5,000 Ohio State Building Authority - Adult Correctional Building - Series 1993 A 5.750 10/01/05 5,200,900
1,040 Ohio State Economic Development Revenue - Superior Forge and Steel
Corporation 7.250 06/01/01 1,098,739
3,825 Ohio State Elementary and Secondary Education Capital Facilities Revenue -
Series 1995 A 5.700 06/01/02 3,996,551
635 Shelby County, OH Hospital Facilities and Improvement Revenue -
Wilson Memorial Hospital 6.100 09/01/98 656,184
350 Youngstown, OH General Obligation 6.800 12/01/97 363,405
350 Youngstown, OH General Obligation 6.900 12/01/98 368,809
350 Youngstown, OH General Obligation 7.000 12/01/99 373,955
Oregon
2,500 Clackamas County, OR Hospital Facilities Authority Revenue - Sisters Providence -
Series A 5.500 10/01/97 2,546,450
Pennsylvania
350 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 6.100 10/01/96 352,583
</TABLE>
Limited Term F-147 13
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
$ 350 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 6.350% 10/01/97 $ 359,726
400 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 6.600 10/01/98 417,568
400 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 6.700 10/01/99 420,732
400 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 6.800 10/01/00 424,348
840 Allegheny County, PA Hospital Development Authority - South Side Hospital -
Series A 8.000 06/01/96 840,000
284 Allegheny County, PA Industrial Development Authority - Solid Waste Disposal -
Conversion Systems, Inc. - Series 1991 8.000 03/01/98 300,813
1,000 Monroeville, PA Hospital Authority Revenue - Forbes Health System -
Series 1995 5.750 10/01/05 980,840
950 Montgomery County, PA Higher Education and Health Authority Revenue -
Pottstown Memorial Medical Center 7.000 11/15/99 990,926
1,000 Pennsylvania Intergovernmental Cooperation Authority - Special Tax Revenue -
Philadelphia Funding Program - Series 1992 5.400 06/15/97 1,016,770
1,000 Pennsylvania Intergovernmental Cooperation Authority - Special Tax Revenue -
Philadelphia Funding Program - Series 1992 5.600 06/15/98 1,027,850
2,500 Pennsylvania Intergovernmental Cooperation Authority - Special Tax Revenue -
Philadelphia Funding Program - Series 1992 6.000 06/15/00 2,619,175
4,000 Pennsylvania State General Obligation - Series 1992 6.000 09/15/99 4,181,200
2,000 Pennsylvania State Industrial Development Authority Revenue -
Economic Development - Series 1991 A 6.400 01/01/97 2,029,420
3,000 Philadelphia, PA General Obligation - Series 1993 5.125 05/15/03 3,014,730
1,900 Philadelphia, PA Gas Works Revenue - Eleventh Series A 7.400 07/01/00 2,008,775
500 Philadelphia, PA Gas Works Revenue - Thirteenth Series - Series 1991 7.100 06/15/97 515,565
3,600 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 5.600 07/01/99 3,649,572
3,425 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 5.700 07/01/00 3,468,258
840 Philadelphia, PA Hospital and Higher Education Facilities Authority Revenue -
Philadelphia MR Project 5.000 08/01/97 847,963
1,390 Philadelphia, PA Hospital and Higher Education Facilities Authority Revenue -
Philadelphia MR Project 5.300 08/01/99 1,397,534
3,990 Philadelphia, PA School District - General Obligation - Series 1994 A 5.450 07/01/04 4,070,798
1,080 Philadelphia, PA School District - General Obligation - Series 1992 A 6.050 05/15/99 1,126,969
5,000 Philadelphia, PA Water and Wastewater Revenue - Series 1993 5.150 06/15/04 4,954,600
Puerto Rico
3,865 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 4.600 07/01/04 3,751,562
1,725 Commonwealth of Puerto Rico Urban Renewal and Housing - Series 1989 0.000 10/01/98 1,532,007
430 University of Puerto Rico System Revenue - Series 1995 N 4.875 06/01/02 432,111
Rhode Island
4,035 Rhode Island Housing and Mortgage Finance Corporation Revenue - Multifamily -
Series 1995 A 5.350 07/01/03 4,041,860
South Dakota
210 South Dakota Student Loan Assistance Corporation Revenue - Series C 7.250 08/01/96 211,151
</TABLE>
14 F-148 Limited Term
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
Tennessee
$1,250 Jackson, TN Hospital Revenue - Jackson-Madison County General Hospital -
Series 1995 4.800% 04/01/02 $1,213,662
1,250 Jackson, TN Hospital Revenue - Jackson-Madison County General
Hospital - Series 1995 4.900 04/01/03 1,209,738
3,250 Metropolitan Nashville and Davidson County - Tennessee Industrial
Development Board Revenue - OSCO Treatment - Series 1993 6.000 05/01/03 3,249,448
1,000 Tennessee Housing Development Agency - Mortgage Finance Program -
Series 1993 A 5.100 07/01/01 1,001,550
605 Tennessee Housing Development Agency - Mortgage Finance Program -
Series 1994 B 5.300 01/01/00 606,694
260 Tennessee Housing Development Agency - Mortgage Finance Program -
Series 1994 B 5.300 07/01/00 260,819
Texas
1,575 Anderson County, TX Department of Criminal Justice - Coffield Prison
Farm - Series 1992 5.300 03/15/00 1,605,146
1,730 Brazos, TX Higher Education Authority - Student Loan Revenue -
Series 1993-A 5.900 12/01/00 1,788,543
1,235 Brazos, TX Higher Education Authority - Student Loan Revenue -
Series 1993-A 6.050 12/01/01 1,284,659
5,000 Dallas-Fort Worth, TX International Regional Airport Joint Revenue -
Series 1992 B 5.500 11/01/98 5,124,600
3,085 Harris County, TX Toll Road Revenue - Series 1992 0.000 08/15/98 2,790,506
1,000 Pasadena, TX Industrial Development Corporation Revenue - Lunar and
Planetary Institute Project 7.050 10/01/01 1,000,220
760 Texas State Higher Education - College Student Loan Revenue 6.900 04/01/99 789,100
745 Texas State Higher Education - College Student Loan Revenue 7.000 04/01/00 783,598
1,545 Texas State Higher Education - College Student Loan Revenue 7.100 04/01/01 1,623,795
Utah
300 Carbon County, UT Solid Waste Disposal Revenue - East Carbon
Development Project - Series 1992 A 8.000 07/01/97 309,870
Vermont
545 Vermont Municipal Bond Bank - Series 1992 A 5.100 12/01/98 553,938
325 Vermont Municipal Bond Bank - Series 1992 A 5.300 12/01/99 331,646
2,000 Vermont State Student Assistance Corporation - Educational Loan
Finance Revenue - Series 1992A-3 5.800 12/15/99 2,051,920
1,000 Vermont State Student Assistance Corporation - Educational Loan
Finance Revenue - Series 1992A-3 5.900 12/15/00 1,027,950
1,000 Vermont State Student Assistance Corporation - Educational Loan
Finance Revenue - Series 1992A-3 6.050 12/15/01 1,033,150
Virginia
100 Southeastern Public Service Authority Virginia Revenue - Regional
Solid Waste System - Series 1993 4.800 07/01/05 96,862
Washington
1,000 Port Tacoma, WA General Revenue - Series 1992 A 5.000 11/01/99 1,014,050
2,000 Washington State General Obligation Refunding Revenue - Series 1993A 5.500 10/01/03 2,059,380
1,860 Washington State Health Care Facilities Authority Revenue -
Franciscan Health System\St. Joseph Hospital and Health Care Center,
Tacoma - Series 1993 4.875 01/01/01 1,861,823
500 Washington State Health Care Facilities Authority Revenue - Kadlec
Medical Center 6.900 06/01/96 500,000
1,670 Washington State Health Care Facilities Authority Revenue -
Children's Hospital and Medical Center 6.000 10/01/02 1,762,351
</TABLE>
Limited Term F-149 15
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity** Value
<C> <S> <C> <C> <C>
Wisconsin
$1,100 Wisconsin State Health and Educational Facilities Authority Revenue
- Lutheran Hospital-La Crosse, Inc. - Series 1993A 5.200% 02/15/00 $ 1,113,574
1,155 Wisconsin State Health and Educational Facilities Authority Revenue
- Lutheran Hospital-La Crosse, Inc. - Series 1993A 5.300 02/15/01 1,175,571
Total Investments in Securities - Municipal Bonds (cost $498,574,253) - 100.5% 507,257,978
Excess of Liabilities over Other Assets - (0.5)% (2,686,530)
Total Net Assets - 100.0% $504,571,448
</TABLE>
*Securities purchased on a "when-issued" basis.
**Maturity date represents actual maturity or earlier put date.
See notes to financial statements.
16 F-150 Limited Term
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $498,574,253) $507,257,978
Receivable for investments sold 2,222,417
Receivable for Fund shares sold 1,303,155
Interest receivable 8,368,523
Other 34,191
Total assets 519,186,264
LIABILITIES:
Bank borrowings (Note G) 2,101,700
Payable for investments purchased 9,021,840
Payable for Fund shares reacquired 966,270
Distributions payable 2,024,177
Accrued expenses 500,829
Total liabilities 14,614,816
NET ASSETS: 504,571,448
Class A:
Applicable to 46,287,465 shares of beneficial interest
issued and outstanding $489,156,797
Net asset value per share $ 10.57
Class C:
Applicable to 1,459,416 shares of beneficial interest issued
and outstanding $ 15,414,651
Net asset value per share $ 10.56
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 29,493,571
EXPENSES:
Distribution fees - Class A (Note E) 2,109,177
Distribution fees - Class C (Note E) 28,351
Investment advisory fees (Note E) 1,592,389
Custody and accounting fees 281,650
Transfer agent's fees 314,000
Registration fees 49,440
Legal fees 11,882
Audit fees 23,030
Reimbursement of organizational expenses (Note F) 13,739
Trustees' fees 15,100
Shareholder services fees (Note E) 60,110
Other 17,056
Advisory fees waived (Note E) (332,579)
Total expenses before credits 4,183,345
Custodian fee credit (Note B) (45,050)
Net expenses 4,138,295
Net investment income 25,355,276
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 1,123,864
Change in unrealized appreciation (depreciation) of
investments (5,083,239)
Net loss on investments (3,959,375)
Net increase in net assets resulting from operations $ 21,395,901
</TABLE>
See notes to financial statements.
Limited Term F-151 17
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income $ 25,355,276 $ 30,791,132
Net realized gain (loss) on security transactions 1,123,864 (5,742,847)
Change in unrealized appreciation (depreciation) of
investments (5,083,239) 4,887,243
Net increase in net assets resulting from operations 21,395,901 29,935,528
Distributions to Class A shareholders:
From net investment income (24,835,168) (30,390,875)
Distributions to Class C shareholders:
From net investment income (175,819)
Net decrease in net assets from distributions to
shareholders (25,010,987) (30,390,875)
Fund share transactions (Note C):
Proceeds from shares sold 90,170,813 95,311,674
Net asset value of shares issued in reinvestment of
distributions 16,369,864 20,137,204
Cost of shares reacquired (167,550,003) (250,424,873)
Net decrease in net assets from Fund share transactions (61,009,326) (134,975,995)
Total decrease in net assets (64,624,412) (135,431,342)
NET ASSETS:
Beginning of year 569,195,860 704,627,202
End of year $504,571,448 $569,195,860
NET ASSETS CONSIST OF:
Paid-in surplus $501,995,106 $563,004,432
Undistributed net investment income 744,546 400,257
Accumulated net realized gain (loss) on security
transactions (6,851,929) (7,975,793)
Unrealized appreciation (depreciation) of investments 8,683,725 13,766,964
$504,571,448 $569,195,860
</TABLE>
See notes to financial statements.
18 F-152 Limited Term
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship Limited Term Tax Exempt Fund is a sub-trust of the Flagship Tax
Exempt Funds Trust (Trust), a Massachusetts business trust organized on March
8, 1985. The Fund is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended. The Fund
commenced investment operations on October 19, 1987. On December 1, 1995, the
Fund began to offer Class C shares to the investing public. Class A shares
are sold with a front-end sales charge. Class C shares are sold with no
front-end sales charge but are assessed a contingent deferred sales charge if
redeemed within one year from the time of purchase. Both classes of shares
have identical rights and privileges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest
in the Fund, which are registered under the Securities Act of 1933, as
amended, are offered to the public on a continuous basis. Shares of
beneficial interest in the Fund, which are registered under the Securities
Act of 1933, as amended, are offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Limited Term F-153 19
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian,
whereby it earns custodian fee credits for temporary cash balances. These
credits, which offset custodian fees that may be charged to the Fund, are
based on 80% of the daily effective federal funds rate. Securities Purchased
on a "When-issued" Basis: The Fund may, upon adequate segregation of
securities as collateral, purchase and sell portfolio securities on a "when-
issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and
payment take place after the date of the transaction and such securities are
subject to market fluctuations during this period. The current market value
of these securities is determined in the same manner as other portfolio
securities. There were $5,696,323 "when-issued" purchase commitments included
in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 6,914,835 $ 74,019,115 9,118,327 $ 95,311,674
Shares issued on reinvestment 1,522,705 16,288,950 1,925,540 20,137,204
Shares reacquired (15,607,722) (166,978,057) (24,055,595) (250,424,873)
Net decrease (7,170,182) $(76,669,992) (13,011,728) $(134,975,995)
Period From
December 1, 1995 to May 31, 1996
--------------------------------
Shares Amount
<S> <C> <C>
Class C:
Shares sold 1,505,009 $ 16,151,698
Shares issued on reinvestment 7,584 80,914
Shares reacquired (53,177) (571,946)
Net increase 1,459,416 $ 15,660,666
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $204,756,904 and $260,412,234, respectively. At May 31, 1996, cost
for federal income tax purposes is $498,574,563 and net unrealized
appreciation aggregated $8,683,415, of which $9,710,319 related to
appreciated securities and $1,026,904 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $6,799,100 to offset future net capital gains expiring on May
31, 2003.
20 F-154 Limited Term
<PAGE>
Notes to Financial Statements
................................................................................
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of .30% of the average daily net assets of
$500 million or less plus .25% of the average daily net assets in excess of
$500 million. During the year ended May 31, 1996, the Advisor, at its
discretion, permanently waived $332,579 of its advisory fees. Included in
accrued expenses at May 31, 1996 are accrued advisory fees of $248,849. Also,
under an agreement with the Fund, the Advisor may subsidize certain expenses
excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares, respectively.
Included in accrued expenses at May 31, 1996 are accrued distribution fees of
$166,863 and $8,637 for Class A and Class C shares, respectively. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $543,300 for the year ended May 31, 1996, of which
approximately $434,900 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,800 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$69,000) have been reimbursed to the Advisor as of May 31, 1996.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $30 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$1,485,500, at a weighted average annualized interest rate of 6.83%. At May
31, 1996, the Fund had $2,101,700 outstanding under the line of credit.
Limited Term F-155 21
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
Class A
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.65 $10.60 $10.74 $10.29 $10.04
Income from investment operations:
Net investment income 0.51 0.51 0.52 0.55 0.60
Net realized and unrealized gain (loss) on
securities (0.09) 0.04 (0.13) 0.45 0.26
Total from investment operations 0.42 0.55 0.39 1.00 0.86
Less distributions:
From net investment income (0.50) (0.50) (0.52) (0.55) (0.60)
From net realized capital gains (0.01) (0.01)
Total distributions (0.50) (0.50) (0.53) (0.55) (0.61)
Net asset value, end of year $10.57 $10.65 $10.60 $10.74 $10.29
Total return/(a)/ 4.03% 5.41% 3.58% 10.02% 9.04%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.79% 0.74% 0.70% 0.70% 0.47%
Net investment income 4.77% 4.88% 4.76% 5.10% 5.88%
Assuming credits and no waivers or reimbursements:
Expenses 0.84% 0.82% 0.79% 0.82% 0.93%
Net investment income 4.72% 4.80% 4.67% 4.98% 5.42%
Net assets at end of year (000's) $489,157 $569,196 $704,627 $570,518 $284,479
Portfolio turnover rate 38.55% 19.74% 22.16% 19.84% 48.35%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.78%; prior year numbers have not
been restated to reflect these credits.
22 F-156 Limited Term
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
December 1, 1995 to
May 31, 1996
Class C
- -------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $10.76
Income from investment operations:
Net investment income 0.22
Net realized and unrealized gain
(loss) on securities (0.19)
Total from investment operations 0.03
Less distributions:
From net investment income (0.23)
From net realized capital gains
Total distributions (0.23)
Net asset value, end of period $10.56
Total return/(a)/ 0.46%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers
and reimbursements:
Expenses/(b)/ 1.19%
Net investment income 4.17%
Assuming credits and no waivers
or reimbursements:
Expenses 1.43%
Net investment income 3.93%
Net assets at end of period (000's) $15,415
Portfolio turnover rate 38.55%
</TABLE>
(a) The total return shown does not include the effect of applicable
contingent deferred sales charge and is annualized.
(b) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.18%.
Limited Term F-157 23
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP LIMITED TERM
TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Limited Term Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Limited
Term Tax Exempt Fund at May 31, 1996, the results of its operations, the changes
in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
24 F-158 Limited Term
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
...............................................................................
<TABLE>
<CAPTION>
Municipal Bonds
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 750 Louisiana Public Facilities Authority Revenue - Loyola University - Series 1989 A 7.250% 10/01/09 $ 812,190
380 Louisiana Public Facilities Authority Revenue - Loyola College and University -
Series 1992 6.750 04/01/10 408,929
Health Care
-------------------------------------------------------------------------------------------------------------------------
3,000 Louisiana Housing Finance Agency - Mortgage Revenue - St. Dominic Assisted
Care Facility - Series 1995 6.950 09/01/36 3,133,050
500 Louisiana Public Facilities Authority Revenue - Mary Bird Perkins Cancer
Center - Series 1994 6.200 01/01/19 507,330
Hospitals
-------------------------------------------------------------------------------------------------------------------------
750 Jefferson Parish, LA Hospital Revenue - Service District Number 1 -
Series 1993 5.250 01/01/13 696,585
1,000 Jefferson Parish, LA Hospital Revenue - Service District Number 2 -
Series 1993 5.750 07/01/16 960,850
500 Louisiana Public Facilities Authority Hospital Revenue - Our Lady of Lourdes
Regional Medical Center - Series 1992 6.450 02/01/22 519,775
1,125 Louisiana Public Facilities Authority Hospital Revenue - Woman's Hospital
Foundation - Series 1992 7.250 10/01/22 1,155,218
1,000 Louisiana Public Facilities Authority Hospital Revenue - Lafayette General
Medical Center - Series 1992 6.400 10/01/12 1,040,450
2,000 Louisiana Public Facilities Authority Hospital Revenue - Lafayette General
Medical Center - Series 1992 6.500 10/01/22 2,072,580
500 Louisiana Public Facilities Authority Hospital Revenue - Saint Francis
Medical Center - Series 1994 5.450 07/01/18 463,110
1,500 Louisiana Public Facilities Authority Hospital Revenue - Woman's Hospital
Foundation - Series 1994 5.950 10/01/14 1,475,220
1,325 Louisiana Public Facilities Authority Revenue - Alton Ochsner Medical Foundation 6.500 05/15/22 1,368,062
500 Louisiana Public Facilities Authority Revenue - Sisters of Mercy - Series 1993 A 5.500 06/01/13 466,525
500 Louisiana Public Facilities Authority Revenue - Sisters of Mercy - Series 1993 A 5.000 06/01/19 437,500
2,500 Louisiana Public Facilities Authority Revenue - General Health Incorporated -
Series 1994 6.375 11/01/24 2,563,900
1,400 Ouachita Parish, LA Hospital Service District Number 1 Revenue - Glenwood
Regional Medical Center - Series 1991 7.500 07/01/21 1,491,798
2,180 St. Tammany Parish, LA Hospital Service District Number 2 - Series 1994 6.250 10/01/14 2,204,569
1,135 Tangipahoa Parish, LA Hospital Service District Number 1 - Series 1994 6.250 02/01/24 1,148,008
Housing/Multifamily
-------------------------------------------------------------------------------------------------------------------------
750 Lake Charles, LA Non-Profit Housing Development Corporation Revenue -
Chateau Project 7.875 02/15/25 752,152
735 Louisiana Public Facilities Authority Revenue - Walmsley Housing - Series A 7.500 06/01/21 784,318
500 Louisiana Public Facilities Authority Revenue - Multifamily Housing 7.750 11/01/16 533,530
</TABLE>
4 F-159 Louisiana
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Housing/Single Family
------------------------------------------------------------------------------------------------------------------------
$1,260 East Baton Rouge, LA Mortgage FinanceAuthority - Single Family 7.875% 08/01/23 $ 1,324,739
355 Louisiana Housing Finance Agency Revenue - Single Family - Series 1995 A-2 6.550 12/01/26 353,839
1,740 Louisiana Housing Finance Agency - Mortgage Revenue - GNMA Collateralized
Mortgage Loan - Villa Maria Retirement Center Project - Series 1993 7.100 01/20/35 1,821,780
635 New Orleans, LA Home Mortgage Authority Revenue - Single Family Housing -
Series 1988 7.750 12/01/22 660,864
305 St. Bernard Parish, LA Home Mortgage Authority Revenue - Single Family -
Series A 8.000 03/25/12 325,377
289 St. Mary, LA Public Trust Financing Authority - Single Family Housing
Revenue - Series A 7.625 03/25/12 310,120
Industrial Development and Pollution Control
------------------------------------------------------------------------------------------------------------------------
1,000 DeSoto Parish, LA Environmental Improvement Revenue - International
Paper Company - Series 1995 B 6.550 04/01/19 1,014,710
1,000 Lake Charles, LA Harbor and Terminal District Port Facilities - Occidental
Petroleum Corporation - Series 1992 7.200 12/01/20 1,037,770
3,000 Lake Charles, LA Harbor and Terminal District Port Facilities - Trunkline LNG
Company Project - Series 1992 7.750 08/15/22 3,330,330
2,500 Louisiana State Offshore Terminal Authority - Deepwater Port Revenue -
LOOP Incorporated Project - Series E 7.600 09/01/10 2,710,975
500 Louisiana State Offshore Terminal Authority - Deepwater Port Revenue -
LOOP Incorporated Project - Series 1991 B 7.200 09/01/08 545,960
3,000 Natchitoches Parish, LA Solid Waste Disposal Revenue - Willamette Industries
Project - Series 1993 5.875 12/01/23 2,852,370
1,000 St. Charles Parish, LA Environmental Revenue - Louisiana Power and Light
Company - Series 1995 6.375 11/01/25 965,110
500 St. Charles Parish, LA Pollution Control Revenue - Louisiana Power and Light
Company 8.000 12/01/14 549,240
1,500 St. Charles Parish, LA Pollution Control Revenue - Union Carbide - Series 1992 7.350 11/01/22 1,556,760
1,500 St. Charles Parish, LA Solid Waste Disposal - Louisiana Power and Light
Company - Series 1992 A 7.000 12/01/22 1,532,505
Municipal Appropriation Obligations
------------------------------------------------------------------------------------------------------------------------
685 Louisiana Public Facilities Authority Revenue - Jefferson Parish Eastbank 7.700 08/01/10 752,342
1,500 Office Facilities Corporation A Louisiana Non-Profit Corporation -
Capital Facilities 7.750 12/01/10 1,656,180
Municipal Revenue/Other
------------------------------------------------------------------------------------------------------------------------
2,000 New Orleans, LA Audubon Park Commission - Aquarium Revenue - Series 1992A 8.000 04/01/12 2,149,800
Municipal Revenue/Utility
------------------------------------------------------------------------------------------------------------------------
500 Guam Power Authority Revenue - Series 1993 A 5.250 10/01/23 416,660
800 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 S 7.000 07/01/07 904,232
</TABLE>
Louisiana F-160 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Municipal Revenue/Water & Sewer
------------------------------------------------------------------------------------------------------------------------
$ 1,500 Louisiana Public Facilities Authority Revenue - Baton Rouge Water Works
Series 1992 6.400% 02/01/10 $ 1,577,640
Non-State General Obligations
------------------------------------------------------------------------------------------------------------------------
500 New Orleans, LA General Obligation - Series 1995 5.850 11/01/14 499,860
1,000 New Orleans, LA General Obligation - Series 1991 0.000 09/01/06 572,280
2,000 New Orleans, LA General Obligation - Series 1991 0.000 09/01/10 869,720
5,785 New Orleans, LA General Obligation - Series 1991 0.000 09/01/16 1,723,525
1,000 Orleans Parish, LA Parishwide School District - General Obligation - Series 1996 5.000 09/01/14 882,820
13,015 Orleans Parish, LA Public School Board Revenue - Series 1991 0.000 02/01/15 4,179,377
Pre-refunded or Escrowed
------------------------------------------------------------------------------------------------------------------------
1,000 Jefferson Parish, LA Home Mortgage Authority - Single Family Mortgage
Revenue - Series 1985 0.000 05/01/17 276,580
800 Louisiana Public Facilities Authority Hospital Revenue - Southern Baptist
Hospital 8.000 05/15/12 929,752
10,000 Louisiana Public Facilities Authority Revenue - Series 1990 0.000 12/01/19 2,347,500
500 Louisiana Public Facilities Authority Revenue - Sisters of Mercy - Series B 7.375 06/01/19 549,340
1,000 Louisiana State General Obligation 7.125 09/01/10 1,109,170
250 Shreveport, LA Home Mortgage Authority - Single Family Revenue 6.750 09/01/10 266,498
Special Tax Revenue
------------------------------------------------------------------------------------------------------------------------
1,250 East Baton Rouge Parish, LA Sales and Use Tax - Series 1993 A 4.900 02/01/18 1,066,875
2,000 East Baton Rouge Parish, LA Sales and Use Tax Revenue - Series 1996 ST 5.400 02/01/18 1,862,260
1,000 Ernest N. Morial - New Orleans, LA Exhibition Hall Authority - Special Tax
- Series 1996 A, B and C 5.500 07/15/18 942,620
1,000 Jefferson Parish, LA Sales Tax District - Special Sales Tax Revenue - Series B 6.750 12/01/06 1,082,280
700 Jefferson Parish, LA School Board - Special Assessment - Sales Tax Revenue -
Series 1986 0.000 09/01/04 442,400
1,530 Lafayette Parish, LA School Board - Sales Tax Revenue - Series 1994 4.875 04/01/13 1,350,531
1,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/13 952,090
1,500 St. John the Baptist Parish, LA Public Improvement Sales Tax 7.800 12/01/14 1,620,195
State/Territorial General Obligations
------------------------------------------------------------------------------------------------------------------------
500 Louisiana State General Obligation - Series 1993 B 5.625 08/01/13 493,195
Total Investments in Securities - Municipal Bonds (cost $74,629,368) - 99.6% 77,363,820
Excess of Other Assets over Liabilities - 0.4% 299,468
Total Net Assets - 100.0% $77,663,288
</TABLE>
See notes to financial statements.
6 F-161 Louisiana
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $74,629,368) $77,363,820
Receivable for investments sold 860,000
Receivable for Fund shares sold 52,794
Interest receivable 1,324,321
Other 4,293
Total assets 79,605,228
LIABILITIES:
Bank borrowings (Note G) 449,111
Payable for investments purchased 971,943
Payable for Fund shares reacquired 93,660
Distributions payable 356,123
Accrued expenses 71,103
Total liabilities 1,941,940
NET ASSETS 77,663,288
Class A:
Applicable to 6,723,976 shares of beneficial interest issued and outstanding $72,005,370
Net asset value per share $ 10.71
Class C:
Applicable to 528,609 shares of beneficial interest issued and outstanding $ 5,657,918
Net asset value per share $ 10.70
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $4,621,027
EXPENSES:
Distribution fees-Class A (Note E) 277,262
Distribution fees-Class C (Note E) 43,079
Investment advisory fees (Note E) 370,400
Custody and accounting fees 59,926
Transfer agent's fees 41,950
Registration fees 2,363
Legal fees 1,882
Audit fees 13,237
Reimbursement of organizational expenses (Note F) 14,334
Trustees' fees 1,830
Shareholder services fees (Note E) 6,774
Other 2,391
Advisory fees waived (Note E) (222,310)
Total expenses before credits 613,118
Custodian fee credit (Note B) (7,466)
Net expenses 605,652
Net investment income 4,015,375
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 13,525
Change in unrealized appreciation (depreciation) of investments (761,714)
Net loss on investments (748,189)
Net increase in net assets resulting from operations $3,267,186
</TABLE>
See notes to financial statements.
Louisiana F-162 7
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 4,015,375 $ 3,897,504
Net realized gain (loss) on security transactions 13,525 110,924
Change in unrealized appreciation (depreciation) of investments (761,714) 1,861,960
Net increase in net assets resulting from operations 3,267,186 5,870,388
Distributions to Class A shareholders:
From net investment income (3,818,526) (3,785,632)
Distributions to Class C shareholders:
From net investment income (224,197) (119,767)
Net decrease in net assets from distributions to shareholders (4,042,723) (3,905,399)
Fund share transactions (Note C):
Proceeds from shares sold 13,860,830 10,213,999
Net asset value of shares issued in reinvestment of distributions 2,198,857 2,326,180
Cost of shares reacquired (8,986,764) (11,461,013)
Net increase in net assets from Fund share transactions 7,072,923 1,079,166
Total increase in net assets 6,297,386 3,044,155
NET ASSETS:
Beginning of year 71,365,902 68,321,747
End of year $77,663,288 $ 71,365,902
NET ASSETS CONSIST OF:
Paid-in surplus $74,973,448 $ 67,927,873
Accumulated net realized gain (loss) on security transactions (44,612) (58,137)
Unrealized appreciation (depreciation) of investments 2,734,452 3,496,166
$77,663,288 $ 71,365,902
</TABLE>
See notes to financial statements.
8 F-163 Louisiana
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship Louisiana Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on September 12, 1989. On
February 2, 1994, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C
shares are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a
continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the
effects of economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute to its shareholders all of its tax
exempt net investment income and net realized gains on security
transactions. Therefore, no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of
certain book-to-tax timing differences is presented as excess distributions
in the statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and
losses on security transactions are determined on the identified cost
basis. Interest income is recorded on the accrual basis. The Fund amortizes
original issue discounts and premiums paid on purchases of portfolio
securities on the same basis for both financial reporting and tax purposes.
Market discounts, if applicable, are recognized as ordinary income upon
disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss
carryforwards, are distributed to shareholders at least annually.
Louisiana F-164 9
<PAGE>
Notes to Financial Statements
...............................................................................
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to
each sub-trust as incurred. Fund expenses not specific to any class of
shares are prorated among the classes based upon the eligible net assets of
each class. Specifically identified direct expenses of each class are
charged to that class as incurred.
The Fund has entered into an agreement with the custodian, whereby it
earns custodian fee credits for temporary cash balances. These credits,
which offset custodian fees that may be charged to the Fund, are based on
80% of the daily effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The
current market value of these securities is determined in the same manner as
other portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------- -------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 997,208 $10,830,874 814,297 $ 8,403,348
Shares issued on reinvestment 187,827 2,038,551 218,176 2,245,257
Shares reacquired (768,321) (8,319,610) (1,100,408) (11,187,669)
NET INCREASE (DECREASE) 416,714 $ 4,549,815 (67,935) $ (539,064)
CLASS C:
Shares sold 277,655 $ 3,029,956 173,642 $ 1,810,651
Shares issued on reinvestment 14,749 160,306 7,881 80,923
Shares reacquired (61,998) (667,154) (26,574) (273,344)
NET INCREASE 230,406 $ 2,523,108 154,949 $ 1,618,230
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $25,869,350 and $19,183,983, respectively. At May 31, 1996, cost
for federal income tax purposes is $74,629,368 and net unrealized
appreciation aggregated $2,734,452, of which $3,033,789 related to
appreciated securities and $299,337 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $44,600 to offset future net capital gains expiring on May 31,
2003.
10 F-165 Louisiana
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly, on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $222,310 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $13,109. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares, respectively.
Included in accrued expenses at May 31, 1996 are accrued distribution fees of
$24,294 and $4,568 for Class A and Class C shares, respectively. Certain non-
promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $254,300 for the year ended May 31, 1996, of which
approximately $221,400 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,000 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$72,000) have been reimbursed as of May 31, 1996.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $3 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$163,500, at a weighted average annualized interest rate of 7.29%. At May 31,
1996, the Fund had $449,111 outstanding under the line of credit.
Louisiana F-166 11
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.80 $ 10.48 $ 10.93 $ 10.30 $ 10.02
Income from investment operations:
Net investment income 0.59 0.60 0.61 0.64 0.65
Net realized and unrealized gain
(loss) on securities (0.08) 0.32 (0.40) 0.67 0.35
Total from investment operations 0.51 0.92 0.21 1.31 1.00
Less distributions:
From net investment income (0.60) (0.60) (0.62) (0.63) (0.65)
From net realized capital gains (0.03) (0.05) (0.07)
In excess of net realized capital gains (0.01)
Total distributions (0.60) (0.60) (0.66) (0.68) (0.72)
Net asset value, end of year $ 10.71 $ 10.80 $ 10.48 $ 10.93 $ 10.30
Total return(a) 4.77% 9.20% 1.77% 13.12% 10.35%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses(b) 0.80% 0.83% 0.66% 0.61% 0.49%
Net investment income 5.46% 5.80% 5.56% 5.95% 6.43%
Assuming credits and no waivers or
reimbursements:
Expenses 1.09% 1.18% 1.12% 1.16% 1.22%
Net investment income 5.17% 5.45% 5.10% 5.40% 5.70%
Net assets at end of year (000's) $72,005 $68,145 $66,821 $54,483 $38,873
Portfolio turnover rate 26.24% 43.90% 22.40% 29.25% 42.51%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.79%; prior year numbers have not
been restated to reflect these credits.
12 F-167 Louisiana
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 2, 1994 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.80 $ 10.48 $ 11.29
Income from investment operations:
Net investment income 0.53 0.54 0.16
Net realized and unrealized gain
(loss) on securities (0.09) 0.32 (0.81)
Total from investment operations 0.44 0.86 (0.65)
Less distributions:
From net investment income (0.54) (0.54) (0.16)
Total distributions (0.54) (0.54) (0.16)
Net asset value, end of period $ 10.70 $ 10.80 $ 10.48
Total return(a) 4.12% 8.59% (17.21%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 1.35% 1.37% 1.23%
Net investment income 4.87% 5.21% 4.79%
Assuming credits and no
waivers or reimbursements:
Expenses 1.64% 1.73% 1.68%
Net investment income 4.58% 4.85% 4.34%
Net assets at end of period (000's) $ 5,658 $ 3,220 $ 1,501
Portfolio turnover rate 26.24% 43.90% 22.40%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.34%; prior period numbers have not
been restated to reflect these credits.
Louisiana F-168 13
<PAGE>
[LOGO OF SHIP ART] Independent Auditor's Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP LOUISIANA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Louisiana Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Louisiana Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
14 F-169 Louisiana
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 Grand Valley, MI State University Revenue - Series 1988 7.875% 10/01/08 $ 1,093,070
1,000 Michigan State University Board of Trustees - General Revenue - Series 1996 A 5.000 02/15/26 862,030
1,000 Oakland County, MI Economic Development Corporation Revenue -
Cranbrook Educational Community - Series 1994 C 6.900 11/01/14 1,076,930
1,000 Western Michigan University General Revenue - Series 1992 A 6.250 11/15/12 1,038,500
Health Care
--------------------------------------------------------------------------------------------------------------------------
420 Independence, MI Economic Development Corporation Revenue 9.400 08/01/17 433,007
1,200 Michigan State Hospital Finance Authority Revenue - Presbyterian Villages -
Series 1995 6.500 01/01/25 1,128,288
Hospitals
--------------------------------------------------------------------------------------------------------------------------
5,000 Dearborn, MI Economic Development Corporation Hospital Revenue -
Oakwood Obligated Group - Series 1995 A 5.750 11/15/15 4,885,500
500 Farmington Hills, MI Hospital Finance Authority - Botsford General Hospital -
Series 1992A 6.500 02/15/11 522,710
500 Farmington Hills, MI Hospital Finance Authority - Botsford General Hospital -
Series 1992A 6.500 02/15/22 516,430
1,940 Kalamazoo, MI Hospital Finance Authority Facility Revenue - Bronson Methodist
Hospital - Series 1992 A 6.375 05/15/17 1,970,982
1,290 Kent County, MI Hospital Facilities Revenue - Pine Rest Christian Hospital 6.500 11/01/10 1,354,810
1,000 Michigan State Hospital Finance Authority Revenue - Crittenton Hospital -
Series 1994 A 5.250 03/01/14 890,610
3,000 Michigan State Hospital Finance Authority Revenue - Memorial Hospital Owosso
Michigan - Series A 7.375 01/01/03 3,063,720
6,500 Michigan State Hospital Finance Authority Revenue - Detroit Medical Center -
Series 1993 A 6.500 08/15/18 6,593,535
1,000 Michigan State Hospital Finance Authority Revenue - Oakland General Hospital -
Series 1989 7.000 07/01/15 1,071,830
1,000 Michigan State Hospital Finance Authority Revenue - Sparrow Group 6.500 11/15/11 1,044,310
2,920 Michigan State Hospital Finance Authority Revenue - Detroit Medical Center
Obligated Group - Series 1993 B 5.500 08/15/23 2,610,538
1,000 Michigan State Hospital Finance Authority Revenue - Gratiot Community
Hospital, Alma, Michigan - Series 1995 6.100 10/01/07 978,330
3,000 Pontiac, MI Hospital Finance Authority Revenue - NOMC Group - Series 1993 6.000 08/01/18 2,597,940
5,165 Pontiac, MI Hospital Finance Authority Revenue - NOMC Group - Series 1993 6.000 08/01/23 4,407,914
250 Commonwealth of Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority Revenue -
Doctor Pila Hospital - Series 1995 5.875 08/01/12 250,468
2,000 Saginaw, MI Hospital Finance Authority Revenue - Saginaw General Hospital 7.625 10/01/08 2,123,860
500 Saginaw, MI Hospital Finance Authority Revenue - St. Luke's Hospital - Series C 6.750 07/01/17 532,425
3,500 University of Michigan University Revenues - Medical Service Plan 6.500 12/01/21 3,632,230
</TABLE>
4 F-170 Michigan
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Housing/Multifamily
-------------------------------------------------------------------------------------------------------------------------
$ 750 Grand Rapids, MI Housing Finance Authority - Multifamily 7.625% 09/01/23 $ 813,068
6,000 Michigan State Housing Development Authority - Section 8 - Series I 0.000 04/01/14 1,210,800
5,000 Michigan State Housing Development Authority Revenue - Rental Housing -
Series 1990 B 7.550 04/01/23 5,304,650
450 Michigan State Housing Development Authority Revenue - Rental Housing -
Series 1991 B 7.100 04/01/21 469,206
1,000 Michigan State Housing Development Authority Revenue - Rental Housing -
Series 1995 A and B 6.150 10/01/15 1,010,350
Housing/Single Family
-------------------------------------------------------------------------------------------------------------------------
730 Michigan State Housing Development Authority - Single Family -
Series 1989 A and B 7.700 12/01/16 757,149
1,280 Michigan State Housing Development Authority - Single Family -
Series 1990 A and B 7.500 06/01/15 1,345,997
3,250 Michigan State Housing Development Authority - Single Family -
Series 1990 C 7.550 12/01/15 3,409,672
2,000 Michigan State Housing Development Authority - Single Family -
Series 1994 A and B 6.450 12/01/14 2,044,320
3,930 Michigan State Housing Development Authority - Single Family -
Series 1994 C and D 6.500 06/01/16 4,007,853
500 Michigan State Housing Development Authority - Single Family -
Series 1995 A and B 6.800 12/01/16 513,240
Industrial Development and Pollution Control
-------------------------------------------------------------------------------------------------------------------------
5,000 Dickenson County, MI Economic Development Corporation - Pollution Control
Refunding Revenue - Champion International Corporation Project - Series 1993 5.850 10/01/18 4,655,400
2,500 Michigan State Strategic Fund Revenue - Ford Motor Company 7.100 02/01/06 2,799,150
5,000 Michigan Strategic Fund Pollution Control Revenue - General Motors -
Series 1995 6.200 09/01/20 4,991,950
3,500 Michigan State Strategic Fund Revenue - Detroit Edison Company - Series 1994 6.450 06/15/24 3,630,725
1,000 Monroe County, MI Economic Development Corporation - Limited Obligation
Revenue - Detroit Edison Company - Series 1992 AA 6.950 09/01/22 1,139,160
Municipal Revenue/Other
-------------------------------------------------------------------------------------------------------------------------
250 Michigan Municipal Bond Authority Revenue - Local Government - Series C 7.250 05/01/20 272,252
1,850 Michigan Municipal Bond Authority Revenue - Local Government - Series A 8.625 11/01/16 1,964,090
5,500 Michigan Municipal Bond Authority Revenue - Local Government 0.000 12/01/07 2,904,440
2,800 Michigan Municipal Bond Authority Revenue - Local Government -
Loan Program - Series 1991 C 0.000 06/15/08 1,418,340
3,000 Michigan Municipal Bond Authority Revenue - Local Government -
Loan Program - Series 1991 C 0.000 06/15/15 962,700
1,800 Michigan Municipal Bond Authority Revenue - Local Government -
Loan Program - Series 1991 C 0.000 06/15/12 694,152
1,000 Michigan State Building Authority Revenue - Series 1991 I 6.750 10/01/11 1,067,670
5,000 Michigan State Building Authority Revenue - Series 1991 I 6.250 10/01/20 5,046,250
6,585 Michigan State Building Authority Revenue - Series 1991 I 6.250 10/01/20 6,645,911
</TABLE>
Michigan F-171 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Municipal Revenue/Transportation
-------------------------------------------------------------------------------------------------------------------------
$ 750 Wayne Charter County, MI Airport Revenue - Detroit Metropolitan Airport -
Series 1994 A 5.875% 12/01/08 $ 772,815
Municipal Revenue/Utility
-------------------------------------------------------------------------------------------------------------------------
1,000 Bay City, MI Electric Utility System Revenue 6.600 01/01/12 1,062,080
300 Guam Power Authority Revenue - Series 1993 A 5.250 10/01/23 249,996
540 Michigan Public Power Agency Revenue - Belle River Project - Series 1993 A 5.250 01/01/18 482,917
3,000 Michigan State South Central Power Agency Supply System Revenue -
Series 1994 7.000 11/01/11 3,236,910
3,000 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 2,744,760
Municipal Revenue/Water & Sewer
-------------------------------------------------------------------------------------------------------------------------
7,325 Detroit, MI Sewage System Revenue - Series 1995-A, B and C 5.000 07/01/25 6,322,574
4,000 Detroit, MI Sewage System Revenue - Series 1995-A, B and C 5.250 07/01/21 3,613,280
1,000 Detroit, MI Water Supply System Revenue - Series 1992 6.375 07/01/22 1,021,100
1,570 Detroit, MI Water Supply System Revenue - Series 1995 A 5.550 07/01/12 1,546,952
2,230 Detroit, MI Water Supply System Revenue - Series 1995 B 5.550 07/01/12 2,197,264
1,000 Grand Rapids, MI Sanitary Sewer System Improvement Revenue - Series 1990 7.000 01/01/16 1,075,760
3,250 Michigan Municipal Bond Authority Revenue - State Revolving Fund -
Series 1992 A 6.550 10/01/13 3,450,818
1,000 Michigan Municipal Bond Authority Revenue - State Revolving Fund - Series 1994 6.500 10/01/14 1,073,040
1,000 Michigan Municipal Bond Authority Revenue - State Revolving Fund - Series 1994 6.500 10/01/17 1,056,930
1,500 Portage Lake, MI Water and Sewage Authority - General Obligation - Series 1995 6.200 10/01/20 1,531,680
2,000 Western Townships Michigan Utility Authority - Sewer Disposal System 8.200 01/01/18 2,200,680
Non-State General Obligations
-------------------------------------------------------------------------------------------------------------------------
1,000 Albion, MI Public Schools - General Obligation - Series 1995 5.125 05/01/21 868,180
1,000 Belding, MI Area Schools - School Building and Site - General Obligation -
Series 1996 6.050 05/01/21 1,008,390
5,000 Brighton, MI Area School District - Series II 0.000 05/01/20 1,180,100
4,625 Cedar Springs, MI Public Schools - School Building and Site - General Obligation -
Series 1995 5.875 05/01/19 4,598,822
3,145 Chippewa Valley, MI Schools District - Macomb County, Michigan -
General Obligation Unlimited Tax - Series 1993 5.000 05/01/21 2,740,836
500 East Lansing, MI Building Authority 7.000 10/01/16 523,215
2,700 Flat Rock, MI Community School District - General Obligation - Series 1995 5.250 05/01/21 2,439,720
2,430 Garden City, MI School District - General Obligation - Series 1994 6.400 05/01/11 2,535,389
750 Hudsonville, MI Building Authority Revenue - Ottawa County - Series 1992 6.600 10/01/17 797,272
1,000 Ionia, MI Public Schools - General Obligation - Series 1995 5.300 05/01/25 904,390
1,000 * Jenison, MI Public Schools - Ottawa County, Michigan - Building and Site -
General Obligation - Series 1996 5.750 05/01/16 983,650
3,000 Kent County, MI Refuse Disposal System Revenue 8.400 11/01/10 3,212,700
2,000 Lansing, MI Building Authority - General Obligation - Series 1995 5.600 06/01/19 1,908,560
2,700 Livonia, MI General Obligation - Public Schools District - Series 1992 II 0.000 05/01/08 1,377,162
4,610 Mona Shores, MI Public Schools District - General Obligation - Series 1995 5.500 05/01/14 4,417,302
1,000 Mt. Pleasant, MI Public School District - General Obligation - Series 1994 6.100 05/01/10 1,029,160
</TABLE>
6 F-172 Michigan
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,600 Muskegon, MI Public Schools - General Obligation - Series 1995 5.250% 05/01/21 $ 1,441,952
1,000 Napoleon, MI Community Schools - General Obligation - Series 1995 5.500 05/01/20 939,290
1,000 Okemos, MI General Obligation - Public School District 0.000 05/01/17 283,400
1,020 Okemos, MI General Obligation - Public School District 0.000 05/01/18 272,156
1,095 Ovid-Elsie, MI Area Schools - General Obligation - Series 1995 5.600 05/01/21 1,041,389
2,635 Pontiac, MI Street Improvement Revenue 8.400 06/01/00 2,782,402
1,500 Reeths-Puffer, MI School District - General Obligation - Series 1995 5.750 05/01/15 1,469,460
750 South Lyon, MI Community School District - General Obligation - Series 1991 6.250 05/01/14 773,692
2,300 Traverse, MI Area Public Schools - General Obligation- Series 1995 5.700 05/01/20 2,210,024
2,500 Waterford, MI School District - General Obligation - Series 1995 6.250 06/01/13 2,571,100
2,470 Waterford, MI School District - General Obligation - Series 1995 6.375 06/01/14 2,559,562
5,000 Wayland, MI Union School District - General Obligation - Series 1994 6.250 05/01/14 5,137,200
750 Wayne County, MI Ecorse Creek Pollution Abatement Drain Number 1 -
Phase III - Drainage District - Series 1988 7.500 11/01/09 801,735
3,270 West Ottawa, MI Public Schools - General Obligation - Series 1992 0.000 05/01/17 926,718
1,725 Williamston, MI Community School District - General Obligation - Series 1996 5.500 05/01/25 1,633,368
1,850 Zeeland, MI Public Schools - General Obligation - Series 1994 B 6.050 05/01/19 1,859,471
Pre-refunded or Escrowed
-------------------------------------------------------------------------------------------------------------------------
1,895 Buena Vista, MI School District-School Building and Site-General Obligation
Unlimited Tax - Saginaw County, Michigan - Series 1991 7.200 05/01/16 2,117,568
1,000 Central Michigan University General Revenue 7.000 10/01/10 1,105,080
750 Detroit, MI General Obligation - Series 1991 8.000 04/01/11 866,752
300 Detroit, MI City School District - Wayne County School 7.750 05/01/10 337,599
1,650 Detroit, MI City School District - Wayne County, Michigan - School Building
and Site - Unlimited Tax General Obligation - Series 1991 7.150 05/01/11 1,843,298
1,000 Detroit, MI Sewer Disposal Revenue 7.125 07/01/19 1,085,700
2,000 Detroit, MI Water Supply System Revenue - Series 1990 7.250 07/01/20 2,221,260
3,000 Grand Rapids, MI Water Supply System Revenue - Series 1990 7.250 01/01/20 3,303,360
2,500 Haslett, MI Public School District 7.500 05/01/20 2,768,450
2,000 Huron Valley, MI School District - Series 1991 7.100 05/01/08 2,226,260
600 Ingham County, MI Building Authority - Series 1988 7.400 05/01/08 651,666
4,000 Lake Orion, MI Community School District - General Obligation - Series 1994 7.000 05/01/15 4,564,400
930 Marquette, MI City Hospital Finance Authority Revenue - Marquette General
Hospital - Series C 7.500 04/01/07 1,021,066
2,240 Marquette, MI City Hospital Finance Authority Revenue - Marquette Genera
Hospital - Series C 7.500 04/01/19 2,459,341
775 Mattawan, MI Consolidated School District 7.550 05/01/14 836,814
775 Mattawan, MI Consolidated School District 7.550 05/01/15 836,814
825 Menominee, MI Area Public School District 7.400 05/01/20 917,425
250 Michigan State Hospital Finance Authority Revenue - Henry Ford Hospital -
Series 1980 B 8.875 05/01/00 283,505
3,000 Michigan Higher Education Facilities Authority Revenue - Aquinas College -
Series 1991 7.350 05/01/11 3,147,210
1,000 Michigan State Hospital Finance Authority Revenue - Mercy Medical Hospital -
Series 1988 A 7.750 06/01/07 1,086,840
1,000 Michigan State Hospital Finance Authority Revenue - Henry Ford Health System -
Series 1990 A 7.000 07/01/10 1,100,650
</TABLE>
Michigan F-173 7
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 6,000 Michigan State Hospital Finance Authority Revenue - Oakwood Hospital -
Series 1990 7.100% 07/01/18 $ 6,630,660
800 Michigan State Hospital Finance Authority Revenue - Sisters of Mercy Health
Corporation - Series 1991 7.200 02/15/18 894,536
2,460 Oakland County, MI Economic Development Authority - Pontiac Osteopathic
Hospital 9.625 01/01/20 2,882,849
1,200 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.900 07/01/07 1,311,504
1,800 Commonwealth of Puerto Rico Highway Authority Revenue - Series 1990 Q 7.750 07/01/16 2,037,258
1,040 Rockford, MI Public Schools 7.375 05/01/19 1,146,881
620 Saginaw Valley State College - Michigan Housing and Auxiliary Facilities Revenue -
Series C 8.125 07/01/10 660,319
7,000 Vicksburg, MI Community Schools 0.000 05/01/20 1,525,650
Special Tax Revenue
-------------------------------------------------------------------------------------------------------------------------
1,000 Battle Creek, MI Downtown Development Authority - Series 1994 7.600 05/01/16 1,093,540
1,800 Battle Creek, MI Tax Increment Finance Authority - Series 1994 7.400 05/01/16 1,955,592
10,000 Detroit, MI Downtown Development Authority - Tax Increment -
Development Area Number 1 Projects - Series 1996 B, C-1, C-2 and D 6.250 07/01/25 9,763,800
1,650 Grand Rapids, MI Downtown Development Authority - Tax Increment Revenue -
Series 1994 6.875 06/01/24 1,790,894
3,985 Grand Rapids, MI Downtown Development Authority - Tax Increment Revenue -
Series 1994 0.000 06/01/17 1,123,690
3,495 Grand Rapids, MI Downtown Development Authority - Tax Increment Revenue -
Series 1994 0.000 06/01/18 927,853
510 Livingston County, MI Drainage District - Genoa-Oceola Sanitary Sewer Drain 6.000 05/01/08 524,214
15,000 Michigan State Trunk Line Fund - Series 1992 A and B 5.500 10/01/21 13,612,500
2,260 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series V 6.625 07/01/12 2,382,989
350 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 X 5.000 07/01/22 296,415
1,000 Puerto Rico Highway and Transportation Authority Revenue - Series 1996 Y and Z 5.500 07/01/36 907,680
800 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/15 777,864
State/Territorial General Obligations
-------------------------------------------------------------------------------------------------------------------------
3,125 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 3,218,125
2,370 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.500 07/01/23 2,449,466
Total Investments in Securities - Municipal Bonds (cost $276,084,666) - 99.1% 287,321,122
Excess of Other Assets over Liabilities - 0.9% 2,466,113
Total Net Assets - 100.0% $289,787,235
</TABLE>
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
8 F-174 Michigan
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $276,084,666) $287,321,122
Cash 2,494,667
Receivable for Fund shares sold 463,522
Interest receivable 4,339,468
Other 16,755
Total assets 294,635,534
LIABILITIES:
Payable for investments purchased 2,986,667
Payable for Fund shares reacquired 326,417
Distributions payable 1,306,604
Accrued expenses 228,611
Total liabilities 4,848,299
NET ASSETS 289,787,235
Class A:
Applicable to 21,856,306 shares of beneficial interest issued and outstanding $248,422,188
Net asset value per share $ 11.37
Class C:
Applicable to 3,644,334 shares of beneficial interest issued and outstanding $ 41,365,047
Net asset value per share $ 11.35
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 18,171,113
EXPENSES:
Distribution fees - Class A (Note E) 1,002,957
Distribution fees - Class C (Note E) 383,244
Investment advisory fees (Note E) 1,459,549
Custody and accounting fees 122,569
Transfer agent's fees 148,230
Registration fees 11,950
Legal fees 7,576
Audit fees 19,975
Trustees' fees 8,170
Shareholder services fees (Note E) 27,295
Other 8,757
Advisory fees waived (Note E) (586,307)
Total expenses before credits 2,613,965
Custodian fee credit (Note B) (25,944)
Net expenses 2,588,021
Net investment income 15,583,092
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 1,355,611
Change in unrealized appreciation (depreciation) of investments (7,054,615)
Net loss on investments (5,699,004)
Net increase in net assets resulting from operations $ 9,884,088
</TABLE>
See notes to financial statements.
Michigan F-175 9
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
May 31, 1996 May 31, 1995
<S> <C> <C>
Operations:
Net investment income $ 15,583,092 $ 15,577,403
Net realized gain (loss) on security transactions 1,355,611 748,965
Change in unrealized appreciation (depreciation) of investments (7,054,615) 5,974,456
Net increase in net assets resulting from operations 9,884,088 22,300,824
Distributions to Class A shareholders:
From net investment income (13,728,134) (13,802,197)
Distributions to Class C shareholders:
From net investment income (1,986,821) (1,718,167)
Net decrease in net assets from distributions to shareholders (15,714,955) (15,520,364)
Fund share transactions (Note C):
Proceeds from shares sold 33,498,805 44,396,387
Net asset value of shares issued in reinvestment of distributions 8,757,179 8,840,102
Cost of shares reacquired (34,140,336) (45,549,587)
Net increase in net assets from Fund share transactions 8,115,648 7,686,902
Total increase in net assets 2,284,781 14,467,362
NET ASSETS:
Beginning of year 287,502,454 273,035,092
End of year $289,787,235 $287,502,454
NET ASSETS CONSIST OF:
Paid-in surplus $279,191,727 $271,150,903
Undistributed net investment income 57,039
Accumulated net realized gain (loss) on security transactions (640,948) (1,996,559)
Unrealized appreciation (depreciation) of investments 11,236,456 18,291,071
$289,787,235 $287,502,454
</TABLE>
See notes to financial statements.
10 F-176 Michigan
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
..............................................................................
A. Description of Business
The Flagship Michigan Triple Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on June 27, 1985. On June
22, 1993, the Fund began to offer Class C shares to the investing public.
Class A shares are sold with a front-end sales charge. Class C shares are
sold with no front-end sales charge but are assessed a contingent deferred
sales charge if redeemed within one year from the time of purchase. Both
classes of shares have identical rights and privileges except with respect to
the effect of sales charges, the distribution and/or service fees borne by
each class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privilege of each class. Shares of
beneficial interest in the Fund, which are registered under the Securities
Act of 1933, as amended, are offered to the public on a continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Michigan F-177 11
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were $982,500 "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 2,144,177 $ 24,873,643 2,859,234 $ 31,899,426
Shares issued on reinvestment 648,404 7,527,122 691,869 7,703,995
Shares reacquired (2,538,104) (29,322,526) (3,424,769) (38,141,919)
Net increase 254,477 $ 3,078,239 126,334 $ 1,461,502
Class C:
Shares sold 745,632 $ 8,625,162 1,121,353 $ 12,496,961
Shares issued on reinvestment 106,101 1,230,057 102,187 1,136,107
Shares reacquired (414,411) (4,817,810) (674,994) (7,407,668)
Net increase 437,322 $ 5,037,409 548,546 $ 6,225,400
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $162,358,599 and $155,471,820, respectively. At May 31, 1996, cost
for federal income tax purposes is $276,365,632 and net unrealized
appreciation aggregated $10,955,490, of which $12,367,261 related to
appreciated securities and $1,411,771 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $360,500 to offset future net capital gains expiring on May 31,
2003.
12 F-178 Michigan
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $586,307 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $73,831. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $84,380 and $33,396 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $552,600 for the year ended May 31, 1996, of which
approximately $477,100 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $7,800 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $12 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$652,600, at a weighted average annualized interest rate of 6.65%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
Michigan F-179 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.59 $ 11.31 $ 11.77 $ 11.12 $ 10.80
Income from investment operations:
Net investment income 0.63 0.65 0.66 0.68 0.69
Net realized and unrealized gain (loss) on
securities (0.22) 0.28 (0.43) 0.65 0.32
Total from investment operations 0.41 0.93 0.23 1.33 1.01
Less distributions:
From net investment income (0.63) (0.65) (0.66) (0.68) (0.69)
From net realized capital gains (0.01)
In excess of net realized capital gains (0.02)
Total distributions (0.63) (0.65) (0.69) (0.68) (0.69)
Net asset value, end of year $ 11.37 $ 11.59 $ 11.31 $ 11.77 $ 11.12
Total return(a) 3.61% 8.57% 1.87% 12.27% 9.74%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.82% 0.80% 0.75% 0.81% 0.81%
Net investment income 5.42% 5.82% 5.56% 5.85% 6.34%
Assuming credits and no waivers or
reimbursements:
Expenses 1.01% 1.03% 1.02% 1.02% 1.01%
Net investment income 5.23% 5.59% 5.29% 5.64% 6.14%
Net assets at end of year (000's) $248,422 $250,380 $242,993 $227,333 $176,584
Portfolio turnover rate 54.01% 36.57% 27.78% 9.55% 11.48%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.81%; prior year numbers have not
been restated to reflect these credits.
14 F-180 Michigan
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended June 22, 1993 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.58 $ 11.30 $ 11.86
Income from investment operations:
Net investment income 0.56 0.58 0.54
Net realized and unrealized gain
(loss) on securities (0.22) 0.28 (0.52)
Total from investment operations 0.34 0.86 0.02
Less distributions:
From net investment income (0.57) (0.58) (0.55)
From net realized capital gains (0.01)
In excess of net realized capital gains (0.02)
Total distributions (0.57) (0.58) (0.58)
Net asset value, end of period $ 11.35 $ 11.58 $ 11.30
Total return/(a)/ 2.96% 7.98% 0.19%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.37% 1.35% 1.25%
Net investment income 4.86% 5.25% 4.89%
Assuming credits and no
waivers or reimbursements:
Expenses 1.56% 1.58% 1.61%
Net investment income 4.67% 5.02% 4.53%
Net assets at end of period (000's) $41,365 $37,122 $30,042
Portfolio turnover rate 54.01% 36.57% 27.78%
</TABLE>
(a) The total returns shown do not include the effect of applicable
contingent deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits
from the custodian which reduce service fees incurred. If included, the
ratio of expenses to average net assets would be 1.36%; prior period numbers
have not been restated to reflect these credits.
Michigan F-181 15
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP MICHIGAN
TRIPLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Michigan Triple Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Michigan Triple Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-182 Michigan
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
-----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$3,630 Missouri State Health and Educational Facilities Authority Revenue -
University Health Sciences - Series 1994 6.350% 06/01/14 $3,697,191
1,500 Missouri State Health and Educational Facilities Authority Revenue -
Saint Louis University High School - Series 1994 6.350 10/01/14 1,529,430
1,155 Northwest Missouri State University Recreational Facilities Revenue -
Series 1992 6.375 06/01/13 1,199,491
795 Northwest Missouri State University Housing System Improvement Revenue - 6.375 12/01/13 827,380
Series 1992
945 University of Puerto Rico System Revenue - Series 1995 N 0.000 06/01/09 471,517
500 University of Puerto Rico System Revenue - Series 1995 N 0.000 06/01/13 193,915
Health Care
-----------------------------------------------------------------------------------------------------------------------
365 Dent County, MO Industrial Development Authority Revenue -
Southeast Community Treatment Center Project- Series 1992 8.500 06/01/12 389,123
750 Farmington, MO Industrial Development Authority Revenue - 8.500 06/01/12 799,568
Southeast Community Treatment Center Project - Series 1992
1,000 Lee's Summit, MO Industrial Development Authority - Health Facilities Revenue -
John Knox Village - Series 1995 6.625 08/15/13 999,360
4,565 St. Louis County, MO Industrial Development Authority - Health Facilities Revenue -
Lutheran Health Care Association - Series 1992A 7.375 02/01/14 4,856,384
2,650 St. Louis County, MO Industrial Development Authority - Health Facilities Revenue -
Lutheran Health Care Association - Series 1992A 7.625 02/01/22 2,833,778
2,465 St. Louis County, MO Industrial Development Authority - Health Facilities Revenue - 6.250 08/01/28 2,447,819
Mother of Perpetual Help - Series 1995
Hospitals
-------------------------------------------------------------------------------------------------------------------------
400 Audrain County, MO Hospital Revenue - Audrain Medical Center 7.350 11/01/08 446,984
1,000 Jackson County, MO Industrial Development Authority Health Care Revenue -
St. Joseph Hospital - Series 1992 6.500 07/01/19 966,020
6,250 Jackson County, MO Industrial Development Authority Health Care Revenue -
St. Joseph Hospital - Series 1992 6.500 07/01/19 6,475,750
2,000 Jackson County, MO Industrial Development Authority Health Care Revenue -
St. Joseph Hospital - Series 1992 6.500 07/01/12 2,081,360
250 Joplin, MO Catholic Health Corporation Industrial Development Authority
Facilities Revenue - St. John's Regional Medical Center 7.125 06/01/14 260,880
2,565 Missouri State Health and Educational Facilities Authority Revenue -
Health Midwest - Series 1992B 6.250 02/15/12 2,629,228
5,355 Missouri State Health and Educational Facilities Authority Revenue -
Health Midwest - Series 1992B 6.250 02/15/22 5,452,568
555 Missouri State Health and Educational Facilities Authority Revenue -
Heartland Health Systems - Series 1992 6.875 11/15/04 577,494
2,000 Missouri State Health and Educational Facilities Authority Revenue - 6.250 06/01/07 2,129,280
SSM Health Care - Series 1992AA
2,000 Missouri State Health and Educational Facilities Authority Revenue -
SSM Health Care - Series 1992AA 6.250 06/01/16 2,042,860
1,000 Missouri State Health and Educational Facilities Authority Revenue -
Heartland Health Systems - Series 1992 6.350 11/15/17 1,028,920
</TABLE>
4 F-183 Missouri
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,475 Missouri State Health and Educational Facilities Authority Revenue -
Health Midwest System - Series 1994 B 6.250% 06/01/14 $1,518,070
2,125 Missouri State Health and Educational Facilities Authority Revenue -
BJC Health System - Series 1994 A 6.750 05/15/12 2,330,849
650 Missouri State Health and Educational Facilities Authority Revenue -
BJC Health System - Series 1994 A 6.500 05/15/20 671,612
6,300 Missouri State Health and Educational Facilities Authority Revenue -
Lester E. Cox Medical Centers - Series 1992 H 0.000 09/01/22 1,274,868
2,650 Missouri State Health and Educational Facilities Authority Revenue -
Lester E. Cox Medical Centers - Series 1992 H 0.000 09/01/17 736,064
5,690 Missouri State Health and Educational Facilities Authority Revenue -
Lester E. Cox Medical Centers - Series 1992 H 0.000 09/01/21 1,223,691
200 Missouri State Health and Educational Facilities Authority Revenue -
Heartland Health Systems - Series 1989 8.125 10/01/10 224,772
100 Missouri State Health and Educational Facilities Authority Revenue -
Lake of the Ozarks Hospital 8.000 02/15/11 104,978
300 Missouri State Health and Educational Facilities Authority Revenue -
C.E. Still Osteopathic Hospital 7.625 02/01/08 300,507
450 Commonwealth of Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority Revenue -
Doctor Pila Hospital - Series 1995 5.875 08/01/12 450,842
250 University of Missouri Revenue - Columbia Hospital and Clinics 6.500 11/01/11 261,290
Housing/Multifamily
-----------------------------------------------------------------------------------------------------------------------
3,000 Kansas City, MO Industrial Development Authority - Multifamily Housing Revenue -
Series 1995 6.300 07/01/20 2,992,410
2,000 Missouri State Economic Development Export and Infrastructure Board -
Multifamily Housing Revenue - Quality Hill 7.500 09/15/21 2,103,300
885 Missouri Housing Development Commission - Multifamily Housing Revenue -
Primm Place Apartments - Series 1995 A and B 6.250 12/01/17 868,601
2,000 St. Louis County, MO Housing Authority Revenue - Multifamily -
Kensington Square - Series 1995 6.650 03/01/20 2,052,240
500 St. Louis County, MO Industrial Development Authority - Multifamily Housing
Revenue - Series 1989 7.500 09/20/19 524,190
3,800 St. Louis County, MO Industrial Development Authority - Multifamily Housing
Revenue - Oak Forest II Apartments - Southfield Apartments - Series 1996 A and B 5.950 03/20/31 3,691,016
1,890 St. Louis, MO Land Clearance Redevelopment Authority - Multifamily
Mortgage Revenue - St. Louis Place Apartments - Series 1993 6.250 08/01/27 1,893,704
Housing/Single Family
-----------------------------------------------------------------------------------------------------------------------
165 Missouri State Housing Development Commission Revenue - Single Family -
Series 1990 A 7.625 02/01/22 171,998
1,100 Missouri State Housing Development Commission Revenue - Single Family -
Series 1990 B 7.750 06/01/22 1,155,363
1,655 Missouri State Housing Development Commission Revenue - Single Family -
Series 1991 A 7.375 08/01/23 1,743,542
535 Missouri State Housing Development Commission Revenue - Single Family -
Series 1994 A 6.700 12/01/07 546,069
</TABLE>
Missouri F-184 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$2,400 Missouri State Housing Development Commission Revenue - Single Family -
Series 1994 A 7.125% 12/01/14 $2,446,680
1,065 Missouri State Housing Development Commission Revenue - Single Family -
Series 1994 A 7.200 12/01/17 1,085,799
Industrial Development and Pollution Control
-----------------------------------------------------------------------------------------------------------------------
500 Jefferson, MO Industrial Development Revenue - Scholastic Incorporated -
Series 1992 7.200 04/01/03 505,660
2,275 Missouri State Industrial Development Revenue - Drury Inn 8.250 12/01/12 2,385,451
1,000 Missouri State Environmental and Energy Resource Authority Revenue -
American Cyanamid - Series 1994 5.800 09/01/09 1,032,910
1,500 Missouri State Environmental Improvement and Energy Resource Authority -
Union Electric Company Project 7.400 05/01/20 1,626,570
2,000 Puerto Rico Ports Authority - Special Facilities Revenue -
American Airlines, Incorporated Project - Series 1996 A 6.250 06/01/26 1,957,600
1,900 St. Louis, MO Industrial Development Authority - Sewage and Solid Waste
Disposal Facilities Revenue - Anheuser-Busch Project - Series 1995 5.875 11/01/26 1,846,705
Municipal Appropriation Obligations
-----------------------------------------------------------------------------------------------------------------------
2,285 Branson, MO Public Building Corporation - Leasehold Revenue -
City Hall and Fire Station - Series 1995 6.250 11/01/12 2,175,092
1,500 Clay County, MO Public Building Authority and Improvement Revenue -
Paradise Pointe Golf Course Project - Series 1992 7.625 05/15/14 1,632,930
1,435 Excelsior Springs, MO Facilities Authority - Leasehold Revenue - Series 1994 6.250 12/15/14 1,473,946
350 Jackson County, MO Lease ParticipationCertificate - Longview Recreation
Complex 8.000 11/01/07 372,134
2,000 Jackson County, MO Public Facilities Authority Leasehold Revenue -
Series 1994 6.125 12/01/15 2,031,080
2,200 Kansas City, MO Land Clearance For Redevelopment Authority Revenue -
Municipal Auditorium and Muehlebach Hotel Redevelopment - Series 1995 A 5.900 12/01/18 2,159,718
645 Kansas City, MO Municipal Assistance Corporation - Leasehold Improvement
Revenue - Truman Medical Center Charitable Foundation Project - Series 1991 A 7.000 11/01/09 676,534
695 Kansas City, MO Municipal Assistance Corporation - Leasehold Improvement
Revenue - Truman Medical Center Charitable Foundation Project - Series 1991 A 7.000 11/01/10 726,365
1,020 Lake St. Louis, MO Certificates of Participation - Public Facilities Revenue -
Municipal Golf Course 6.900 12/01/05 1,044,959
2,720 Lake St. Louis, MO Certificates of Participation - Public Facilities Revenue -
Municipal Golf Course 7.550 12/01/14 2,830,187
375 Missouri School Board Association Certificates of Participation 7.875 03/01/06 398,648
680 Missouri School Board Association Lease Participation - Valley Park 7.375 03/01/10 718,488
1,120 Missouri State Psychiatric Rehabilitation Center - Certificates of Participation -
Series 1995 A 6.000 11/01/15 1,092,370
1,000 St. Louis County, MO Regional Convention and Sports Complex Authority -
Series 1993 B 5.500 08/15/13 926,480
1,700 St. Louis County, MO Regional Convention and Sports Complex Authority -
Series 1993 B 5.750 08/15/21 1,560,464
1,410 St. Louis, MO Land Clearance Redevelopment Authority Revenue -
Station East Redevelopment Project - Series 1990 7.750 07/01/21 1,467,401
</TABLE>
6 F-185 Missouri
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 950 St. Louis, MO Municipal Finance Corporation - Leasehold Revenue
Improvement - Series 1992 6.250% 02/15/12 $ 979,450
1,000 St. Louis, MO Regional Convention and Sports Complex Authority - Series C 7.900 08/15/21 1,083,930
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
650 St. Louis County, MO Industrial Development Revenue Authority - Kiel
Center Multipurpose Arena - Series 1992 7.625 12/01/09 683,761
1,000 St. Louis County, MO Industrial Development Revenue Authority - Kiel
Center Multipurpose Arena - Series 1992 7.750 12/01/13 1,056,610
500 St. Louis County, MO Industrial Development Revenue Authority - Kiel
Center Multipurpose Arena - Series 1992 7.875 12/01/24 532,280
3,975 St. Louis, MO Parking Revenue - Series 1992 6.625 12/15/21 4,069,684
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
4,000 Kansas City, MO Airport Revenue - Series 1994 B 6.875 09/01/14 4,306,000
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
2,025 Higginsville, MO Electric System Revenue - Series 1994 A 6.750 06/01/16 2,157,415
250 Independence, MO Electric Utility Revenue 7.200 06/01/14 264,762
3,530 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 3,229,668
2,000 Sikeston, MO Electric Revenue - Series 1992 6.200 06/01/10 2,135,460
4,000 Sikeston, MO Electric System Revenue - Series 1996 6.000 06/01/16 4,117,960
1,000 Sikeston, MO Electric System Revenue - Series 1996 6.000 06/01/13 1,035,700
750 Sikeston, MO Electric System Revenue - Series 1996 6.000 06/01/14 774,262
5,000 Sikeston, MO Electric System Revenue - Series 1996 5.000 06/01/22 4,387,450
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
380 Adair County, MO Public Water Supply District Number 1 - Waterworks Revenue 7.600 12/15/08 404,354
50 Boone County, MO Public Water Supply District Number 4 - Water System Revenue 7.100 08/01/04 53,416
50 Callaway County, MO Public Water Supply District Number 1 8.375 01/01/05 53,294
50 Carroll County, MO Public Water Supply District Number 1 8.000 03/01/09 54,092
50 Clay County, MO Public Water Supply District Number 6 8.200 06/01/01 50,638
50 DeKalb County, MO Public Water Supply District Number 001 8.000 01/01/09 53,578
400 East Central Missouri Water and Sewer System Authority Revenue - St. Charles
County Public Water Supply District Number 2 - Series 1992 7.000 08/01/08 412,876
50 Fulton, MO Waterworks Revenue 7.500 10/01/02 54,698
50 Hamilton, MO Waterworks Revenue 7.750 07/01/14 53,444
50 Kahoka, MO Water and Sewer System Revenue 8.000 01/01/05 52,630
50 Knox County, MO Public Water Supply District Number 1 - Water System Revenue 8.000 01/01/09 53,640
50 La Monte, MO Waterworks and Sewage System Revenue 8.000 03/01/04 54,152
50 Laclede County, MO Public Water Supply District Number 3 - Waterworks Revenue 8.125 01/01/07 52,107
1,000 Missouri State Economic Development Export and Infrastructure Board -
Community Water Company - Series 1992 7.125 05/01/17 1,016,260
</TABLE>
Missouri F-186 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,150 Missouri State Environmental Improvement and Energy Resource Authority -
Water Facility Revenue - St. Louis Water 6.900% 02/01/21 $1,203,716
750 Missouri State Environmental Improvement and Energy Resource Authority -
Water Pollution Control Revenue 7.000 10/01/10 800,378
3,600 Missouri State Environmental Improvement and Energy Resource Authority -
Water Pollution Control Revenue 6.875 06/01/14 3,834,000
2,000 Missouri State Environmental Improvement and Energy Resource Authority -
Water Pollution Control Revenue - State Revolving Fund Program - Series 1992A 6.550 07/01/14 2,087,720
600 Missouri State Environmental and Energy Resource Authority Revenue -
Water Pollution Control - Series 1994 A 7.200 07/01/16 667,296
1,000 Missouri State Environmental Improvement and Energy Resource Authority -
Water Pollution Control Revenue - Series 1995 B 6.050 07/01/16 1,011,220
500 Missouri State Environmental Improvement and Energy Resources Authority -
Water Pollution Control Revenue - State Revolving Fund Program -
Kansas City Project - Series 1996 A 5.750 01/01/16 490,195
125 Osceola, MO Sewer System Improvement Revenue 8.000 11/01/09 135,372
100 Pike County, MO Public Water Supply District Number 1 - Water Revenue 7.750 07/01/09 105,369
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
565 Chesterfield, MO General Obligation - Series 1995 6.300 02/15/14 584,815
1,025 Excelsior Springs, MO 40 School District Building Corporation -
Leasehold Revenue - Series 1994 0.000 03/01/14 360,780
1,000 Jefferson City, MO School District - General Obligation - Series 1991 A 6.700 03/01/11 1,112,540
100 Commonwealth of Puerto Rico Municipal Finance Agency - Series A 8.250 07/01/08 108,986
1,500 Troy, MO Lincoln County R-III School District - General Obligation - Series 1994 6.100 03/01/14 1,530,375
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
200 Callaway County, MO Public Water Supply District Number 2 8.500 03/01/10 210,848
9,000 Cape Girardeau County, MO Single Family Mortgage Revenue - Series 1983 0.000 12/01/14 2,984,130
1,850 Cape Girardeau, MO Waterworks System Revenue - Series 1992 6.400 03/01/12 1,990,304
100 Cass County, MO Public Water Supply District Number 2 8.000 10/01/10 109,049
750 Central Missouri State University Revenue 7.250 07/01/15 832,972
50 Clark County, MO Public Water Supply District Number 1 8.250 12/01/15 55,062
50 Concordia, MO Waterworks and Sewer System Revenue 8.375 07/01/08 54,130
50 Cooper County, MO Nursing Home - General Obligation 8.375 03/01/08 52,190
2,670 Green County, MO Single Family Mortgage Revenue 0.000 03/01/16 814,911
450 Jackson County, MO Industrial Development Authority Health Care Revenue -
St. Joseph Hospital 8.250 07/01/07 479,853
1,000 Jackson County, MO School District Number 002 - Series A 6.650 03/15/11 1,042,240
1,500 Jackson County, MO Single Family Mortgage Revenue - Series 1983 0.000 03/01/15 483,525
50 Johnson County, MO Public Water Supply District Number 1 Revenue 8.500 05/01/09 52,727
200 Johnson County, MO Public Water Supply District Number 2 Revenue 8.500 01/01/09 217,594
400 Kansas City, MO Airport Revenue - Series 1987 7.750 09/01/02 426,252
250 Kansas City, MO Airport Revenue - Series 1989 B 7.200 09/01/09 274,420
1,400 Kansas City, MO Municipal Assistance Corporation - Leasehold Refunding and
Improvement Revenue - H. Roe Bartle Convention Center Project - Series 1990 B-1 7.125 04/15/16 1,543,780
</TABLE>
8 F-187 Missouri
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 450 Kansas City, MO School District Building Corporation - Capital Improvement Project 7.900% 02/01/08 $ 486,418
2,500 Kirkwood, MO Industrial Development Authority Health Care System Revenue - St.
Joseph Hospital - Series 1992 6.500 07/01/12 2,741,175
50 Marion County, MO Public Water Supply District Number 1 - Water Revenue 8.250 01/01/12 55,268
625 Missouri School Board Association Lease Participation - North St. Francois County
- Series 1990 7.375 04/01/10 667,956
335 Missouri School Board Association Lease Participation - North St. Francois County
- Series 1990 7.000 04/01/10 355,224
225 Missouri State Health and Educational Facilities Authority Revenue - St. Louis
University - Series B 7.875 06/01/12 238,439
100 Missouri State Health and Educational Facilities Authority Revenue - General
Tuition - St. Louis University 7.250 06/01/09 109,506
100 Missouri State Health and Educational Facilities Authority Revenue - Bethesda
Health Group 7.875 04/01/08 107,420
300 Missouri State Health and Educational Facilities Authority Revenue - Bethesda
Health Group 8.000 04/01/13 322,887
450 Missouri State Health and Educational Facilities Authority Revenue - SSM Health
Care Project 7.750 06/01/16 489,078
650 Missouri State Health and Educational Facilities Authority Revenue - SSM Health
Care Project - Series 1990 B 7.000 06/01/15 750,347
395 Missouri State Health and Educational Facilities Authority Revenue - Sisters of
Mercy Health System 7.250 06/01/19 432,549
1,700 Missouri State Health and Educational Facilities Authority Revenue - Barnes
Hospital 7.125 12/15/20 1,894,973
500 Phelps County, MO Hospital Revenue - Phelps County Regional Medical Center 8.200 03/01/05 568,800
1,250 Phelps County, MO Hospital Revenue - Phelps County Regional Medical Center 8.300 03/01/20 1,426,250
750 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.000 07/01/19 805,972
1,230 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.625 07/01/18 1,359,605
1,000 St. Charles, MO School District - General Obligation - Series 1994 6.500 02/01/14 1,099,300
1,000 St. Louis County, MO GNMA Collateralized Mortgage Revenue - Certificates of
Receipt - Series 1993 H 5.400 07/01/15 943,900
1,000 St. Louis County, MO Regional Convention and Sports Complex Authority - Series B 7.000 08/15/11 1,123,520
200 St. Louis, MO Land Clearance Redevelopment Authority Revenue 7.400 08/15/04 213,226
500 St. Louis, MO Land Clearance Redevelopment Authority Revenue 7.600 08/15/07 535,275
445 St. Louis, MO School District - General Obligation - Series 1991 6.750 04/01/11 492,722
2,250 Sikeston, MO Electric Revenue - Series 1992 6.250 06/01/12 2,443,590
250 University of Missouri Revenue - Columbia Recreational Facilities 7.100 10/01/07 270,175
50 Vandalia, MO Water and Sewer System Revenue 7.625 04/01/06 55,471
50 Vandalia, MO Water and Sewer System Revenue 7.625 04/01/07 55,471
</TABLE>
Missouri F-188 9
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,095 Branson, MO Tax Increment Allocation - Branson Meadows - Series 1995 6.700% 11/01/07 $1,072,739
1,245 Branson, MO Tax Increment Allocation - Branson Meadows - Series 1995 6.950 11/01/09 1,230,284
1,500 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series V 6.625 07/01/12 1,581,630
500 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series V 5.750 07/01/18 474,830
3,535 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series
1993 X 5.000 07/01/22 2,993,792
9,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series
1996 Y and Z 5.000 07/01/36 7,499,430
1,400 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series
1993 W 5.500 07/01/15 1,361,262
State/Territorial General Obligations
---------------------------------------------------------------------------------------------------------------------------
2,400 Commonwealth of Puerto Rico Public Improvement - General Obligation - Series 1993 5.000 07/01/21 2,038,488
2,500 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 2,574,500
3,350 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.500 07/01/23 3,462,326
1,800 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series 1995 5.000 07/01/19 1,552,410
1,500 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series M 5.500 07/01/21 1,397,775
Student Loan Revenue Bonds
---------------------------------------------------------------------------------------------------------------------------
1,000 Missouri Higher Education Loan Authority - Student Loan Subordinate Lien
Revenue - Series 1992 6.500 02/15/06 1,018,040
4,190 Missouri State Higher Education Loan Authority - Student Loan Revenue - Series
1994 F 6.750 02/15/09 4,263,995
Total Investments in Securities - Municipal Bonds (cost $211,194,012) - 99.0% 216,806,785
Excess of Other Assets over Liabilities - 1.0% 2,129,676
Total Net Assets - 100.0% $218,936,461
</TABLE>
See notes to financial statements.
10 F-189 Missouri
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $211,194,012) $216,806,785
Receivable for investments sold 180,000
Receivable for Fund shares sold 254,671
Interest receivable 4,652,850
Other 11,856
Total assets 221,906,162
LIABILITIES:
Bank borrowings (Note G) 1,761,139
Payable for Fund shares reacquired 42,944
Distributions payable 989,461
Accrued expenses 176,157
Total liabilities 2,969,701
NET ASSETS: 218,936,461
Class A:
Applicable to 20,244,922 shares of beneficial interest
issued and outstanding $212,716,648
Net asset value per share $ 10.51
Class C:
Applicable to 592,367 shares of beneficial interest issued
and outstanding $ 6,219,813
Net asset value per share $ 10.50
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 13,429,637
EXPENSES:
Distribution fees - Class A (Note E) 851,451
Distribution fees - Class C (Note E) 48,302
Investment advisory fees (Note E) 1,092,915
Custodian's fees 112,867
Transfer agent's fees 163,575
Registration fees 14,544
Legal fees 5,647
Audit fees 16,836
Reimbursement of organizational expenses (Note F) 16,340
Trustees' fees 6,095
Shareholder services fees (Note E) 20,725
Other 6,529
Advisory fees waived (Note E) (598,909)
Total expenses before credits 1,756,917
Custodian fee credit (Note B) (37,307)
Net expenses 1,719,610
Net investment income 11,710,027
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 1,089,042
Change in unrealized appreciation (depreciation) of
investments (5,482,503)
Net loss on investments (4,393,461)
Net increase in net assets resulting from operations $ 7,316,566
See notes to financial statements.
</TABLE>
Missouri F-190 11
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Operations:
Net investment income $ 11,710,027 $ 11,205,053
Net realized gain (loss) on security transactions 1,089,042 (2,995,152)
Change in unrealized appreciation (depreciation) of
investments (5,482,503) 7,465,017
Net increase in net assets resulting from operations 7,316,566 15,674,918
Distributions to Class A shareholders:
From net investment income (11,560,299) (11,116,432)
Distributions to Class C shareholders:
From net investment income (246,972) (151,944)
Net decrease in net assets from distributions to
shareholders (11,807,271) (11,268,376)
Fund share transactions (Note C):
Proceeds from shares sold 31,869,368 33,344,451
Net asset value of shares issued in reinvestment of
distributions 6,602,041 6,400,051
Cost of shares reacquired (24,122,187) (24,296,688)
Net increase in net assets from Fund share transactions 14,349,222 15,447,814
Total increase in net assets 9,858,517 19,854,356
NET ASSETS:
Beginning of year 209,077,944 189,223,588
End of year $218,936,461 $209,077,944
NET ASSETS CONSIST OF:
Paid-in surplus $217,908,015 $203,656,037
Accumulated net realized gain (loss) on security
transactions (4,584,327) (5,673,369)
Unrealized appreciation (depreciation) of investments 5,612,773 11,095,276
$218,936,461 $209,077,944
See notes to financial statements.
</TABLE>
12 F-191 Missouri
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Missouri Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on August 3, 1987. On
February 2, 1994, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Missouri F-192 13
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 2,711,275 $ 29,055,443 3,030,807 $ 31,183,676
Shares issued on reinvestment 601,080 6,446,529 613,522 6,311,985
Shares reacquired (2,194,192) (23,512,867) (2,358,031) (24,044,260)
Net increase 1,118,163 $ 11,989,105 1,286,298 $ 13,451,401
Class C:
Shares sold 262,545 $ 2,813,925 209,323 $ 2,160,775
Shares issued on reinvestment 14,502 155,512 8,579 88,066
Shares reacquired (56,931) (609,320) (24,434) (252,428)
Net increase 220,116 $ 2,360,117 193,468 $ 1,996,413
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $94,347,708 and $80,840,304, respectively. At May 31, 1996, cost
for federal income tax purposes is $211,247,526 and net unrealized
appreciation aggregated $5,559,259, of which $7,905,176 related to
appreciated securities and $2,345,917 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $4,530,800 to offset future net capital gains expiring on May
31, 2003.
14 F-193 Missouri
<PAGE>
Notes to Financial Statements
................................................................................
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $598,909 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $55,822. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $72,348 and $4,943 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $631,600 for the year ended May 31, 1996, of which
approximately $544,700 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,300 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$83,600) have been reimbursed to the Advisor as of May 31, 1996.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $10 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$388,300, at a weighted average annualized interest rate of 6.75%. At May 31,
1996, the Fund had $1,761,139 outstanding under the line of credit.
Missouri F-194 15
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
CLASS A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.72 $ 10.50 $ 10.87 $ 10.32 $ 10.04
Income from investment operations:
Net investment income 0.58 0.60 0.61 0.64 0.65
Net realized and unrealized gain (loss) on
securities (0.21) 0.22 (0.34) 0.60 0.29
Total from investment operations 0.37 0.82 0.27 1.24 0.94
Less distributions:
From net investment income (0.58) (0.60) (0.61) (0.63) (0.65)
From net realized capital gains (0.02) (0.06) (0.01)
In excess of net realized capital gains (0.01)
Total distributions (0.58) (0.60) (0.64) (0.69) (0.66)
Net asset value, end of year $ 10.51 $ 10.72 $ 10.50 $ 10.87 $ 10.32
Total return/(a)/ 3.51% 8.19% 2.42% 12.54% 9.70%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.80% 0.67% 0.62% 0.55% 0.47%
Net investment income 5.37% 5.78% 5.52% 5.99% 6.39%
Assuming credits and no waivers or
reimbursements:
Expenses 1.05% 1.08% 1.06% 1.11% 1.13%
Net investment income 5.12% 5.37% 5.08% 5.43% 5.73%
Net assets at end of year (000's) $212,717 $205,089 $187,347 $144,775 $76,069
Portfolio turnover rate 37.66% 40.08% 34.30% 33.26% 31.73%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.78%; prior year numbers have not
been restated to reflect these credits.
16 F-195 Missouri
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 2, 1994 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.72 $10.50 $11.33
Income from investment operations:
Net investment income 0.51 0.53 0.02
Net realized and unrealized gain
(loss) on securities (0.21) 0.23 (0.83)
Total from investment operations 0.30 0.76 (0.81)
Less distributions:
From net investment income (0.52) (0.54) (0.02)
Total distributions (0.52) (0.54) (0.02)
Net asset value, end of period $10.50 $10.72 $10.50
Total return(a) 2.84% 7.60% (17.62%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses(b) 1.35% 1.20% 1.15%
Net investment income 4.79% 5.19% 4.44%
Assuming credits and no
waivers or reimbursements:
Expenses 1.60% 1.63% 1.61%
Net investment income 4.54% 4.76% 3.98%
Net assets at end of period (000's) $6,220 $3,989 $1,877
Portfolio turnover rate 37.66% 40.08% 34.30%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.33%; prior period numbers have not
been restated to reflect these credits.
Missouri F-196 17
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP MISSOURI
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Missouri Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Missouri Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
18 F-197 Missouri
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds -- New Jersey Intermediate
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 140 New Jersey Educational Facilities Financing Authority Revenue - Seton Hall
University - Series 1991 D 6.600% 07/01/02 $150,328
330 New Jersey Educational Facilities Authority - St. Peter's College - Series 1992 B 6.000 07/01/99 341,114
100 New Jersey Educational Facilities Authority - St. Peter's College - Series 1992 B 6.200 07/01/01 104,775
160 New Jersey Educational Facilities Authority - Stevens Institute of Technology -
Series 1992 A 6.400 07/01/03 170,467
100 New Jersey State Educational Facilities Authority - Ramapo College -
Series 1993 D 5.250 07/01/05 100,930
Hospitals
----------------------------------------------------------------------------------------------------------------------
300 New Jersey Health Care Facilities Financing Authority Revenue -
Newark Beth Israel Medical Center - Series 1994 5.800 07/01/07 309,927
100 New Jersey Health Care Facilities Financing Authority Revenue -
West Jersey Health System - Series 1992 6.000 07/01/07 103,684
250 New Jersey Health Care Facilities Financing Authority Revenue -
Bayonne Hospital - Series 1994 6.400 07/01/07 269,835
250 New Jersey Health Care Facilities Financing Authority Revenue -
Monmouth Medical Center - Series C 5.700 07/01/02 260,800
250 New Jersey Health Care Facilities Financing Authority Revenue -
Dover Medical Center - Series 1994 5.900 07/01/05 263,082
Industrial Development and Pollution Control
----------------------------------------------------------------------------------------------------------------------
150 New Jersey Economic Development Authority - Electric Energy Facility
Revenue - Vineland Cogeneration Project - Series 1992 6.750 06/01/99 156,234
200 New Jersey Economic Development Authority Revenue - Burlington Coat
Factory - Series 1995 5.400 09/01/03 201,556
480 New Jersey Economic Development Authority Revenue - Educational Testing
Services - Series 1995 B 5.500 05/15/05 487,445
Municipal Appropriation Obligations
----------------------------------------------------------------------------------------------------------------------
300 New Jersey Economic Development Authority Revenue - Market Transition
Facility - Series 1994 A 7.000 07/01/04 336,090
Municipal Revenue/Other
----------------------------------------------------------------------------------------------------------------------
330 Hoboken, NJ Parking Authority Revenue - Hudson County - Series 1992A 5.850 03/01/00 339,342
250 New Jersey Economic Development Authority District - Heating and Cooling
Revenue - Trigen Trenton Project - Series 1993 A 6.100 12/01/04 254,140
Municipal Revenue/Transportation
----------------------------------------------------------------------------------------------------------------------
340 New Jersey State Turnpike Authority Revenue - Series 1991 C 6.400 01/01/07 359,747
200 Port Authority of New York and New Jersey - Series 95 5.500 07/15/05 203,720
200 Port Authority of New York and New Jersey - Series 95 5.875 07/15/09 203,572
100 South Jersey Transportation System Revenue Authority - Series 1992 B 5.900 11/01/06 104,579
</TABLE>
New Jersey F-198 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
..........................................................................
Municipal Bonds - New Jersey Intermediate (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Utility
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250 Commonwealth of Puerto Rico Electric Power Authority - Series 1992 Q 5.900% 07/01/01 $260,205
Municipal Revenue/Water & Sewer
-------------------------------------------------------------------------------------------------------------------------
200 Atlantic City, NJ Municipal Utilities Authority - Water System Revenue -
Series 1993 5.650 05/01/07 194,784
100 Hoboken-Union City, NJ Weehawken Sewerage Authority Revenue - Series 1992 5.500 08/01/01 103,532
100 North Jersey District Water Supply - Wanaque South Project - Series 1993 5.700 07/01/05 104,166
Non-State General Obligations
-------------------------------------------------------------------------------------------------------------------------
100 Atlantic City, NJ Board of Education - School Revenue - Series 1992 6.000 12/01/06 105,020
100 Camden, NJ General Obligation - Series 1992 5.500 06/01/02 103,244
100 Cherry Hill Township New Jersey General Obligation - Camden County -
Series 1992 7.625 06/01/01 112,426
60 East Orange, NJ General Obligation - Essex County, New Jersey - Series 1992 8.400 08/01/06 74,350
100 Essex County, NJ Improvement Authority - General Obligation Lease Revenue -
Series 1993 5.300 12/01/05 100,966
320 Essex County, NJ Improvement Authority - General Obligation Lease Revenue -
Series 1994 6.350 04/01/07 325,581
100 Essex County, NJ Improvement Authority Revenue - General Obligation -
Orange Municipal Utility and Lease - Series 1993 5.450 12/01/03 103,291
100 Gloucester Township, NJ General Obligation - Series 1993 5.300 07/15/05 101,293
400 Jersey City, NJ General Obligation - City School 6.500 02/15/02 431,072
250 Mercer County, NJ Improvement Revenue - Special Services School District -
Series 1992 A 0.000 04/01/04 168,892
100 Monmouth County, NJ Improvement Authority Revenue - Howell Township
Board of Education Project - Series 1992 6.000 07/01/03 106,082
100 Montclair, NJ General Obligation - Series 1992 5.800 03/01/06 103,179
200 Ocean County, NJ General Obligation - Series 1991 A 6.250 10/01/06 212,276
185 Perth Amboy, NJ General Obligation - Series 1994 6.200 08/01/04 198,821
100 Woodbridge Township, NJ General Obligation - Series 1992 6.150 08/15/06 105,794
Special Tax Revenue
-------------------------------------------------------------------------------------------------------------------------
100 New Jersey Sports and Exposition Authority - Convention Center Luxury Tax -
Series 1992 A 6.000 07/01/07 104,415
State/Territorial General Obligations
-------------------------------------------------------------------------------------------------------------------------
200 New Jersey State General Obligation - Series 1992 D 0.000 02/15/03 143,338
</TABLE>
6 F-199 New Jersey
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds - New Jersey Intermediate (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 190 New Jersey State Higher Education Assistance Authority -
Student Loan Revenue - NJClass Loan Program - Series 1992 A 5.200% 01/01/98 $ 190,764
95 New Jersey State Higher Education Assistance Authority -
Student Loan Revenue - NJClass Loan Program - Series 1992 A 5.200 07/01/98 95,498
90 New Jersey State Higher Education Assistance Authority -
Student Loan Revenue - NJClass Loan Program - Series 1992 A 6.000 01/01/06 88,835
Total Investments in Securities - Municipal Bonds (cost $8,087,443) - 100.5% 8,359,191
Excess of Liabilities over Other Assets - (0.5)% (41,610)
Total Net Assets - 100.0% $ 8,317,581
</TABLE>
See notes to financial statements.
New Jersey F-200 7
<PAGE>
[LOGO OF SHIP ART]
New Jersey Intermediate
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at market value (cost $8,087,443) $ 8,359,191
Interest receivable 161,477
Other 688
Total assets 8,521,356
LIABILITIES:
Bank overdraft 52,553
Payable for Fund shares reaquired 92,494
Distributions payable 35,420
Accrued expenses 23,308
Total liabilities 203,775
NET ASSETS:
Applicable to 820,239 shares of beneficial interest issued
and outstanding $ 8,317,581
Net asset value per share $ 10.14
</TABLE>
[LOGO OF SHIP ART]
New Jersey Intermediate
Statement of Operations For the year ended May 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 501,032
EXPENSES:
Distribution fees (Note E) 36,470
Investment advisory fees (Note E) 45,699
Custody and accounting fees 43,929
Transfer agent's fees 17,440
Registration fees 184
Legal fees 107
Audit fees 10,720
Trustees' fees 259
Shareholder services fees (Note E) 977
Other 542
Advisory fees waived (Note E) (45,699)
Expense subsidy (Note E) (56,297)
Total expenses before credits 54,331
Custodian fee credit (Note B) (619)
Net expenses 53,712
Net investment income 447,320
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 12,478
Change in unrealized appreciation (depreciation) of investments (98,145)
Net loss on investments (85,667)
Net increase in net assets resulting from operations $ 361,653
</TABLE>
See notes to financial statements.
8 F-201 New Jersey
<PAGE>
[LOGO OF SHIP ART]
New Jersey Intermediate
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
May 31, 1996 May 31, 1995
<S> <C> <C>
Operations:
Net investment income $ 447,320 $ 457,146
Net realized gain (loss) on security transactions 12,478 (155,497)
Change in unrealized appreciation (depreciation) of investments (98,145) 346,033
Net increase in net assets resulting from operations 361,653 647,682
Distributions to shareholders:
From net investment income (446,648) (463,100)
Net decrease in net assets from distributions to shareholders (446,648) (463,100)
Net decrease in net assets from Fund share transactions (Note C) (813,929) (288,863)
Total decrease in net assets (898,924) (104,281)
NET ASSETS:
Beginning of year 9,216,505 9,320,786
End of year $ 8,317,581 $ 9,216,505
NET ASSETS CONSIST OF:
Paid-in surplus $ 8,278,034 $ 9,091,963
Undistributed net investment income 1,954 1,282
Accumulated net realized gain (loss) on security transactions (234,155) (246,633)
Unrealized appreciation (depreciation) of investments 271,748 369,893
$ 8,317,581 $ 9,216,505
</TABLE>
See notes to financial statements.
New Jersey F-202 9
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
<TABLE>
<CAPTION>
Municipal Bonds - New Jersey Double Tax Exempt
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 410 New Jersey State Educational Facilities Authority - Monmouth College -
Series 1993 A 5.625% 07/01/13 $ 379,656
Hospitals
------------------------------------------------------------------------------------------------------------------------
200 New Jersey Health Care Facilities Financing Authority Revenue -
Newark Beth Israel Medical Center - Series 1994 6.000 07/01/16 200,438
250 New Jersey Health Care Facilities Financing Authority Revenue -
Irvington General Hospital - Series 1994 6.375 08/01/15 256,078
200 New Jersey Health Care Facilities Financing Authority Revenue -
Bayonne Hospital - Series 1994 6.250 07/01/12 205,404
250 New Jersey Health Care Facilities Financing Authority Revenue -
Monmouth Medical Center - Series C 6.250 07/01/16 255,990
450 New Jersey Economic Development Authority Revenue - Clara Maass Health
System Obligated Group - Series 1995 5.000 07/01/25 388,418
Housing/Multifamily
------------------------------------------------------------------------------------------------------------------------
500 New Jersey State Housing and Mortgage Finance Agency - Home Buyer Project -
Series 1 6.600 11/01/14 515,240
Housing/Single Family
------------------------------------------------------------------------------------------------------------------------
250 New Jersey State Housing and Mortgage Finance Agency Revenue - Series 1994 K 6.300 10/01/16 252,398
200 New Jersey State Housing and Mortgage Finance Agency Revenue - Series 1994 K 6.375 10/01/26 200,916
Industrial Development and Pollution Control
------------------------------------------------------------------------------------------------------------------------
50 New Jersey Economic Development Authority - Natural Gas Facilities Revenue -
Elizabethtown Gas Company - Series A 6.750 10/01/21 51,214
235 New Jersey Economic Development Authority - Electric Energy Facility Revenue -
Vineland Cogeneration Project - Series 1992 6.750 06/01/99 244,767
100 New Jersey Economic Development Authority - Water Facilities Revenue -
New Jersey-American Water Company Incorporated 5.500 06/01/23 92,354
Project - Series 1993 A and B
150 New Jersey Economic Development Authority Water Facilities Revenue -
Hackensack Water Company - Series 1994 B 5.900 03/01/24 146,385
185 New Jersey Economic Development Authority Revenue - Economic Growth -
Series 1992A-3 6.550 12/01/07 191,854
625 New Jersey Economic Development Authority Revenue - Educational Testing
Services - Series 1995 B 6.125 05/15/15 636,712
250 Union County, NJ Industrial Pollution Control Financing Authority Revenue -
American Cyanamid - Series 1994 5.800 09/01/09 262,328
Municipal Appropriation Obligations
------------------------------------------------------------------------------------------------------------------------
300 New Jersey Economic Development Authority Revenue - RWJ Health Care
Corporation - Series 1994 6.250 07/01/14 308,796
300 New Jersey Economic Development Authority Revenue - Economic Recovery -
Series 1992 A 6.000 03/15/21 299,199
</TABLE>
10 F-203 New Jersey
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
<TABLE>
<CAPTION>
Municipal Bonds - New Jersey Double Tax Exempt (continued)
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 100 Hoboken, NJ Parking Authority Revenue - Hudson County - Series 1992A 6.625% 03/01/09 $ 101,284
100 New Jersey Economic Development Authority District - Heating and Cooling
Revenue - Trigen Trenton Project - Series 1993 A 6.200 12/01/10 98,639
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
125 Port Authority of New York and New Jersey - Series 96 6.600 10/01/23 130,948
200 Port Authority of New York and New Jersey - Series 100 5.750 12/15/20 193,864
100 Port Authority of New York and New Jersey - Series 95 5.875 07/15/09 101,786
50 South Jersey Transportation System Revenue Authority - Series 1992 B 6.000 11/01/12 51,156
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
200 Commonwealth of Puerto Rico Electric Power Authority - Series 1992 R 6.250 07/01/17 201,498
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
50 Atlantic City, NJ Municipal Utilities Authority - Water System Revenue -
Series 1993 5.650 05/01/07 48,696
100 Atlantic City, NJ Municipal Utilities Authority - Water System Revenue -
Series 1993 5.750 05/01/17 95,209
150 Bergen County, NJ Utilities Authority - Water Pollution Control System Revenue -
Series 1992 B 6.000 12/15/13 153,004
250 Camden County, NJ Municipal Utilities Authority - County Agreement Sewer Revenue -
Series 1996 5.125 07/15/17 228,165
75 Evesham Municipal Utilities Authority - Burlington County, NJ - Series 1993 B 5.600 07/01/15 72,731
250 Hoboken-Union City, NJ Weehawken Sewerage Authority Revenue - Series 1992 6.200 08/01/19 254,618
200 New Jersey Wastewater Treatment Trust - Series 1994 6.500 04/01/14 210,666
200 North Jersey District Water Supply - Wanaque South Project - Series 1993 6.000 07/01/21 200,404
25 Ocean County, NJ Utilities Authority - Wastewater Revenue 6.750 01/01/13 25,790
35 Stafford, NJ Municipal Utility Authority - Water and Sewer Revenue -
Series 1992 A 6.000 12/01/12 35,659
50 Stafford, NJ Municipal Utility Authority Water and Sewer Revenue -
Series 1992 A 6.125 12/01/22 50,493
75 Wanaque Valley, NJ Regional Sewer Authority - Series 1993 A 6.125 09/01/22 70,045
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
200 Atlantic City, NJ General Obligation - Series 1994 5.650 08/15/04 200,162
50 Atlantic City, NJ Board of Education - School Revenue - Series 1992 6.150 12/01/12 51,942
200 Atlantic County, NJ General Obligation - Series 1994 6.000 01/01/07 209,092
25 Cherry Hill Township New Jersey General Obligation - Camden County -
Series 1992 6.300 06/01/12 26,100
340 East Orange, NJ General Obligation - Essex County, New Jersey - Series 1992 8.400 08/01/06 421,318
450 Essex County, NJ Improvement Authority General Obligation Lease Revenue -
Series 1994 6.600 04/01/14 459,405
300 Essex County, NJ Improvement Authority - General Obligation Lease Revenue -
Series 1994 6.350 04/01/07 305,232
50 Monmouth County, NJ Improvement Authority Revenue - Howell Township
Board of Education Project - Series 1992 6.450 07/01/08 53,844
</TABLE>
New Jersey F-204 11
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds - New Jersey Double Tax Exempt (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 165 Parsippany Troy Hills Township, NJ General Obligation - Morris County,
New Jersey - Series 1992 0.000% 04/01/07 $ 92,638
250 Union City, NJ General Obligation - Series 1992 6.375 11/01/10 269,235
25 Woodbridge Township, NJ General Obligation -
Series 1992 6.150 08/15/06 26,445
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
100 Essex County, NJ Improvement Authority - General Obligation Lease Revenue -
County Jail and Youth House - Series 1994 6.900 12/01/14 113,997
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
100 New Jersey Sports and Exposition Authority - Convention Center Luxury Tax -
Series 1992 A 5.500 07/01/22 94,322
250 New Jersey Sports and Exposition Authority - Convention Center Luxury Tax -
Series 1992 A 6.250 07/01/20 255,708
300 Commonwealth of Puerto Rico Highway Authority Revenue - Series 1990 Q 6.000 07/01/20 295,848
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
550 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400 07/01/25 495,786
165 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 179,015
Total Investments in Securities - Municipal Bonds (cost $10,652,274) - 96.8% 10,762,891
Excess of Other Assets over Liabilities - 3.2% 350,967
Total Net Assets - 100.0% $11,113,858
</TABLE>
See notes to financial statements.
12 F-205 New Jersey
<PAGE>
[LOGO OF SHIP ART]
New Jersey Double Tax Exempt
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at market value (cost $10,652,274) $10,762,891
Cash 42,004
Receivable for investments sold 100,000
Receivable for Fund shares sold 76,450
Interest receivable 204,726
Other 635
Total assets 11,186,706
LIABILITIES:
Distributions payable 51,789
Accrued expenses 21,059
Total liabilities 72,848
NET ASSETS:
Applicable to 1,119,318 shares of beneficial interest issued and outstanding $11,113,858
Net asset value per share $ 9.93
</TABLE>
[LOGO OF SHIP ART]
New Jersey Double Tax Exempt
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 564,064
EXPENSES:
Distribution fees (Note E) 38,444
Investment advisory fees (Note E) 48,257
Custody and accounting fees 45,484
Transfer agent's fees 12,980
Registration fees 1,224
Legal fees 77
Audit fees 10,570
Trustees' fees 183
Shareholder services fees (Note E) 1,309
Other 428
Advisory fees waived (Note E) (48,257)
Expense subsidy (Note E) (67,802)
Total expenses before credits 42,897
Custodian fee credit (Note B) (2,174)
Net expenses 40,723
Net investment income 523,341
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 12,350
Change in unrealized appreciation (depreciation) of investments (194,748)
Net loss on investments (182,398)
Net increase in net assets resulting from operations $ 340,943
</TABLE>
See notes to financial statements.
New Jersey F-206 13
<PAGE>
[LOGO OF SHIP ART]
New Jersey Double Tax Exempt
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
INCREASE (DECREASE) IN NET ASSETS May 31, 1996 May 31, 1995
<S> <C> <C>
Operations:
Net investment income $ 523,341 $ 362,726
Net realized gain (loss) on security transactions 12,350 (58,873)
Change in unrealized appreciation (depreciation) of investments (194,748) 299,124
Net increase in net assets resulting from operations 340,943 602,977
Distributions to shareholders:
From net investment income (528,114) (361,591)
Net decrease in net assets from distributions to shareholders (528,114) (361,591)
Net increase in net assets from Fund share transactions (Note C) 3,577,978 2,602,038
Total increase in net assets 3,390,807 2,843,424
NET ASSETS:
Beginning of year 7,723,051 4,879,627
End of year $11,113,858 7,723,051
NET ASSETS CONSIST OF:
Paid-in surplus $11,170,517 7,596,177
Undistributed net investment income 1,135
Accumulated net realized gain (loss) on security transactions (167,276) (179,626)
Unrealized appreciation (depreciation) of investments 110,617 305,365
$11,113,858 7,723,051
</TABLE>
See notes to financial statements.
14 F-207 New Jersey
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
Flagship's New Jersey Intermediate Tax Exempt Fund (New Jersey Intermediate)
and New Jersey Double Tax Exempt Fund (New Jersey Double Tax Exempt) are
sub-trusts of the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts
business trust organized on March 8, 1985. The Funds are open-end, non-
diversified management investment companies registered under the Investment
Company Act of 1940, as amended. The Funds commenced investment operations
on September 16, 1992. Shares of beneficial interest in each Fund, which are
registered under the Securities Act of 1933, as amended, are offered to the
public on a continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities having remaining
maturities of 60 days or less are stated at amortized cost, which is
equivalent to fair value.
The Funds must maintain a diversified investment portfolio as a
registered investment company, however, the Funds' investments are
primarily in the securities of their state. Such concentration subjects the
Funds to the effects of economic changes occurring within that state.
Federal Income Taxes: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to their shareholders all of their tax exempt
net investment income and net realized gains on security transactions.
Therefore, no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Funds amortize
original issue discounts and premiums paid on purchases of portfolio
securities on the same basis for both financial reporting and tax purposes.
Market discounts, if applicable, are recognized as ordinary income upon
disposition or maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to
each sub-trust as incurred.
The Funds have entered into an agreement with the custodian, whereby they
earn custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Funds, are based on 80% of
the daily effective federal funds rate.
New Jersey F-208 15
<PAGE>
Notes to Financial Statements
................................................................................
Securities Purchased on a "When-issued" Basis: The Funds may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The
current market value of these securities is determined in the same manner as
other portfolio securities. There were no "when-issued" purchase commitments
included in the New Jersey Intermediate and New Jersey Double Tax Exempt
Funds' statements of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
New Jersey Intermediate
Shares sold 105,150 $ 1,086,130 130,179 $ 1,291,018
Shares issued on reinvestment 25,702 265,262 27,564 272,616
Shares reacquired (209,872) (2,165,321) (187,184) (1,852,497)
Net decrease (79,020) $ (813,929) (29,441) $ (288,863)
New Jersey Double Tax Exempt
Shares sold 403,389 $ 4,073,080 366,626 $ 3,549,177
Shares issued on reinvestment 25,230 255,146 17,363 166,570
Shares reacquired (74,581) (750,248) (116,890) (1,113,709)
Net increase 354,038 $ 3,577,978 267,099 $ 2,602,038
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated:
<TABLE>
<CAPTION>
Fund Purchases Sales
<C> <C> <C>
New Jersey Intermediate $ 1,567,110 $ 2,281,229
New Jersey Double Tax Exempt $ 4,743,627 $ 1,470,773
</TABLE>
At May 31, 1996, cost for federal income tax purposes is $8,087,443 and
$10,652,274 for the New Jersey Intermediate and New Jersey Double Tax Exempt
Funds, respectively, and net unrealized appreciation aggregated $271,748 and
$110,617, respectively, which includes:
<TABLE>
<CAPTION>
Fund Unrealized Appreciation Unrealized Depreciation
<S> <C> <C>
New Jersey Intermediate $276,510 $ 4,762
New Jersey Double Tax Exempt $208,639 $98,022
</TABLE>
At May 31, 1996, the Funds have available capital loss carryforwards of
approximately $234,200 and $167,300, respectively, to offset future net capital
gains expiring in May 31, 2003.
16 F-209 New Jersey
<PAGE>
Notes to Financial Statements
................................................................................
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of agreements which
provide for furnishing of investment advice, office space and facilities to
the Funds, receives fees computed monthly, on the average daily net assets
of the Funds at an annualized rate of 1/2 of 1%. During the year ended May
31, 1996, the Advisor, at its discretion, permanently waived all of its
advisory fees for the Funds amounting to $45,699 for the New Jersey
Intermediate and $48,257 for the New Jersey Double Tax Exempt Funds. Also,
under an agreement with the Funds, the Advisor may subsidize certain
expenses excluding advisory and distribution fees.
The Funds have Distribution Agreements with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Funds' shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, each Fund has adopted a plan to reimburse the Distributor for
its actual expenses incurred in the distribution and promotion of sales of
the Funds' shares. The maximum amount payable for these expenses on an
annual basis is .40% of each Fund's average daily net assets. Included in
accrued expenses at May 31, 1996 are accrued distribution fees of $2,883 and
$3,750 for the New Jersey Intermediate and New Jersey Double Tax Exempt
Funds, respectively. Certain non-promotional expenses directly attributable
to current shareholders are aggregated by the Distributor and passed through
to the Funds as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Funds, the Distributor received commissions on sales of the Funds' shares
for the year ended May 31, 1996, as follows:
<TABLE>
<CAPTION>
Fund Gross Commissions Paid to Other Dealers
<S> <C> <C>
New Jersey Intermediate $ 19,100 $15,500
New Jersey Double Tax Exempt $105,700 $92,300
</TABLE>
Certain officers and trustees of the Trust are also officers and/or
directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Funds, amounting to
approximately $32,200 for the New Jersey Intermediate and approximately
$58,900 for the New Jersey Double Tax Exempt Funds, will be reimbursed to
the Advisor on a straight-line basis over a period of three years beginning
June 1, 1996. In the event that the Advisor's current investment in the
Trust falls below $100,000 prior to the full reimbursement of the
organizational expenses, then it will forego any further reimbursement.
New Jersey F-210 17
<PAGE>
[LOGO OF SHIP ART)
New Jersey Intermediate Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended September 16, 1992 to
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.25 $10.04 $10.15 $ 9.70
Income from investment operations:
Net investment income 0.51 0.50 0.53 0.34
Net realized and unrealized gain
(loss) on securities (0.11) 0.22 (0.10) 0.45
Total from investment operations 0.40 0.72 0.43 0.79
Less distributions:
From net investment income (0.51) (0.51) (0.52) (0.34)
In excess of net realized capital gains (0.02)
Total distributions (0.51) (0.51) (0.54) (0.34)
Net asset value, end of period $10.14 $10.25 $10.04 $10.15
Total return/(a)/ 3.89% 7.42% 4.27% 11.07%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 0.60% 0.69% 0.16% 0.40%
Net investment income 4.90% 5.04% 5.10% 4.84%
Assuming credits and no
waivers or reimbursements:
Expenses 1.71% 1.81% 1.81% 2.70%
Net investment income 3.79% 3.92% 3.45% 2.54%
Net assets at end of period (000's) $8,318 $9,217 $9,321 $5,649
Portfolio turnover rate 17.46% 35.32% 26.50% 28.93%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.59%; prior period numbers have not
been restated to reflect these credits.
18 F-211 New Jersey
<PAGE>
[LOGO OF SHIP ART)
New Jersey Double Tax Exempt Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended September 16, 1992 to
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.09 $ 9.79 $ 10.12 $ 9.58
Income from investment operations:
Net investment income 0.55 0.55 0.57 0.38
Net realized and unrealized gain
(loss) on securities (0.16) 0.30 (0.23) 0.54
Total from investment operations 0.39 0.85 0.34 0.92
Less distributions:
From net investment income (0.55) (0.55) (0.57) (0.38)
In excess of net realized capital gains (0.10)
Total distributions (0.55) (0.55) (0.67) (0.38)
Net asset value, end of period $ 9.93 $ 10.09 $ 9.79 $ 10.12
Total return/(a)/ 3.97% 9.16% 3.24% 13.02%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 0.44% 0.36% 0.01% 0.00%
Net investment income 5.42% 5.75% 5.52% 5.43%
Assuming credits and no
waivers or reimbursements:
Expenses 1.63% 2.07% 2.81% 5.80%
Net investment income 4.23% 4.04% 2.72% (0.37%)
Net assets at end of period (000's) $11,114 $7,723 $4,880 $2,388
Portfolio turnover rate 15.61% 33.58% 90.63% 75.40%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.42%; prior period numbers have not
been restated to reflect these credits.
New Jersey F-212 19
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NEW JERSEY
TAX EXEMPT FUNDS
We have audited the accompanying statements of assets and liabilities, including
the statements of investments in securities and net assets, of the Flagship New
Jersey Intermediate Tax Exempt Fund and the Flagship New Jersey Double Tax
Exempt Fund as of May 31, 1996, the related statements of operations for the
year then ended, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Funds' custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship New
Jersey Intermediate Tax Exempt Fund and the New Jersey Double Tax Exempt Fund at
May 31, 1996, the results of their operations, the changes in their net assets
and the financial highlights for the respective stated periods, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
20 F-213 New Jersey
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Commonwealth of Puerto Rico Industrial, Medical and Environmental -
Pollution Control Facilities Financing Authority - Catholic University of
Puerto Rico Project - Series 1993 5.600% 12/01/07 $ 496,655
5,000 University of New Mexico Regents - System Revenue - Series 1992A 6.000 06/01/21 5,006,450
Health Care
--------------------------------------------------------------------------------------------------------------------------
1,000 Hobbs, NM Health Facilities Revenue - Evangelical Lutheran Good Samaritan
Society - Series 1996 5.500 05/01/26 941,380
500 Las Cruces, NM Health Facilities Revenue - Evangelical Lutheran Good
Samaritan Society - Series 1992 6.450 12/01/17 520,210
Hospitals
--------------------------------------------------------------------------------------------------------------------------
450 Albuquerque, NM Hospital System - Presbyterian Healthcare Services -
Series 1992A 6.375 08/01/07 482,872
1,500 Albuquerque, NM Evangelical Lutheran Good Samaritan Society - Series 1993 5.900 06/01/13 1,510,605
350 Socorro, NM Health Facilities Revenue - Evangelical Lutheran Good
Samaritan Society - Series 1994 6.000 05/01/08 361,868
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
1,000 Las Cruces, NM Housing Development Corporation - Multifamily Mortgage
Revenue - Series 1993A 6.400 10/01/19 989,140
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
1,250 New Mexico Mortgage Finance Authority Revenue - Single Family -
Series 1995A 6.650 07/01/26 1,271,475
170 New Mexico Mortgage Finance Authority - Single Family - Series 1992A-1 6.850 07/01/10 176,406
850 New Mexico Mortgage Finance Authority - Single Family - Series 1992A-2 6.900 07/01/24 878,602
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
985 Farmington, NM Pollution Control Revenue - Public Service Company -
San Juan and Four Corners - Series 1992A 6.375 12/15/22 1,017,998
1,000 Lordsburg, NM Pollution Control Revenue - Phelps Dodge Corporation -
Series 1993 6.500 04/01/13 1,030,200
500 Sandoval County, NM Gross Receipts Tax Revenue - Series 1994 7.150 11/01/10 535,095
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
700 Commonwealth of Puerto Rico Urban Renewal and Housing - Series 1989 7.875 10/01/04 767,228
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
100 New Mexico Finance Authority Revenue - Revolving Fund Public Project -
Series 1995A 5.500 06/01/07 100,141
60 * New Mexico Finance Authority - Court Automation Fee Revenue - Series 1996 4.900 06/01/03 59,684
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
1,000 Albuquerque, NM Airport Revenue - Series 1995 A and B 6.600 07/01/16 1,042,900
</TABLE>
4 F-214 New Mexico
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Utility
----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,200 Guam Power Authority Revenue - Series 1993A 5.250% 10/01/23 $ 999,984
500 Guam Power Authority Revenue - Series 1992A 6.375 10/01/08 529,230
250 Las Cruces, NM Utility and Improvement Revenue 6.250 07/01/12 252,190
1,000 Los Alamos County, NM Incorporated Utility System Revenue - Series 1994A 5.700 07/01/05 1,036,520
1,500 Los Alamos County, NM Incorporated Utility System Revenue - Series 1994A 6.000 07/01/15 1,505,535
2,000 Commonwealth of Puerto Rico Electric Power Authority Revenue - Series 1995Z 5.250 07/01/21 1,780,600
100 Rio Grande, NM Natural Gas Association System Revenue and Improvement -
Dona Ana County - Series 1993 6.000 07/01/07 97,161
1,000 Rio Grande, NM Natural Gas Association System Revenue and Improvement -
Dona Ana County - Series 1993 6.125 07/01/13 952,680
Municipal Revenue/Water & Sewer
----------------------------------------------------------------------------------------------------------------------------
1,000 Albuquerque, NM Joint Water and Sewer System Revenue - Series 1990A 0.000 07/01/07 540,440
100 Grants, NM Water and Sewer Improvement Revenue - Series 1993B 5.600 01/01/08 97,584
500 Grants, NM Water and Sewer Improvement Revenue - Series 1993B 5.800 01/01/13 459,535
Non-State General Obligations
----------------------------------------------------------------------------------------------------------------------------
80 Bernalillo County, NM General Obligation - Series 1994 5.750 10/01/05 83,323
480 Grants/Cibola County, NM School District Number 1 - General Obligation -
Series 1994 6.250 05/01/08 489,869
510 Grants/Cibola County, NM School District Number 1 - General Obligation -
Series 1994 6.250 05/01/09 517,268
200 Torrance County, NM General Obligation - Series 1993 5.500 07/01/04 201,150
Pre-refunded or Escrowed
----------------------------------------------------------------------------------------------------------------------------
250 Albuquerque, NM Joint Water and Sewer System Revenue - Series 1990A 6.000 07/01/15 262,030
200 Commonwealth of Puerto Rico - Public Improvement 7.300 07/01/20 222,826
327 Santa Fe County, NM Office and Training Facilities Revenue Project 9.000 07/01/07 417,236
500 Santa Fe, NM Water and Sewer Revenue - Series 1994A 6.300 06/01/24 542,085
Resource Recovery
----------------------------------------------------------------------------------------------------------------------------
1,000 Las Cruces, NM South Central Solid Waste Authority Revenue -
Environmental Services - Series 1995 6.000 06/01/16 970,570
Special Tax Revenue
----------------------------------------------------------------------------------------------------------------------------
4,250 Albuquerque, NM Gross Receipts - Lodgers Tax Revenue - Series 1991 0.000 07/01/11 1,747,430
2,550 Dona Ana County, NM Gross Receipts Tax and Improvement Revenue -
Series 1993 6.000 06/01/19 2,481,864
810 Espanola, NM Gross Receipts Tax Revenue - Series 1994 5.900 03/01/08 826,103
465 Grants, NM Gross Receipts Tax and Improvement Revenue - Series 1993B 5.800 07/01/13 426,749
250 Las Cruces, NM Gross Receipts Tax Revenue - Series 1992 6.250 12/01/05 261,710
225 Las Cruces, NM Revenue - Series 1995 5.250 12/01/06 221,085
1,400 Las Cruces, NM Revenue - Series 1995 5.450 12/01/08 1,358,546
500 Las Cruces, NM Revenue - Series 1995 5.500 12/01/15 472,040
500 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993W 5.500 07/01/13 476,045
</TABLE>
New Mexico F-215 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$2,000 Puerto Rico Highway and Transportation Authority Revenue - Series 1996 Y and Z 5.500% 07/01/36 $1,815,360
200 Rio Rancho, NM Gross Receipts - Tax Revenue - Series 1994A 5.100 12/01/07 192,064
300 Roswell, NM Sales Tax Revenue - Series 1993 6.000 06/01/12 294,561
225 Sandoval County, NM Gross Receipts Tax/Fire District Revenue - Series 1993 6.600 12/01/04 230,843
200 Sandoval County, NM Gross Receipts Tax/Fire District Revenue - Series 1993 6.900 12/01/07 205,544
375 Sandoval County, NM Gross Receipts Tax Revenue - Series 1992 6.900 11/01/12 396,518
130 Sandoval County, NM Gross Receipts Tax Revenue - Series 1992A 6.500 12/01/06 137,198
30 Santa Fe, NM Subordinate Lien Gross Receipts Tax Revenue - Series 1995 A and B 4.750 06/01/04 29,221
500 Silver City, NM Sales Tax Revenue - Series 1993 5.850 07/01/09 479,690
470 Tucumcari, NM Municipal Gross Receipts/Lodgers' Tax Improvement Revenue -
Series 1993 5.875 06/01/12 447,322
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
200 Guam Government General Obligation - Series 1993A 5.000 11/15/05 183,418
1,500 Guam Government General Obligation - Series 1993A 5.375 11/15/13 1,321,065
500 Guam Government General Obligation - Series 1993A 5.400 11/15/18 432,845
2,550 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/19 2,199,248
1,730 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series M 3.750 07/01/16 1,547,935
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
1,600 New Mexico Educational Assistance Foundation - Student Loan Revenue -
Series A 6.850 04/01/05 1,684,864
500 New Mexico Educational Assistance Foundation - Student Loan Revenue -
Series 1A 6.550 12/01/05 508,130
410 New Mexico Educational Assistance Foundation - Student Loan Revenue -
Series 1A 6.850 12/01/05 417,868
1,250 New Mexico Educational Assistance Foundation - Student Loan Revenue -
Series 1995 IV-A1 6.500 03/01/04 1,319,812
Total Investments in Securities - Municipal Bonds (cost $50,967,832) - 100.2% 51,261,803
Excess of Liabilities over Other Assets - (0.2)% (88,622)
Total Net Assets - 100.0% $51,173,181
</TABLE>
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
6 F-216 New Mexico
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $50,967,832) $51,261,803
Receivable for Fund shares sold 716
Interest receivable 1,100,784
Other 3,216
Total assets 52,366,519
LIABILITIES:
Bank borrowings (Note G) 802,919
Payable for investments purchased 60,196
Payable for Fund shares reacquired 66,108
Distributions payable 223,098
Accrued expenses 41,017
Total liabilities 1,193,338
NET ASSETS:
Applicable to 5,219,040 shares of beneficial interest issued and
outstanding $51,173,181
Net asset value per share $ 9.81
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
...............................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 2,981,914
EXPENSES:
Distribution fees (Note E) 206,501
Investment advisory fees (Note E) 258,828
Custody and accounting fees 51,098
Transfer agent's fees 28,205
Registration fees 976
Legal fees 1,411
Audit fees 11,725
Reimbursement of organizational expenses (Note F) 10,358
Trustees' fees 1,464
Shareholder services fees (Note E) 6,100
Other 1,786
Advisory fees waived (Note E) (226,537)
Total expenses before credits 351,915
Custodian fee credit (Note B) (16,918)
Net expenses 334,997
Net investment income 2,646,917
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions (189,794)
Change in unrealized appreciation (depreciation) of investments (845,219)
Net loss on investments (1,035,013)
Net increase in net assets resulting from operations $ 1,611,904
</TABLE>
See notes to financial statements.
New Mexico F-217 7
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 2,646,917 $ 2,682,640
Net realized gain (loss) on security transactions (189,794) (878,425)
Change in unrealized appreciation (depreciation) of investments (845,219) 2,239,449
Net increase in net assets resulting from operations 1,611,904 4,043,664
Distributions to shareholders:
From net investment income (2,660,344) (2,699,610)
Net decrease in net assets from distributions to shareholders (2,660,344) (2,699,610)
Net increase (decrease) in net assets from Fund share transactions (Note C) 71,218 (360,910)
Total (decrease) increase in net assets (977,222) 983,144
NET ASSETS:
Beginning of year 52,150,403 51,167,259
End of year $51,173,181 $52,150,403
NET ASSETS CONSIST OF:
Paid-in surplus $52,262,539 $52,204,748
Accumulated net realized gain (loss) on security transactions (1,383,329) (1,193,535)
Unrealized appreciation (depreciation) of investments 293,971 1,139,190
$51,173,181 $52,150,403
</TABLE>
See notes to financial statements.
8 F-218 New Mexico
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship New Mexico Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced investment operations on September 16,
1992. Shares of beneficial interest in the Fund, which are registered under
the Securities Act of 1933, as amended, are offered to the public on a
continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations
are readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
New Mexico F-219 9
<PAGE>
Notes to Financial Statements
................................................................................
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were $60,000 "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
--------------------- -----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 691,631 $ 6,925,871 1,187,721 $ 11,354,468
Shares issued on reinvestment 133,282 1,333,109 143,686 1,363,952
Shares reacquired (817,071) (8,187,762) (1,406,966) (13,079,330)
Net increase (decrease) 7,842 $ 71,218 (75,559) $ (360,910)
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $29,517,115 and $29,945,810, respectively. At May 31, 1996, cost
for federal income tax purposes is $50,867,040 and net unrealized
appreciation aggregated $394,763, of which $915,045 related to appreciated
securities and $520,282 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $1,383,300 to offset future net capital gains in the amounts of
$1,092,700 through May 31, 2003 and $290,600 through May 31, 2004.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly, on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $226,537 of its
advisory fees. Included in accrued expenses at May 31, 1996, are accrued
advisory fees of $4,356. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's shares. The maximum amount payable for these expenses on an annual
basis is .40% of the Fund's average daily net assets. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $17,425. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
10 F-220 NEW MEXICO
<PAGE>
Notes to Financial Statements
................................................................................
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $131,800 for the year ended May 31, 1996, of which
approximately $114,300 was paid to other dealers. Certain officers and
trustees of the Trust are also officers and/or directors of the Distributor
and/or Advisor.
F. Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$51,700) are being reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $31,018 has been reimbursed. In the
event that the Advisor's current investment in the Trust falls below
$100,000 prior to the full reimbursement of the organizational expenses, then
it will forego any further reimbursement.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$114,500, at a weighted average annualized interest rate of 6.77%. At May 31,
1996, the Fund had $802,919 outstanding under the line of credit.
New Mexico F-221 11
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended Year Ended September 16, 1992 to
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.01 $ 9.68 $ 10.04 $ 9.58
Income from investment operations:
Net investment income 0.51 0.52 0.53 0.37
Net realized and unrealized gain (loss) on securities (0.19) 0.33 (0.33) 0.46
Total from investment operations 0.32 0.85 0.20 0.83
Less distributions:
From net investment income (0.52) (0.52) (0.53) (0.37)
From net realized capital gains (0.01)
In excess of net realized capital gains (0.02)
Total distributions (0.52) (0.52) (0.56) (0.37)
Net asset value, end of period $ 9.81 $ 10.01 $ 9.68 $ 10.04
Total return/(a)/ 3.18% 9.25% 1.92% 11.72%
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.68% 0.67% 0.40% 0.14%
Net investment income 5.10% 5.48% 5.24% 5.28%
Assuming credits and no waivers or reimbursements:
Expenses 1.09% 1.17% 1.14% 1.37%
Net investment income 4.69% 4.98% 4.50% 4.05%
Net assets at end of period (000's) $51,173 $52,150 $51,167 $31,499
Portfolio turnover rate 57.40% 38.06% 38.88% 36.11%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.65%; prior period numbers have not
been restated to reflect these credits.
12 F-222 New Mexico
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NEW MEXICO
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship New
Mexico Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship New
Mexico Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
NEW MEXICO F-223 13
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$750 Brookhaven, NY Industrial Development
Agency - Civic Facility Revenue - Dowling
College\The National Aviation and
Transportation Center - Series 1993 6.750% 03/01/23 $ 763,162
1,000 New Rochelle, NY Industrial Development
Agency - Civic Facility Revenue - College
of New Rochelle - Series 1992 6.625 07/01/12 1,029,830
2,100 New York State Dormitory Authority Revenue
- University of Rochester - Series 1994A 6.500 07/01/19 2,230,683
500 Suffolk County, NY Industrial Development
Authority Revenue - Dowling College - Series 1994 6.625 06/01/24 514,910
Health Care
----------------------------------------------------------------------------------------------------------------------
400 New York State Dormitory Authority Revenue
- Menorah Campus 7.400 02/01/31 439,400
250 New York State Dormitory Authority Revenue
- Department of Health - Veteran's Home 7.250 07/01/21 269,828
1,500 New York State Dormitory Authority Revenue
Department of Health - Series 1995 6.625 07/01/24 1,528,770
2,000 New York State Dormitory Authority Revenue
- Bishop Henry B. Hucles Nursing Home,
Incorporated - Series 1996 6.000 07/01/24 1,921,320
Hospitals
----------------------------------------------------------------------------------------------------------------------
150 New York State Dormitory Authority Revenue
- United Health Services - Series 1-989 7.350 08/01/29 161,284
245 New York State Dormitory Authority Revenue
- Iroquois Nursing Home 7.000 02/01/15 261,219
1,000 New York State Dormitory Authority Revenue
- Nyack Hospital - Series 1996 6.000 07/01/06 984,370
500 New York State Medical Care Facilities
Finance Agency Revenue - Hospital and
Nursing Home - Series 1991A 7.450 08/15/31 542,095
1,000 New York State Medical Care Facilities
Finance Agency - Mortgage Revenue - Series
1995B 6.100 02/15/15 978,090
Housing/Multifamily
----------------------------------------------------------------------------------------------------------------------
250 New York City Housing Development
Corporation - Multifamily 7.350 06/01/19 265,440
500 New York State Housing Finance Agency
Revenue - Multifamily - Series 1992A 7.000 08/15/22 523,070
1,000 New York State Housing Finance Agency
Revenue - Multifamily - Series 1994C 6.450 08/15/14 1,029,660
Housing/Single Family
----------------------------------------------------------------------------------------------------------------------
1,500 New York State Mortgage Agency Revenue -
Series 43 6.450 10/01/17 1,534,800
250 New York State Mortgage Agency Revenue -
Homeowner 7.950 10/01/21 265,072
595 New York State Mortgage Agency Revenue -
Single Family - Series UU 7.750 10/01/23 624,744
1,000 New York State Mortgage Agency Revenue -
Homeowner - Series 46 6.600 10/01/19 1,030,290
IndustrialDevelopment and Pollution Control
----------------------------------------------------------------------------------------------------------------------
1,000 Herkimer County, NY Industrial Development
Agency Revenue - Burrows Paper Recycling 8.000 01/01/09 1,040,920
750 Jefferson County, NY Industrial
Development Agency - Solid Waste Disposal
Revenue - Champion International 7.200 12/01/20 796,268
350 New York State Energy Research and
Development Authority Electric Facility -
Consolidated Edison Company - Series A 7.500 01/01/26 377,212
</TABLE>
4 F-224 New York
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,250 New York State Energy Research and Development Authority Electric Facility -
Long Island Lighting Company - Series 1992 A 7.150% 09/01/19 $1,231,300
500 New York State Energy Research and Development Authority Electric Facility -
Long Island Lighting Company - Series 1992 D 6.900 08/01/22 484,830
1,500 New York State Energy Research and Development Authority Facilities Revenue -
Edison Company of New York - Series 1995 A 6.100 08/15/20 1,510,710
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
500 Albany, NY Industrial Development Agency Lease Revenue - New York State
Assembly Building - Series A 7.750 01/01/10 538,415
600 Franklin County, NY Industrial Development Agency Lease Revenue -
County Correctional Facility - Series 1992 6.750 11/01/12 625,338
300 New York State Dormitory Authority Revenue - Department of Education 7.750 07/01/21 331,719
500 New York State Dormitory Authority Revenue - State University Athletic Facility 7.250 07/01/21 539,655
1,000 New York State Dormitory Authority Revenue - State University Educational
Facilities Revenue - Series 1993 B 5.250 05/15/19 874,520
1,000 New York State Dormitory Authority Revenue - Upstate Community Colleges -
Series 1995 A 6.250 07/01/25 972,540
1,500 New York State Dormitory Authority - City University System Consolidated
Revenue - Series 1995 A, B, C and Series 1995 1, 2 and 3 5.625 07/01/16 1,387,050
1,000 New York State Housing Finance Agency - Health Facilities Revenue -
New York City - Series 1996 A 6.000 11/01/08 966,020
2,000 New York State Housing Finance Agency Revenue - Service Contract -
Series 1995 A 6.375 09/15/15 1,985,520
250 New York State Municipal Bond Bank Agency Special Program Revenue -
Buffalo - Series A 6.875 03/15/06 265,458
250 New York State Municipal Bond Bank Agency Special Program Revenue -
Rochester - Series A 6.750 03/15/11 266,118
110 New York State Medical Care Facilities Finance Agency Revenue -
Mental Health Services - Series A 7.700 02/15/18 116,808
50 New York State Medical Care Facilities Finance Agency Revenue -
Mental Health Services 7.750 02/15/20 54,748
1,750 New York State Urban Development Corporation Revenue - State Facilities -
Series 1995 5.700 04/01/20 1,619,135
1,500 New York State Urban Development Corporation Revenue - Center for
Industrial Innovation - Series 1995 5.500 01/01/13 1,381,875
2,125 New York State Urban Development Corporation Project Revenue -
University Facilities Grants - Series 1995 5.500 01/01/19 1,923,890
1,000 New York State Urban Development Corporation Revenue - Onondaga County
Convention Center - Series 1995 6.250 01/01/20 977,050
500 Triborough Bridge and Tunnel Authority New York Revenue -
Convention Center Project - Series 1990 E 7.250 01/01/10 555,445
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
500 Albany, NY Parking Authority Revenue - Green and Hudson Street Garage -
Series A 7.150 09/15/16 544,145
1,500 Albany, NY Parking Authority Revenue - Series 1992A 0.000 11/01/17 385,950
230 New York City Industrial Development Agency Civic Facility Revenue -
Federation of Protestant Welfare 6.950 11/01/11 242,321
</TABLE>
New York F-225 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 500 New York City Industrial Development Agency Civic Facility Revenue -
Lighthouse Incorporated Project 6.500% 07/01/22 $ 506,320
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------------------------
1,000 Metropolitan Transit Authority of New York - Commuter Facilities Revenue -
Series 1994 A 6.375 07/01/18 1,028,000
1,000 Metropolitan Transportation Authority, NY - Transit Facilities Revenue -
Series 1996 A 6.100 07/01/21 1,002,480
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
75 Endwell, NY Fire District - General Obligation 7.000 03/01/11 82,264
50 Endwell, NY Fire District - General Obligation 7.000 03/01/12 54,774
50 Endwell, NY Fire District - General Obligation 7.000 03/01/13 54,674
50 Endwell, NY Fire District - General Obligation 7.000 03/01/14 54,546
50 Endwell, NY Fire District - General Obligation 7.000 03/01/15 54,392
50 Endwell, NY Fire District - General Obligation 7.000 03/01/16 54,513
275 Leray, NY General Obligation - Public Improvement 7.600 11/15/02 311,275
275 Leray, NY General Obligation - Public Improvement 7.600 11/15/04 316,352
150 Leray, NY General Obligation - Public Improvement 7.600 11/15/06 174,141
225 Minerva, NY Central School District - General Obligation 7.000 06/15/06 249,847
1,000 New York City, NY General Obligation - Series 1994 7.000 08/15/16 1,046,930
40 New York City, NY General Obligation - Series 1991 F 8.250 11/15/19 45,205
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
985 New York State Dormitory Authority Revenue - State University College -
Series 1994 X 7.400 07/01/24 1,152,046
950 New York State Urban Development Corporation Revenue -
Syracuse University Center of Science and Technology - Series 1987 7.875 01/01/17 1,024,005
Resource Recovery
--------------------------------------------------------------------------------------------------------------------------
750 Onondaga County, NY Resource Recovery Agency Project Revenue -
Resource Recovery Facility - Series 1992 7.000 05/01/15 754,590
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
1,000 Albany, NY Housing Authority - Multifamily Revenue - Series 1995 5.850 10/01/07 976,550
300 New York State General Obligation - Series 1991 7.300 03/01/12 332,490
1,500 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400 07/01/25 1,352,145
Total Investments in Securities - Municipal Bonds (cost $48,113,039) - 98.5% 49,520,536
Excess of Other Assets over Liabilities - 1.5% 756,271
Total Net Assets - 100.0% $50,276,807
</TABLE>
See notes to financial statements.
6 F-226 New York
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $48,113,039) $49,520,536
Receivable for Fund shares sold 290,704
Interest receivable 971,595
Other 3,100
Total assets 50,785,935
LIABILITIES:
Bank overdraft 146,986
Payable for Fund shares reacquired 78,829
Distributions payable 240,712
Accrued expenses 42,601
Total liabilities 509,128
NET ASSETS 50,276,807
Class A:
Applicable to 4,748,782 shares of beneficial interest issued and outstanding $49,643,402
Net asset value per share $ 10.45
Class C:
Applicable to 60,603 shares of beneficial interest issued and outstanding $ 633,405
Net asset value per share $ 10.45
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 3,141,419
EXPENSES:
Distribution fees Class A (Note E) 200,142
Distribution fees Class C (Note E) 533
Investment advisory fees (Note E) 250,771
Custody and accounting fees 66,151
Transfer agent's fees 28,990
Registration fees 643
Legal fees 1,290
Audit fees 11,725
Reimbursement of organizational expenses (Note F) 51,551
Trustees' fees 1,464
Shareholder services fees (Note E) 5,120
Other 1,795
Advisory fees waived (Note E) (244,412)
Expense subsidy (Note E) (26,209)
Total expenses before credits 349,554
Custodian fee credit (Note B) (17,661)
Net expenses 331,893
Net investment income 2,809,526
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 478,081
Change in unrealized appreciation (depreciation) of investments (1,249,236)
Net loss on investments (771,155)
Net increase in net assets resulting from operations $ 2,038,371
</TABLE>
See notes to financial statements.
New York F-227 7
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 2,809,526 $ 2,907,972
Net realized gain (loss) on security transactions 478,081 (1,184,251)
Change in unrealized appreciation (depreciation) of investments (1,249,236) 2,143,233
Net increase in net assets resulting from operations 2,038,371 3,866,954
Distributions to Class A shareholders:
From net investment income (2,844,780) (2,892,313)
Distributions to Class C shareholders:
From net investment income (2,773)
Net decrease in net assets from distributions to shareholders (2,847,553) (2,892,313)
Fund share transactions (Note C):
Proceeds from shares sold 9,271,700 8,779,466
Net asset value of shares issued in reinvestment of distributions 1,441,365 1,503,289
Cost of shares reacquired (8,644,636) (10,673,547)
Net increase (decrease) in net assets from Fund share transactions 2,068,429 (390,792)
Total increase in net assets 1,259,247 583,849
NET ASSETS:
Beginning of year 49,017,560 48,433,711
End of year $50,276,807 $49,017,560
NET ASSETS CONSIST OF:
Paid-in surplus $49,966,701 $47,920,640
Undistributed net investment income 15,659
Accumulated net realized gain (loss) on security transactions (1,097,391) (1,575,472)
Unrealized appreciation (depreciation) of investments 1,407,497 2,656,733
$50,276,807 $49,017,560
</TABLE>
See notes to financial statements.
8 F-228 New York
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship New York Tax Exempt Fund (Fund) is a sub-trust of the Flagship
Tax Exempt Funds Trust (Trust), a Massachusetts business trust organized on
March 8, 1985. The Fund is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended. The
Fund commenced investment operations on January 16, 1991. On March 4, 1996,
the Fund began to offer Class C shares to the investing public. Class A
shares are sold with a front-end sales charge. Class C shares are sold with
no front-end sales charge but are assessed a contingent deferred sales charge
if redeemed within one year from the time of purchase. Both classes of shares
have identical rights and privileges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest
in the Fund, which are registered under the Securities Act of 1933, as
amended, are offered to the public on a continuous basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
New York F-229 9
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it
earns custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a When-issued Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a when-issued basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no when-issued purchase commitments included
in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------------- ---------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 809,698 $ 8,632,992 865,004 $ 8,779,466
Shares issued on reinvestment 135,396 1,441,291 148,376 1,503,289
Shares reacquired (813,050) (8,644,636) (1,060,848) (10,673,547)
Net increase (decrease) 132,044 $ 1,429,647 (47,468) $ (390,792)
Period From
March 4, 1996 to May 31, 1996
-----------------------------
Shares Amount
Class C:
Shares sold 60,596 $ 638,708
Shares issued on reinvestment 7 74
Shares reacquired
Net increase 60,603 $ 638,782
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $28,131,982 and $26,503,249, respectively. At May 31, 1996, cost
for federal income tax purposes is $48,113,039 and net unrealized
appreciation aggregated $1,407,497, of which $1,869,137, related to
appreciated securities and $461,640 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $1,097,400 to offset future net capital gains expiring on May
31, 2003.
10 F-230 New York
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly, on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived advisory fees
amounting to $244,412. Included in accrued expenses at May 31, 1996 are
accrued advisory fees of $2,134. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $16,944 and $294 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $202,800 for the year ended May 31, 1996, of which
approximately $175,900 was paid to other dealers. For the year ended May 31,
1996, the Distributor did not receive any contingent deferred sales charges
on redemptions of shares. Certain officers and trustees of the Trust are also
officers and/or directors of the Distributor and/or Advisor.
F. Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$257,000) are being reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $205,781 has been reimbursed. In
the event that the Advisor's current investment in the Trust falls below
$100,000 prior to the full reimbursement of the organizational expenses, then
it will forego any further reimbursement.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$99,900, at a weighted average annualized interest rate of 6.17%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
New York F-231 11
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.62 $ 10.38 $ 10.91 10.10 9.69
Income from investment operations:
Net investment income 0.60 0.62 0.64 0.66 0.68
Net realized and unrealized gain (loss) on
securities (0.17) 0.24 (0.37) 0.88 0.41
Total from investment operations 0.43 0.86 0.27 1.54 1.09
Less distributions:
From net investment income (0.60) (0.62) (0.64) (0.66) (0.68)
From net realized capital gains (0.07) (0.07)
In excess of net realized capital gains (0.09)
Total distributions (0.60) (0.62) (0.80) (0.73) (0.68)
Net asset value, end of year $ 10.45 $ 10.62 $ 10.38 10.91 10.10
Total return(a) 4.15% 8.74% 2.38% 15.87% 11.71%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.70% 0.43% 0.30% 0.28% 0.18%
Net investment income 5.58% 6.15% 5.83% 6.28% 6.89%
Assuming credits and no waivers or
reimbursements:
Expenses 1.20% 1.22% 1.26% 1.44% 1.43%
Net investment income 5.08% 5.36% 4.87% 5.12% 5.64%
Net assets at end of year (000's) $49,643 $49,018 $48,434 $33,996 $20,701
Portfolio turnover rate 53.53% 58.69% 59.70% 45.65% 36.89%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.66%; prior year numbers have not
been restated to reflect these credits.
12 F-232 NEW YORK
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
March 4, 1996 to
CLASS C May 31, 1996
- -------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $ 10.89
Income from investment operations:
Net investment income 0.12
Net realized and unrealized gain (loss) on securities (0.44)
Total from investment operations (0.32)
Less distributions:
From net investment income (0.12)
From net realized capital gains
In excess of net realized capital gains
Total distributions (0.12)
Net asset value, end of period $ 10.45
Total return(a) (11.83%)
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b) 1.35%
Net investment income 4.49%
Assuming credits and no waivers or reimbursements:
Expenses 1.77%
Net investment income 4.07%
Net assets at end of period (000's) $ 633
Portfolio turnover rate 53.53%
</TABLE>
(a) The total return shown does not include the effect of applicable contingent
deferred sales charge and is annualized.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.31%.
NEW YORK F-233 13
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NEW YORK
TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship New
York Tax Exempt Fund as of May 31, 1996, the related statement of operations for
the year then ended, and the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship New
York Tax Exempt Fund at May 31, 1996, the results of its operations, the changes
in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
14 F-234 New York
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 165 North Carolina Educational Facilities Finance Agency Revenue -
High Point College 7.050% 12/01/05 $ 177,246
175 North Carolina Educational Facilities Finance Agency Revenue -
High Point College 7.100 12/01/06 187,684
1,235 North Carolina Educational Facilities Finance Agency Revenue -
Duke University - Series 1991 C 6.750 10/01/21 1,326,859
175 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/02 181,792
195 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/03 202,392
205 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/04 212,589
220 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/05 227,924
235 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/06 243,232
255 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/07 263,782
270 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/08 279,032
295 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/09 304,576
315 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/10 325,008
340 University of North Carolina Asheville Revenue - Dorm and Dining Hall System 7.000 06/01/11 350,632
295 University of North Carolina Chapel Hill Revenue - Student Recreation Center
Series 1991 7.000 06/01/08 320,370
Hospitals
--------------------------------------------------------------------------------------------------------------------------
2,055 North Carolina Medical Care Commission Health Care Facilities Revenue -
Stanly Memorial Hospital 7.800 10/01/19 2,166,854
1,500 North Carolina Medical Care Commission Hospital Revenue - Rex Hospital -
Series 1993 6.250 06/01/17 1,537,305
1,000 North Carolina Medical Care Commission Hospital Revenue -
Annie Penn Memorial Hospital - Series 1991 7.500 08/15/21 1,028,040
1,275 North Carolina Medical Care Commission Hospital Revenue -
Halifax Memorial Hospital - Series 1992 6.750 08/15/14 1,268,230
1,000 North Carolina Medical Care Commission Hospital Revenue -
Halifax Memorial Hospital - Series 1992 6.750 08/15/24 977,690
2,200 North Carolina Medical Care Commission Hospital Revenue -
Roanoke-Chowan Hospital 7.750 10/01/19 2,313,102
600 North Carolina Medical Care Commission Hospital Revenue -
Transylvania Community Hospital 8.000 10/01/19 633,426
1,000 North Carolina Medical Care Commission Hospital Revenue -
Mercy Hospital - Series 1992 6.500 08/01/15 1,009,970
3,400 North Carolina Medical Care Commission Hospital Revenue -
Community Hospital Thomasville 8.100 10/01/15 3,708,176
1,000 North Carolina Medical Care Commission Hospital Revenue -
Gaston Memorial Hospital - Series 1995 5.500 02/15/19 941,410
2,500 Northern Hospital District Surry County, NC Hospital Revenue - Series 1991 7.875 10/01/21 2,595,900
3,000 Pitt County, NC Memorial Hospital Revenue - Series 1995 5.250 12/01/21 2,729,850
1,850 Stokes County, NC Hospital Revenue - Stokes-Reynolds Memorial Hospital 8.000 01/01/07 1,885,316
3,500 University of North Carolina Board of Governors - University of North Carolina
Hospitals at Chapel Hill Revenue - Series 1996 5.250 02/15/26 3,173,555
500 Wake County, North Carolina Hospital Revenue 7.400 10/01/16 529,890
1,950 Wake County, NC Hospital Revenue - Series 1993 0.000 10/01/10 833,352
</TABLE>
4 F-235 North Carolina
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Housing/Multifamily
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 620 North Carolina Housing Finance Agency - Multifamily - Series 1992B 6.900% 07/01/24 $ 641,650
Housing/Single Family
---------------------------------------------------------------------------------------------------------------------------
1,025 North Carolina Housing Finance Agency - Single Family Revenue - Series C 8.000 03/01/17 1,054,848
480 North Carolina Housing Finance Agency - Single Family Revenue - Series D 8.200 09/01/07 505,128
475 North Carolina Housing Finance Agency - Single Family Revenue - Series E 8.125 09/01/19 496,912
935 North Carolina Housing Finance Agency - Single Family Revenue - Series G and H 7.800 03/01/21 982,180
970 North Carolina Housing Finance Agency - Single Family Revenue - Series O 7.600 03/01/21 1,022,002
2,035 North Carolina Housing Finance Agency - Single Family Revenue - Series Y 6.300 09/01/15 2,051,565
1,885 North Carolina Housing Finance Agency - Single Family Revenue - Series Y 6.350 09/01/18 1,904,566
1,950 North Carolina Housing Finance Agency - Single Family Revenue - Series BB 6.500 09/01/26 1,978,353
3,500 North Carolina Housing Finance Agency - Single Family Revenue -
Series 1995 CC and DD 6.200 09/01/27 3,456,740
840 Winston Salem, NC Single Family Housing Revenue 8.000 09/01/07 872,768
Industrial Development and Pollution Control
----------------------------------------------------------------------------------------------------------------------------
1,400 Gaston County, NC Industrial Facilities and Pollution Control Financing
Authority - Combustion Engineering Project 8.850 11/01/15 1,507,982
1,400 Haywood County, NC Industrial Facilities and Pollution Control Financing
Authority - Environmental Revenue - Champion International Corporation -
Series 1995 6.250 09/01/25 1,365,896
4,000 Haywood County, NC Industrial Facilities and Pollution Control Financing
Authority - Environmental Revenue - Champion International Corporation -
Series 1993 5.500 10/01/18 3,551,040
3,100 Haywood County, NC Industrial Facilities and Pollution Control Financing
Authority Revenue - Champion International Corporation Project - Series 1995 6.000 03/01/20 2,952,905
2,000 Martin County, NC Industrial Facilities and Pollution Control Finance Authority
Revenue - Solid Waste Disposal - Weyerhaeuser 7.250 09/01/14 2,184,140
6,000 Martin County, NC Industrial Facilities and Pollution Control Finance Authority
Revenue - Weyerhaeuser - Series 1994 6.800 05/01/24 6,348,960
1,100 New Hanover County, NC Industrial Facilities and Pollution Control Financing
Authority Revenue - Occidental Petroleum - Series 1992 6.700 07/01/19 1,101,133
Municipal Appropriation Obligations
----------------------------------------------------------------------------------------------------------------------------
500 Asheville, NC Certificates of Participation - Series 1992 6.500 02/01/08 512,540
1,500 Buncombe County, NC Certificates of Participation - Series 1992 6.625 12/01/10 1,541,925
705 Durham, NC Certificates of Participation - Series 1990 7.250 09/01/10 750,388
1,000 Durham, NC Certificates of Participation - Series 1991 6.750 12/01/11 1,056,500
870 Durham, NC Certificates of Participation - Series 1995 5.800 06/01/15 860,534
1,500 Gastonia, NC Certificates of Participation - Police Station - Series 1995 5.700 08/01/15 1,462,335
1,000 Harnett County, NC Certificates of Participation - Series 1994 6.200 12/01/06 1,075,940
1,750 Harnett County, NC Certificates of Participation - Series 1994 6.200 12/01/09 1,842,452
500 Harnett County, NC Certificates of Participation - Series 1994 6.400 12/01/14 521,350
1,000 Pitt County, NC Certificates of Participation 6.900 04/01/08 1,068,960
715 Stokes County, NC Certificates of Participation 7.000 03/01/06 777,155
</TABLE>
North Carolina F-236 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Utility
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 Concord, NC Utilities Systems Revenue - Series 1995 5.500% 12/01/19 $ 950,710
2,400 Fayetteville, NC Public Works Commission Revenue - Series 1993 4.750 03/01/14 2,074,872
1,845 Fayetteville, NC Public Works Commission Revenue - Series 1995 A 5.250 03/01/16 1,724,374
1,000 Fayetteville, NC Public Works Commission Revenue - Series 1995 A 5.375 03/01/20 932,080
2,000 Greenville, NC Utilities Commission Enterprise System Revenue - Series 1994 6.000 09/01/16 1,999,780
5,300 North Carolina Eastern Municipal Power Agency Revenue - Series 1993B 6.000 01/01/18 5,363,918
700 North Carolina Municipal Power Agency Number 1 - Catawba Electric Revenue 7.000 01/01/16 729,274
355 North Carolina Municipal Power Agency Number 1 - Catawba Electric Revenue 7.625 01/01/14 377,411
2,000 North Carolina Municipal Power Agency Number 1 - Catawba Electric Revenue -
Series 1992 0.000 01/01/10 905,460
6,000 North Carolina Municipal Power Agency Number 1 - Catawba Electric Revenue -
Series 1992 0.000 01/01/09 2,947,260
5,000 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 S 6.125 07/01/09 5,179,800
1,400 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 1,280,888
870 Shelby, NC Combined Enterprise System Revenue - Series 1995 B 5.500 05/01/17 815,555
970 Shelby, NC Combined Enterprise System Revenue - Series 1995 B 5.500 05/01/17 918,105
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
1,455 Charlotte, NC Water and Sewer - General Obligation - Series 1995 A 5.400 04/01/17 1,402,038
1,615 Charlotte, NC Water and Sewer - General Obligation - Series 1995 A 5.400 04/01/20 1,539,999
1,490 Charlotte, NC Water and Sewer - General Obligation - Series 1995 A 5.400 04/01/17 1,435,764
500 Charlotte, NC Water and Sewer - General Obligation - Series 1995 A 5.400 04/01/19 477,865
1,830 Charlotte, NC Water and Sewer - General Obligation - Series 1995 A 5.400 04/01/20 1,745,015
3,400 Greensboro, NC Combined Enterprise System Revenue - Series 1995 A 5.375 06/01/19 3,172,846
1,000 Salisbury, NC Water and Sewer General Obligation - Series 1995 5.300 05/01/14 942,140
4,000 Union County, NC Enterprise System Revenue - Series 1996 5.500 06/01/17 3,855,360
750 Winston-Salem, NC Water and Sewer System Revenue - Series 1995 A and B 5.600 06/01/14 730,118
1,500 Winston-Salem, NC Water and Sewer System Revenue - Series 1995 A and B 5.700 06/01/17 1,462,380
603 Woodfin, NC Treatment Facilities - Certificates of Participation - Series 1993 5.500 12/01/03 596,935
Non-State General Obligations
---------------------------------------------------------------------------------------------------------------------------
890 Currituck County, NC General Obligation - Series 1995 5.400 04/01/12 865,392
290 Currituck County, NC General Obligation - Series 1995 5.400 04/01/13 280,152
750 Currituck County, NC General Obligation - Series 1995 5.400 04/01/14 719,925
800 Currituck County, NC General Obligation - Series 1995 5.400 04/01/15 763,552
1,025 Durham, NC General Obligation - Series 1994 4.900 02/01/13 927,205
1,000 New Hanover, NC General Obligation - Series 1995 5.500 03/01/12 979,290
1,600 Union County, NC General Obligation - Series 1995 5.200 06/01/12 1,524,496
1,600 Union County, NC General Obligation - Series 1995 5.200 06/01/13 1,505,008
1,410 Union City, NC Certificates of Participation - Series 1992 6.375 04/01/12 1,467,260
Pre-refunded or Escrowed
---------------------------------------------------------------------------------------------------------------------------
145 Asheville, NC Housing Development Corporation Revenue - Asheville Gardens 10.500 05/01/11 191,420
1,000 Buncombe County, NC Metropolitan Sewer District - Series 1992B 6.750 07/01/16 1,072,290
600 Cleveland County, NC General Obligation 7.200 06/01/08 665,478
1,300 Cleveland County, NC General Obligation 7.200 06/01/09 1,441,869
</TABLE>
6 F-237 North Carolina
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$2,300 Cleveland County, NC General Obligation 7.200% 06/01/10 $2,550,999
1,900 Craven, NC Regional Medical Authority - Health Care Facilities Revenue 7.200 10/01/19 2,119,944
750 Cumberland County, NC Hospital Facilities Revenue 7.875 10/01/14 824,625
1,450 Greensboro, NC Certificates of Participation - Greensboro Center City Corporation 7.900 07/01/09 1,584,430
3,900 North Carolina Medical Care Commission Health Care Facilities Revenue -
Gaston Health Care Support 7.250 02/15/19 4,241,211
240 North Carolina Eastern Municipal Power Agency Revenue - Series 1987 A 4.500 01/01/24 198,655
500 North Carolina Eastern Municipal Power Agency Revenue - Series 1988 7.625 01/01/23 537,735
690 North Carolina Eastern Municipal Power Agency Revenue - Series 1989 A 7.500 01/01/21 753,991
500 North Carolina Eastern Municipal Power Agency Revenue - Series 1989 A 7.250 01/01/23 543,220
3,590 North Carolina Eastern Municipal Power Agency Revenue - Series 1988 8.000 01/01/21 3,878,528
490 North Carolina Eastern Municipal Power Agency Revenue - Series 1988 8.000 01/01/21 529,381
995 North Carolina Eastern Municipal Power Agency Revenue - Series 1991A 6.500 01/01/18 1,093,067
7,535 North Carolina Housing Finance Agency - Multifamily Revenue - Series D 0.000 07/01/28 320,162
115 North Carolina Medical Care Commission Hospital Revenue -
Memorial Mission Hospital 7.625 10/01/08 130,172
280 North Carolina Medical Care Commission Hospital Revenue -
Scotland Memorial Hospital 8.000 10/01/97 294,297
190 North Carolina Medical Care Commission Hospital Revenue -
Scotland Memorial Hospital 8.100 10/01/98 205,494
200 North Carolina Medical Care Commission Hospital Revenue -
Scotland Memorial Hospital 8.150 10/01/99 219,440
1,000 North Carolina Medical Care Commission Hospital Revenue -
Scotland Memorial Hospital 8.625 10/01/11 1,107,600
600 North Carolina Municipal Power Agency Number 1 - Catawba Electric Revenue 7.875 01/01/19 647,610
700 Pender County, NC Certificates of Participation - Series 1991 7.700 06/01/11 799,533
1,785 Pitt County, NC Revenue - Pitt County Memorial Hospital - Series A 6.900 12/01/21 1,991,275
500 Commonwealth of Puerto Rico - General Obligation - Series 1988 7.750 07/01/06 545,040
2,000 Commonwealth of Puerto Rico - General Obligation - Series 1988 7.750 07/01/13 2,180,160
780 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 853,952
1,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.900 07/01/07 1,092,920
850 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.875 07/01/17 928,582
2,650 Commonwealth of Puerto Rico Electric Power Authority - Series K 9.375 07/01/17 2,859,430
200 Commonwealth of Puerto Rico Electric Power Authority - Series M 8.000 07/01/08 219,174
100 Spindale, NC Sanitary Sewer Revenue 7.600 02/01/07 107,736
100 Spindale, NC Sanitary Sewer Revenue 7.600 02/01/08 107,736
200 Spindale, NC Sanitary Sewer Revenue 7.600 02/01/09 215,472
295 University of North Carolina Charlotte Revenue - Housing and Dining System -
Series K 7.500 01/01/04 316,435
200 Washington County, NC General Obligation 7.600 03/01/08 215,748
200 Washington County, NC General Obligation 7.600 03/01/09 215,748
Resource Recovery
--------------------------------------------------------------------------------------------------------------------------
1,000 Coastal Regional, NC Solid Waste Management Authority System Revenue -
Series 1992 6.500 06/01/08 1,034,610
1,000 Coastal Regional, NC Solid Waste Management Authority System Revenue - Series 1992 6.300 06/01/04 1,059,840
1,250 Iredell County, NC Solid Waste System - Series 1992 6.250 06/01/12 1,253,900
2,375 Winston-Salem, NC Special Obligation - Solid Waste Management - Series 1995 5.500 04/01/16 2,256,606
</TABLE>
North Carolina F-238 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 975 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500% 07/01/13 $ 928,288
3,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 X 5.250 07/01/21 2,643,000
2,450 Commonwealth of Puerto Rico Infrastructure Financing Authority - Series A 7.750 07/01/08 2,645,584
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
2,325 North Carolina General Obligation - Series 1995 5.200 06/01/15 2,184,221
2,750 North Carolina General Obligation - Series 1995 5.250 06/01/16 2,603,452
1,505 North Carolina State General Obligation - Series 1994 A 4.750 02/01/12 1,349,398
220 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 238,687
1,500 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/15 1,318,440
1,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series M 5.500 07/01/21 931,850
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
1,000 North Carolina State Education Assistance Authority - Student Loan Revenue -
Series 1995 A 6.300 07/01/15 975,040
Total Investments in Securities - Municipal Bonds (cost $183,091,029) - 98.7% 189,199,733
Excess of Other Assets over Liabilities - 1.3% 2,406,083
Total Net Assets - 100.0% $191,605,816
</TABLE>
See notes to financial statements.
8 F-239 North Carolina
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $183,091,029) $189,199,733
Receivable for Fund shares sold 139,144
Interest receivable 3,823,664
Other 11,888
Total assets 193,174,429
LIABILITIES:
Bank borrowings (Note F) 391,253
Payable for Fund shares reacquired 159,414
Distributions payable 858,607
Accrued expenses 159,339
Total liabilities 1,568,613
NET ASSETS 191,605,816
Class A:
Applicable to 18,416,737 shares of beneficial interest
issued and outstanding $185,016,463
Net asset value per share $ 10.05
Class C:
Applicable to 656,837 shares of beneficial interest issued
and outstanding $ 6,589,353
Net asset value per share $ 10.03
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 12,311,088
EXPENSES:
Distribution fees - Class A (Note E) 765,262
Distribution fees - Class C (Note E) 64,653
Investment advisory fees (Note E) 993,064
Custody and accounting fees 112,877
Transfer agent's fees 129,915
Registration fees 7,928
Legal fees 5,034
Audit fees 18,300
Trustees' fees 5,335
Shareholder services fees (Note E) 17,990
Other 6,241
Advisory fees waived (Note E) (318,954)
Total expenses before credits 1,807,645
Custodian fee credit (Note B) (48,877)
Net expenses 1,758,768
Net investment income 10,552,320
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 2,647,708
Change in unrealized appreciation (depreciation) of
investments (6,091,694)
Net loss on investments (3,443,986)
Net increase in net assets resulting from operations $ 7,108,334
</TABLE>
See notes to financial statements.
NORTH CAROLINA F-240 9
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 10,552,320 $ 11,020,844
Net realized gain (loss) on security transactions 2,647,708 (2,530,209)
Change in unrealized appreciation (depreciation) of
investments (6,091,694) 5,165,137
Net increase in net assets resulting from operations 7,108,334 13,655,772
Distributions to Class A shareholders:
From net investment income (10,307,619) (10,778,846)
Distributions to Class C shareholders:
From net investment income (329,070) (253,254)
Net decrease in net assets from distributions to
shareholders (10,636,689) (11,032,100)
Fund share transactions (Note C):
Proceeds from shares sold 16,169,457 22,302,491
Net asset value of shares issued in reinvestment of
distributions 5,859,549 6,165,340
Cost of shares reacquired (24,794,063) (33,440,579)
Net decrease in net assets from Fund share transactions (2,765,057) (4,972,748)
Total decrease in net assets (6,293,412) (2,349,076)
NET ASSETS:
Beginning of year 197,899,228 200,248,304
End of year $191,605,816 $197,899,228
NET ASSETS CONSIST OF:
Paid-in surplus $188,467,956 $191,317,382
Accumulated net realized gain (loss) on security
transactions (2,970,844) (5,618,552)
Unrealized appreciation (depreciation) of investments 6,108,704 12,200,398
$191,605,816 $197,899,228
</TABLE>
See notes to financial statements.
10 F-241 North Carolina
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship North Carolina Double Tax Exempt Fund (Fund) is a sub-trust of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on March 27, 1986. On
October 4, 1993, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
NORTH CAROLINA F-242 11
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were no "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
--------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 1,344,285 $ 13,800,240 2,002,418 $ 19,667,401
Shares issued on reinvestment 551,768 5,657,437 607,677 6,006,500
Shares reacquired (2,231,686) (22,878,721) (3,316,397) (32,425,504)
Net decrease (335,633) $ (3,421,044) (706,302) $ (6,751,603)
CLASS C:
Shares sold 232,489 $ 2,369,217 266,917 $ 2,635,090
Shares issued on reinvestment 19,714 202,112 16,107 158,840
Shares reacquired (187,452) (1,915,342) (104,445) (1,015,075)
Net increase 64,751 $ 655,987 178,579 $ 1,778,855
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $106,082,488 and $108,818,425, respectively. At May 31, 1996, cost
for federal income tax purposes is $183,091,029 and net unrealized
appreciation aggregated $6,108,704, of which $7,033,594 related to
appreciated securities and $924,890 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $2,970,800 to offset future net capital gains in the amounts of
$440,600 through May 31, 2002, and $2,530,200 through May 31, 2003.
12 F-243 North Carolina
<PAGE>
Notes to Financial Statements
................................................................................
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $318,954 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $47,333. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $63,071 and $5,265 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $358,200 for the year ended May 31, 1996, of which
approximately $308,900 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,600 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $10 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$365,100, at a weighted average annualized interest rate of 6.78%. At May 31,
1996, the Fund had $391,253 outstanding under the line of credit.
North Carolina F-244 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.23 $ 10.08 $ 10.51 $ 9.97 $ 9.70
Income from investment operations:
Net investment income 0.55 0.57 0.57 0.58 0.60
Net realized and unrealized gain (loss) on
securities (0.18) 0.15 (0.42) 0.55 0.27
Total from investment operations 0.37 0.72 0.15 1.13 0.87
Less distributions:
From net investment income (0.55) (0.57) (0.58) (0.59) (0.60)
Total distributions (0.55) (0.57) (0.58) (0.59) (0.60)
Net asset value, end of year $ 10.05 $ 10.23 $ 10.08 $ 10.51 $ 9.97
Total return(a) 3.67% 7.45% 1.30% 11.66% 9.30%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.90% 0.91% 0.89% 0.95% 0.98%
Net investment income 5.32% 5.73% 5.41% 5.70% 6.10%
Assuming credits and no waivers or
reimbursements:
Expenses 1.03% 1.06% 1.04% 1.04% 1.05%
Net investment income 5.19% 5.58% 5.26% 5.61% 6.03%
Net assets at end of year (000's) $185,016 $191,850 $196,087 $169,944 $131,488
Portfolio turnover rate 54.16% 34.67% 21.23% 11.52% 16.91%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.87%; prior year numbers have not
been restated to reflect these credits.
14 F-245 North Carolina
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended October 4, 1993 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.22 $10.06 $10.84
Income from investment operations:
Net investment income 0.49 0.51 0.32
Net realized and unrealized gain
(loss) on securities (0.18) 0.16 (0.78)
Total from investment operations 0.31 0.67 (0.46)
Less distributions:
From net investment income (0.50) (0.51) (0.32)
Total distributions (0.50) (0.51) (0.32)
Net asset value, end of period $10.03 $10.22 $10.06
Total return/(a)/ 3.01% 6.97% (6.26%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.45% 1.46% 1.49%
Net investment income 4.77% 5.13% 4.65%
Assuming credits and no
waivers or reimbursements:
Expenses 1.58% 1.61% 1.79%
Net investment income 4.64% 4.98% 4.35%
Net assets at end of period (000's) $6,589 $6,049 $4,161
Portfolio turnover rate 54.16% 34.67% 21.23%
</TABLE>
(a) The total returns shown do not include the effect of applicable
contingent deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.42%; prior period numbers have not
been restated to reflect these credits.
North Carolina F-246 15
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NORTH CAROLINA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship North Carolina Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
North Carolina Double Tax Exempt Fund at May 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-247 North Carolina
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 300 Miami University, OH General Receipts 0.000% 12/01/06 $ 173,427
450 Miami University, OH General Receipts 0.000 12/01/08 228,105
2,050 Miami University Ohio State University Revenue 6.900 12/01/04 2,178,207
2,025 Ohio State Higher Educational Facilities Commission Revenue -
University of Dayton - Series 1992 6.600 12/01/17 2,154,215
2,545 Ohio State Higher Educational Facilities Commission Revenue -
Case Western Reserve 7.625 10/01/08 2,681,946
750 Ohio State Higher Educational Facilities Commission Revenue -
Case Western Reserve University - Series 1990 6.500 10/01/20 810,720
1,870 Ohio State Higher Educational Facilities Commission Revenue -
Case Western Reserve University - Series 1990 7.125 10/01/14 2,032,503
4,000 University of Puerto Rico System Revenue - Series 1995 N 0.000 06/01/09 1,995,840
1,230 Youngstown, OH State University General Receipts - Series 1994 A 6.000 12/15/16 1,239,507
Health Care
--------------------------------------------------------------------------------------------------------------------------
4,030 Cuyahoga County, OH Health Care Facilities Revenue - Altenheim Nursing Home 9.280 06/01/15 4,417,646
3,120 Franklin County, OH Health Care Facilities Revenue - Heinzerling Foundation -
Series 1995 6.200 11/01/20 2,983,968
2,825 Warren County, OH Hospital Facility Improvement Revenue - Otterbein Home
Project 7.200 07/01/11 3,027,411
Hospitals
--------------------------------------------------------------------------------------------------------------------------
500 Athens County, OH Community Mental Health Hospital - West Center - Series I 6.900 06/01/10 519,060
3,000 Barberton, OH Hospital Facilities - Barberton Citizens Hospital - Series 1992 7.250 01/01/12 3,195,060
500 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial Hospital 8.000 12/01/06 536,215
1,000 Cambridge, OH Hospital Improvement Revenue - Guernsey Memorial Hospital 8.000 12/01/11 1,062,940
670 Clark County, OH Hospital Improvement Revenue - Community Hospital - Series A 9.100 04/01/97 687,762
1,000 Clermont County, OH Hospital Facilities Revenue - Mercy Health Care System -
Series 1993 B 5.875 09/01/15 984,610
3,000 Cuyahoga County, OH Hospital Facilities Revenue - Fairview General Hospital -
Series 1994 5.500 08/15/14 2,860,440
250 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 6.250 08/15/14 249,970
5,500 Cuyahoga County, OH Hospital Revenue - Meridia Health System - Series 1995 6.250 08/15/24 5,399,295
7,000 Cuyahoga County, OH Hospital Facilities Revenue - Cleveland Clinic Foundation -
1988 A 8.000 12/01/15 7,338,240
3,000 Cuyahoga County, OH Hospital Facilities Revenue - Meridia Health System 7.250 08/15/19 3,215,220
1,500 Cuyahoga County, OH Hospital Facilities Revenue - Fairview General
Hospital/Lutheran Medical Center - Series 1993 6.250 08/15/10 1,553,760
2,000 Cuyahoga County, OH Industrial Development Revenue - University Health
Care Center - Series 1991 7.300 08/01/11 2,186,140
2,010 Erie County, OH Hospital Improvement Revenue - Firelands Community Hospital -
Series 1992 6.750 01/01/08 2,087,003
2,000 Fairfield County, OH Hospital Improvement Revenue - Lancaster and Fairfield
Hospitals 5.375 06/15/12 1,916,000
4,775 Franklin County, OH Hospital Refunding and Improvement Revenue -
The Children's Hospital Project - Series 1996 A 5.875 11/01/25 4,628,646
</TABLE>
4 F-248 Ohio
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,350 Franklin County, OH Hospital Facilities Refunding Revenue - Riverside United Methodist
Hospital 7.250% 05/15/20 $1,466,762
1,500 Franklin County, OH Hospital Revenue - Holy Cross Hospital 7.625 06/01/09 1,654,290
3,500 Garfield Heights, OH Hospital and Improvement Revenue - Marymont Hospital - Series 1992A 6.700 11/15/15 3,627,645
3,000 Hamilton County, OH Hospital Facilities Revenue - Bethesda Hospital - Series 1992A 6.250 01/01/12 3,005,730
1,720 Hamilton County, OH Health System Revenue - Providence Hospital - Series 1992 6.875 07/01/15 1,735,222
2,325 Hancock County, OH Hospital Revenue - Blanchard Valley Hospital 7.625 11/15/14 2,483,007
2,500 Lake County, OH Hospital Facilities Revenue - Lake Hospital System - Series 1993 5.375 08/15/10 2,426,100
7,890 Lorain, OH Hospital Facilities Revenue - EMH Regional Medical Center - Series 1995 5.375 11/01/21 7,279,551
3,860 Lorain, OH Hospital Revenue - Lakeland Community Hospital - Series 1992 6.500 11/15/12 3,909,871
1,000 Lucas County, OH Hospital Improvement Revenue - St. Vincent Medical Center - Series A 6.750 08/15/20 1,085,760
1,500 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series A 8.125 12/01/11 1,606,425
3,000 Lucas County, OH Hospital Improvement Revenue - St. Vincent Medical Center - Series 1992 6.500 08/15/12 3,261,270
2,750 Lucas County, OH Hospital Revenue - Flower Memorial Hospital - Series 1993 6.125 12/01/13 2,593,882
1,450 Lucas County, OH Hospital Improvement Revenue - St. Vincent Medical Center -
Series 1993B 5.375 08/15/17 1,337,045
2,750 Mahoning County, OH Hospital Facilities Improvement Revenue - YHA Project 7.000 10/15/14 2,974,978
500 Mansfield, OH Hospital Improvement Revenue - Mansfield General Hospital 6.700 12/01/09 538,285
1,250 Maumee, Ohio Hospital Facilities Revenue - St. Luke's Hospital - Series 1994 5.800 12/01/14 1,223,662
4,875 Miami County, OH Hospital Facilities Revenue - Upper Valley Medical Centers - Series A 8.375 05/01/13 5,092,815
4,000 Middleburg Heights, OH Hospital Revenue - Southwest General Health Center - Series 1995 5.625 08/15/15 3,860,840
2,000 Middleburg Heights, OH Hospital Revenue - Southwest General Health Center - Series 1995 5.750 08/15/21 1,935,240
5,000 Montgomery County, OH Hospital Facilities Revenue - Kettering Medical Center -
Series 1996 6.250 04/01/20 5,298,150
2,500 Montgomery County, OH Hospital Revenue - Sisters of Charity Health Care Systems -
Series 1992A 6.250 05/15/08 2,628,650
1,000 Muskingum County, OH Hospital Facilities Revenue - Bethesda Care System - Series 1996 5.400 12/01/16 936,470
1,725 Shelby County, OH Hospital Facilities and Improvement Revenue - Wilson Memorial Hospital 7.700 09/01/18 1,804,919
1,750 Trumbull County, OH Hospital Revenue - Trumbull Memorial Hospital - Series B 6.900 11/15/12 1,895,268
1,500 Washington County, OH Hospital Facilities Revenue - Marietta Area Health Care Project 7.375 09/01/12 1,568,955
1,500 Westerville, OH Minerva Park and Blendon Joint Township Hospital District Improvement
Revenue - St. Ann's Hospital - Series 1991A 7.100 09/15/21 1,650,090
</TABLE>
Ohio F-249 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
Housing/Multifamily
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,500 Fairlawn, OH Health Care Facilities Revenue - The Village at St. Edward 8.750% 10/01/19 $ 2,681,300
1,000 Ohio Capital Corporation for Housing - Multifamily Revenue 7.500 11/01/11 1,063,860
3,000 Ohio Capital Corporation for Housing - Multifamily Revenue 7.600 11/01/23 3,199,740
Housing/Single Family
- -----------------------------------------------------------------------------------------------------------------------------------
1,990 Ohio Housing Finance Agency - Residential Mortgage Revenue - Series 1994A-2 6.100 09/01/14 1,995,791
5,255 Ohio Housing Finance Agency - Residential Mortgage Revenue - Series 1994B-1 6.375 09/01/14 5,335,296
Industrial Development and Pollution Control
- -----------------------------------------------------------------------------------------------------------------------------------
2,125 Ashtabula County, OH Industrial Development Revenue - Ashland Oil - Series A 6.900 05/01/10 2,208,470
7,000 Ohio State Air Quality Development Authority Revenue - Columbus Southern Power Company -
Series 1985B 6.250 12/01/20 6,866,720
4,900 Ohio State Air Quality Development Authority Revenue - Ohio Power Company - Series B 7.400 08/01/09 5,124,077
1,000 Ohio State Air Quality Development Authority - Ashland Oil, Inc. - Series 1992 6.850 04/01/10 1,022,150
2,000 Ohio State Air Quality Development Authority Revenue - Dayton Power and Light Company -
Series 1995 6.100 09/01/30 1,996,920
4,500 Ohio State Water Development Authority Revenue - Cincinnati Gas - Series 1994A 5.450 01/01/24 4,202,415
7,050 Ohio State Water Development Authority Pollution Control Revenue - Ohio Edison Company 7.625 07/01/23 7,379,517
1,000 Summitt County, OH Industrial Development Authority Revenue - Century Products Inc. 7.750 11/01/05 1,041,500
1,650 Toledo-Lucas County, OH Port Authority Revenue - Cargill - Series 1992 7.250 03/01/22 1,811,056
Municipal Appropriation Obligations
- -----------------------------------------------------------------------------------------------------------------------------------
190 Ohio State Building Authority - Columbus State Office Building - Series B 8.800 04/01/00 196,772
1,500 Ohio State Building Authority - Correctional Facilities - Series B 7.125 09/01/09 1,538,910
1,500 Ohio State Building Authority Facilities - Juvenile Correction Building Fund -
Series 1994A 6.600 10/01/14 1,596,945
1,100 Ohio State Department of Transportation - Certificates of Participation - Panhandle Rail
Line 6.500 04/15/12 1,155,099
1,900 Ohio State Public Facilities Commission Higher Education - Capital Facilities Revenue -
Series 1989A 7.250 05/01/04 2,057,187
Municipal Revenue/Transportation
- -----------------------------------------------------------------------------------------------------------------------------------
7,000 Ohio State Turnpike Commission Revenue - Series 1994A 5.750 02/15/24 6,718,740
Municipal Revenue/Utility
- -----------------------------------------------------------------------------------------------------------------------------------
6,800 Cleveland, OH Public Power System Improvement Revenue - Series 1994A 7.000 11/15/24 7,470,888
2,250 Cleveland, OH Public Power System Improvement Revenue - Series 1994A 0.000 11/15/12 882,405
1,535 Cleveland, OH Public Power System Improvement Revenue - Series 1994A 0.000 11/15/13 565,816
10,685 Cleveland, OH Public Power System First Mortgage Revenue - Series 1994 7.000 11/15/17 11,754,889
1,900 Cleveland, OH Public Power System First Mortgage Revenue - Series 1994 7.000 11/15/17 2,090,247
1,000 Hamilton, OH Gas System Revenue - Series 1993A 5.000 10/15/18 892,340
</TABLE>
6 F-250 Ohio
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$13,520 Ohio Municipal Electric Generation Agency - Joint Venture 5 - Beneficial
Interest Certificates - Belleville Hydroelectric Project - Series 1993 5.375% 02/15/24 $12,486,802
1,545 Commonwealth of Puerto Rico Electric Power Authority - Series O 0.000 07/01/17 434,979
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
2,000 Clermont County, OH Sewer System Revenue - Series 1993 5.200 12/01/21 1,806,840
6,000 Cleveland, OH Waterworks Revenue - First Mortgage - Series 1993 G 5.500 01/01/21 5,697,720
4,500 Cleveland, OH Waterworks Improvement and Refunding First Mortgage Revenue -
Series 1996 H 5.750 01/01/26 4,344,840
1,200 Greenville, OH Wastewater System Mortgage Revenue -Darke County -
Series 1992 6.350 12/01/17 1,236,504
1,000 Hamilton, OH Waterworks Revenue - Series A 6.400 10/15/10 1,050,780
775 Hubbard, OH - Sewer System Mortgage Revenue 8.800 11/15/17 837,217
795 Huber Heights, OH Water System Revenue - Series 1995 0.000 12/01/19 202,137
1,000 Mahoning Valley, OH Sanitary District - Series 1991 7.800 12/15/11 1,095,670
1,375 Mahoning Valley, OH Sanitary District - Series 1991 7.900 12/15/14 1,512,926
1,000 Mahoning Valley, OH Sanitary District - Series 1991 7.900 12/15/15 1,100,310
1,000 Mt. Gilead, OH Water System Revenue - Series 1992 7.200 12/01/17 1,080,800
190 Ohio State Water Development Authority Revenue - Pure Water and Improvement -
Series 1985 9.375 12/01/18 199,120
780 Orrville, OH Sewer Improvement Mortgage Revenue - Series 1994 6.000 12/01/11 798,915
500 Orrville, OH Sewer Improvement Mortgage Revenue - Series 1994 6.125 12/01/18 508,320
1,000 Ottawa County, OH Special Assessment - Portage-Catawba Island Sewer Project 7.000 09/01/11 1,098,880
750 Toledo, OH Sewerage System Mortgage Revenue - Series 1994 6.350 11/15/17 776,625
500 Toledo, OH Water System Mortgage Revenue - Series 1994 6.450 11/15/24 522,405
1,050 Warren County, OH Sewer System Revenue - Warren County Sewer District -
Series 1993 5.450 12/01/15 1,002,698
750 Warren County, OH Waterworks System Revenue - Series 1992 6.600 12/01/16 798,090
Non-State General Obligations
3,000 Adams County, OH Valley School District - General Obligation - Series 1995 7.000 12/01/15 3,436,260
5,635 Adams County, OH Valley School District - General Obligation - Series 1995 5.250 12/01/21 5,148,192
1,085 Amherst, OH Police and Jail Facility - General Obligation Unlimited Tax -
Series 1993 5.375 12/01/18 1,011,990
600 Anthony Wayne, OH Local School District - School Facilities Construction -
General Obligation - Series 1995 0.000 12/01/13 220,602
1,880 Avon Lake, OH City School District - General Obligation - Library Improvement -
Series 1993 5.650 12/01/13 1,831,139
2,905 Batavia, OH Local School District Board of Education - School Improvement -
Series 1995 6.300 12/01/22 2,998,599
1,570 Centerville, OH Recreational Facilities - Series 1993 5.800 12/01/20 1,529,965
125 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/04 146,162
125 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/05 147,034
125 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/06 147,638
125 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/07 147,996
125 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/08 148,548
130 Chesapeake-Union Exempt Village School District - Ohio Improvement Revenue 8.500 12/01/09 154,956
500 Cleveland, OH General Obligation - Series 1992 6.375 07/01/12 523,235
</TABLE>
Ohio F-251 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 4,745 Cleveland, OH General Obligation - Series 1994 6.625% 11/15/14 $ 5,098,597
590 Columbus, OH General Obligation - Series 1985 9.375 04/15/06 779,343
500 Columbus, OH General Obligation - Series 1985 9.375 04/15/07 668,225
200 Dayton, OH General Obligation 10.500 10/01/99 235,516
2,500 Delaware County, OH General Obligation - Sewer Improvement - Series 1995 5.250 12/01/15 2,346,225
1,000 Delaware County, OH City School District - School Facilities Construction and
Improvement - General Obligation - Series 1995 5.750 12/01/20 976,900
1,000 Delaware County, OH City School District - School Facilities Construction and
Improvement - General Obligation - Series 1995 0.000 12/01/10 441,420
1,000 Delaware County, OH City School District - School Facilities Construction and
Improvement - General Obligation - Series 1995 0.000 12/01/11 415,710
250 East Holmes, OH Local School District - General Obligation 7.700 12/01/08 272,135
850 Eastern Local School District Board of Education, OH - School Improvement -
General Obligation - Series 1995 6.250 12/01/13 906,219
1,250 Franklin County, OH Refunding General Obligation Limited Tax - Series 1993 5.375 12/01/20 1,177,862
1,575 Garaway, OH Local School District 7.200 12/01/14 1,735,634
620 Geauga County, OH General Obligation - Sewer District Improvement -
Bainbridge Water - Series 1995 6.850 12/01/10 688,547
1,200 Jefferson County, OH Human Services Building - General Obligation 6.625 12/01/14 1,284,684
1,885 Kent, OH General Obligation - Sewer System Improvement - Series 1992 6.500 12/01/10 1,971,672
1,070 Kettering, OH General Obligation 6.650 12/01/12 1,132,670
1,000 Kettering, OH City School District - General Obligation - Series 1994 5.250 12/01/22 913,430
1,000 Lakeview, OH Local School District - General Obligation - Series 1994 6.900 12/01/14 1,094,490
1,440 Lakewood, OH Various Purpose General Obligation - Series 1995 A and B 5.750 12/01/15 1,423,382
1,000 Lakota, OH Local School District - General Obligation - Series 1994 5.350 12/01/12 950,180
935 Logan-Hocking, OH Local School District - General Obligation - Hocking,
Perry and Vinton Counties - Series 1993A 0.000 12/01/07 506,630
590 Logan-Hocking, OH Local School District - General Obligation - Hocking,
Perry and Vinton Counties - Series 1993A 0.000 12/01/10 260,438
735 Marysville, OH Exempted Village School District - General Obligation -
Series 1995 0.000 12/01/10 324,444
865 Marysville, OH Exempted Village School District - General Obligation -
Series 1995 0.000 12/01/16 262,467
2,100 Miami County, OH General Obligation 6.350 12/01/17 2,176,650
2,200 North Royalton, OH City School District - General Obligation - Series 1994 6.000 12/01/14 2,242,328
2,400 North Royalton, OH City School District - General Obligation - Series 1994 6.100 12/01/19 2,443,440
500 Olmsted Falls, OH Local School District 7.050 12/15/11 551,535
1,500 Painesville, OH General Obligation - Waterworks Improvement 6.400 12/01/12 1,555,650
885 Pickerington, OH Local School District - General Obligation - Series 1993 0.000 12/01/08 448,606
940 Pickerington, OH Local School District - General Obligation - Series 1993 0.000 12/01/09 444,808
650 Pickerington, OH Local School District - General Obligation - Series 1993 0.000 12/01/10 286,923
500 Pickerington, OH Local School District - General Obligation - Series 1993 0.000 12/01/11 207,855
500 Pickerington, OH Local School District - General Obligation - Series 1993 0.000 12/01/13 183,835
1,665 Reynoldsburg, OH City School District - General Obligation 6.550 12/01/17 1,766,199
500 Sandusky County, OH General Obligation - Series 1994 6.200 12/01/13 519,550
1,200 Solon, OH City School District - School Improvement Refunding -
General Obligation Unlimited Tax - Series 1993 0.000 12/01/07 650,220
1,155 Solon, OH City School District - School Improvement Refunding -
General Obligation Unlimited Tax - Series 1993 5.300 12/01/13 1,115,418
</TABLE>
8 F-252 Ohio
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,100 Summit County, OH Various Purpose - General Obligation - Series 1996 A 5.250% 12/01/15 $ 1,026,256
1,000 Sylvania, OH City School District - General Obligation - Series 1992 6.600 06/01/16 1,061,130
1,000 Trumbull County, OH General Obligation - Series 1993 5.300 12/01/14 936,190
540 Trumbull County, OH General Obligation - Series 1994 6.200 12/01/14 554,672
1,300 Trumbull County, OH Correctional Facilities - General Obligation Limited
Tax - Series 1995 0.000 12/01/10 573,846
1,320 Twinsburg, OH City School District - General Obligation 6.700 12/01/11 1,421,072
1,830 Upper Arlington, OH City School District - Franklin County, OH -
General Obligation - Series 1996 0.000 12/01/11 760,749
1,870 Upper Arlington, OH City School District - Franklin County, OH -
General Obligation - Series 1996 0.000 12/01/12 731,507
800 Westerville, OH City School District - General Obligation Library -
Series 1995 5.600 12/01/18 771,280
1,000 Woodridge, OH Local School District - General Obligation - Series 1994 6.000 12/01/19 1,002,320
925 Wooster, OH City School District - General Obligation 6.500 12/01/17 964,821
1,650 Youngstown, OH General Obligation 7.550 12/01/11 1,782,330
300 Youngstown, OH General Obligation - Series 1994 6.125 12/01/14 305,934
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
2,000 Athens, OH Sewer System Revenue 7.300 12/01/14 2,048,520
1,660 Bedford, OH Hospital Improvement Revenue - Community Hospital of Bedford 8.500 05/15/09 1,891,188
1,400 Canton, OH General Obligation 7.875 12/01/08 1,545,068
3,085 Carroll County, OH Hospital Improvement Revenue - Timken Mercy
Medical Center 7.125 12/01/18 3,477,258
1,085 Clermont County, OH Hospital Facilities Revenue - Mercy Health
Care System - Series 1989 7.500 09/01/19 1,220,484
3,660 Clermont County, OH Hospital Facilities Revenue - Mercy Health
Care System - Series 1989 7.500 09/01/19 4,051,510
1,000 Clermont County, OH Sewer System Revenue - Series 1990 7.250 12/01/11 1,119,010
2,700 Clermont County, OH Sewer System Revenue - Series 1991 7.100 12/01/21 3,040,092
1,000 Clermont County, OH Waterworks System Revenue 8.200 12/01/12 1,080,630
1,010 Cleveland, OH General Obligation 7.500 08/01/08 1,155,248
1,010 Cleveland, OH General Obligation 7.500 08/01/09 1,155,248
790 Cleveland, OH City School District 8.250 12/01/08 933,820
3,775 Cleveland, OH Public Power System Improvement Revenue 8.375 08/01/17 4,042,157
2,000 Cuyahoga County, OH Hospital Facilities Revenue - University
Hospital Health System - Series 1989 6.875 01/15/19 2,154,040
4,000 Cuyahoga County, OH Hospital Facilities Revenue - Fairview General Hospital 7.375 08/01/19 4,404,400
650 Cuyahoga County, OH Hospital Facilities Revenue - Mt. Sinai Medical Center 6.625 11/15/21 716,690
5,530 Cuyahoga County, OH Improvement Revenue - Medical Center Corporation 7.800 06/01/09 6,095,498
1,000 Cuyahoga Falls, OH Electric Distribution System Improvement Revenue 7.000 12/01/10 1,095,200
1,000 Delphos, OH Sewer System Revenue 7.250 09/01/20 1,113,930
2,600 Erie County, OH Franciscan Services Corporation - Providence Hospital 7.625 01/01/19 2,826,304
1,500 Findlay, OH Sewer System Revenue 7.200 08/01/11 1,640,955
1,000 Franklin County, OH Hospital Facilities Refunding Revenue - Riverside
United Methodist Hospital 7.600 05/15/20 1,121,260
500 Geauga County, OH Hospital Improvement Revenue - Geauga Hospital Association 8.700 11/15/04 532,150
1,200 Geauga County, OH Hospital Improvement Revenue - Geauga Hospital Association 8.750 11/15/13 1,277,712
6,750 Hamilton, OH Electric System Mortgage Revenue - Series B 8.000 10/15/22 7,439,108
720 Huber Heights, OH General Obligation 9.250 12/01/08 788,717
</TABLE>
OHIO F-253 9
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 1,000 Hudson, OH Local School District - Series 1990 A 7.100% 12/15/13 $ 1,112,810
1,000 Hudson, OH Local School District - Series 1991 A 7.100 12/15/14 1,113,680
155 Logan County, OH General Obligation - Sanitary Sewer System Improvement -
Indian Lake Sewer District 7.750 12/01/02 178,408
155 Logan County, OH General Obligation - Sanitary Sewer System Improvement -
Indian Lake Sewer District 7.750 12/01/03 180,440
155 Logan County, OH General Obligation - Sanitary Sewer System Improvement -
Indian Lake Sewer District 7.750 12/01/04 182,111
155 Logan County, OH General Obligation - Sanitary Sewer System Improvement -
Indian Lake Sewer District 7.750 12/01/05 183,314
155 Logan County, OH General Obligation - Sanitary Sewer System Improvement -
Indian Lake Sewer District 7.750 12/01/06 184,041
1,075 Lorain, OH Sewer System Revenue 8.750 04/01/11 1,178,050
1,850 Massillon, OH City School District 7.200 12/01/11 2,066,450
3,000 Middleburg Heights, OH Hospital Improvement Revenue - Southwest General
Hospital - Series 1991 7.200 08/15/19 3,367,350
6,460 Ohio Housing Finance Agency - Single Family Mortgage Revenue - Series 1985 A 0.000 01/15/15 1,845,364
5,700 Ohio Housing Finance Agency - Single Family Mortgage Revenue - Series 1985 A 0.000 01/15/15 1,662,519
20 Ohio State Building Authority - Frank J. Lausche State Office Building - Series A 10.125 10/01/06 24,207
3,250 Ohio State Building Authority - Correctional Facilities - Series A 7.350 08/01/06 3,576,105
5,660 Ohio State Higher Educational Facilities Commission Revenue -
Case Western Reserve University Project - Series 1988 7.700 10/01/18 6,020,089
1,000 Ohio State Higher Educational Facilities Commission Revenue -
John Carroll University 9.250 10/01/07 1,087,820
4,630 Ohio State Water Development Authority Revenue - Pure Water and Improvement -
Series 1990 I 6.000 12/01/16 4,686,856
1,600 Pickerington, OH Local School District - General Obligation 7.250 12/01/13 1,790,416
2,000 Commonwealth of Puerto Rico - General Obligation - Series 1988 7.750 07/01/06 2,180,160
780 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 853,952
1,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.900 07/01/07 1,092,920
3,600 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue - Series A 7.875 07/01/17 3,932,820
700 Commonwealth of Puerto Rico Highway Authority Revenue - Series 1990 Q 7.750 07/01/10 792,267
2,000 Commonwealth of Puerto Rico Electric Power Authority - Series K 9.375 07/01/17 2,158,060
4,000 Commonwealth of Puerto Rico Electric Power Authority - Series P 7.000 07/01/21 4,474,680
1,250 Ross County, OH Hospital Revenue - Medical Center Hospital 7.500 12/01/14 1,344,025
605 Scioto County, OH General Obligation 7.150 08/01/11 672,591
750 Southwest Local School District - Ohio General Obligation 7.650 12/01/10 844,508
1,500 Stark County, OH Sanitary Sewer System Revenue 7.750 11/15/18 1,648,545
1,220 Trumbull County, OH Hospital Revenue - St. Joseph Riverside Hospital 7.750 11/01/13 1,307,413
1,000 University of Cincinnati - Ohio General Receipt Revenue - Series I 7.300 06/01/09 1,078,400
1,750 University of Toledo - Ohio General Receipt Revenue 7.700 06/01/18 1,900,168
1,000 Warren, OH General Obligation 8.625 11/15/13 1,117,480
</TABLE>
10 F-254 OHIO
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 550 Columbiana County, OH Jail Facilities Construction -
General Obligation - Series 1994 6.600% 12/01/17 $ 574,128
175 East Cleveland, OH Local Government Revenue 7.900 12/01/97 182,530
24,850 Puerto Rico Highway and Transportation Authority
Revenue - Series 1996 Y and Z 5.500 07/01/36 22,555,848
2,300 Commonwealth of Puerto Rico Highway and
Transportation Authority Revenue - Series 1993 W 5.500 07/01/15 2,236,359
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
750 Ohio State Full Faith and Credit General Obligation
Infrastructure Revenue - College Savings - Series 1995 6.200 08/01/13 783,750
2,000 Ohio State Full Faith and Credit General Obligation
Infrastructure Revenue - College Savings - Series 1995 6.200 08/01/14 2,083,260
7,640 Ohio State Capital Appreciation - Series 1993 0.000 08/01/13 2,863,090
2,000 Commonwealth of Puerto Rico Public Improvement -
General Obligation - Series 1996 A 5.400 07/01/25 1,802,860
220 Commonwealth of Puerto Rico - General Obligation
- Series 1988 8.000 07/01/07 238,687
2,700 Commonwealth of Puerto Rico Public Building Authority
Guaranteed Public Education and Health Facilities - Series M 5.500 07/01/21 2,515,995
Total Investments in Securities - Municipal
Bonds (cost $448,988,260) - 98.8% 472,251,349
Excess of Other Assets over Liabilities - 1.2% 5,765,622
Total Net Assets - 100.0% $478,016,971
</TABLE>
See notes to financial statements.
Ohio F-255 11
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $448,988,260) $472,251,349
Receivable for investments sold 385,000
Receivable for Fund shares sold 401,724
Interest receivable 9,242,833
Other 28,280
Total Assets 482,309,186
LIABILITIES:
Bank overdraft 265,873
Payable for investments purchased 1,174,844
Payable for Fund shares reacquired 265,427
Distributions payable 2,182,483
Accrued expenses 403,588
Total Liabilities 4,292,215
NET ASSETS 478,016,971
Class A:
Applicable to 39,528,702 shares of beneficial interest
issued and outstanding $443,077,498
Net asset value per share $ 11.21
Class C:
Applicable to 3,117,471 shares of beneficial interest
issued and outstanding $ 34,939,473
Net asset value per share $ 11.21
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 30,528,053
EXPENSES:
Distribution fees - Class A (Note E) 1,802,234
Distribution fees - Class C (Note E) 307,322
Investment advisory fees (Note E) 2,421,117
Custody and accounting fees 178,414
Transfer agent's fees 292,215
Registration fees 20,431
Legal fees 12,228
Audit fees 22,143
Trustees' fees 12,810
Shareholder services fees (Note E) 45,750
Other 14,236
Advisory fees waived (Note E) (522,006)
Total expenses before credits 4,606,894
Custodian fee credit (Note B) (46,769)
Net expenses 4,560,125
Net investment income 25,967,928
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on security transactions 1,077,770
Change in unrealized appreciation (depreciation) of investments (10,640,829)
Net loss on investments (9,563,059)
Net increase in net assets resulting from operations $ 16,404,869
</TABLE>
See notes to financial statements.
12 F-256 Ohio
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 25,967,928 $ 26,446,299
Net realized gain (loss) on security transactions 1,077,770 (3,578,718)
Change in unrealized appreciation (depreciation) of investments (10,640,829) 12,308,189
Net increase in net assets resulting from operations 16,404,869 35,175,770
Distributions to Class A shareholders:
From net investment income (24,658,411) (24,987,149)
Distributions to Class C shareholders:
From net investment income (1,590,477) (1,382,811)
Net decrease in net assets from distributions to shareholders (26,248,888) (26,369,960)
Fund share transactions (Note C):
Proceeds from shares sold 53,249,272 48,038,369
Net asset value of shares issued in reinvestment of distributions 15,315,498 15,361,718
Cost of shares reacquired (54,731,176) (69,123,935)
Net increase (decrease) in net assets from Fund share transactions 13,833,594 (5,723,848)
Total increase in net assets 3,989,575 3,081,962
NET ASSETS:
Beginning of year 474,027,396 470,945,434
End of year $478,016,971 $474,027,396
NET ASSETS CONSIST OF:
Paid-in surplus $459,094,346 $445,465,373
Undistributed net investment income 76,339
Accumulated net realized gain (loss) on security transactions (4,340,464) (5,418,234)
Unrealized appreciation (depreciation) of investments 23,263,089 33,903,918
$478,016,971 $474,027,396
</TABLE>
See notes to financial statements.
Ohio F-257 13
<PAGE>
[LOGO] Notes to Financial Statements
- --------------------------------------------------------------------------------
A. DESCRIPTION OF BUSINESS
The Flagship Ohio Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on June 27, 1985. On
August 3, 1993, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C
shares are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a
continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value. The Fund must maintain a
diversified investment portfolio as a registered investment company,
however, the Fund's investments are primarily in the securities of its
state. Such concentration subjects the Fund to the effects of economic
changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions.
Therefore, no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes
original issue discounts and premiums paid on purchases of portfolio
securities on the same basis for both financial reporting and tax purposes.
Market discounts, if applicable, are recognized as ordinary income upon
disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
14 F-258 Ohio
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it
earns custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 3,527,301 $ 40,460,865 3,620,183 $ 39,954,959
Shares issued on reinvestment 1,246,857 14,270,782 1,305,755 14,385,121
Shares reacquired (4,213,105) (48,146,969) (5,696,668) (62,325,986)
NET INCREASE (DECREASE) 561,053 $ 6,584,678 (770,730) $ (7,985,906)
CLASS C:
Shares sold 1,114,495 $ 12,788,407 734,040 $ 8,083,410
Shares issued on reinvestment 91,272 1,044,716 88,671 976,597
Shares reacquired (577,507) (6,584,207) (625,068) (6,797,949)
NET INCREASE 628,260 $ 7,248,916 197,643 $ 2,262,058
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $157,639,637 and $147,632,393, respectively. At May 31, 1996, cost
for federal income tax purposes is $448,988,260 and net unrealized
appreciation aggregated $23,263,089, of which $25,347,863 related to
appreciated securities and $2,084,774 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $4,341,800 to offset future net capital gains in the amounts of
$10,100 through May 31, 1999, $753,000 through May 31, 2002, and $3,578,700
through May 31, 2003.
Ohio F-259 15
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $522,006 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $158,615. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $150,794 and $28,235 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $931,000 for the year ended May 31, 1996, of which
approximately $806,600 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $12,300 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of
$30 million is provided by State Street Bank & Trust Co. The Fund may
temporarily borrow up to $22 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$649,700, at a weighted average annualized interest rate of 6.8%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
16 F-260 Ohio
<PAGE>
[LOGO] FINANCIAL HIGHLIGHTS Selected data for each share of beneficial
interest outstanding throughout the year.
<TABLE>
<CAPTION>
............................................................................................................................
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
CLASS A MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 11.43 $ 11.21 $ 11.59 $ 11.05 $ 10.72
Income from investment operations:
Net investment income 0.62 0.64 0.64 0.66 0.68
Net realized and unrealized gain
(loss) on securities (0.21) 0.22 (0.38) 0.54 0.33
TOTAL FROM INVESTMENT OPERATIONS
Less distributions:
From net investment income (0.63) (0.64) (0.64) (0.66) (0.68)
TOTAL DISTRIBUTIONS (0.63) (0.64) (0.64) (0.66) (0.68)
NET ASSET VALUE, END OF YEAR $ 11.21 $ 11.43 $ 11.21 $ 11.59 $ 11.05
Total return/a/ 3.59% 7.99% 2.24% 11.20% 9.77%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses/b/ 0.92% 0.95% 0.93% 0.96% 0.95%
Net investment income 5.41% 5.78% 5.48% 5.81% 6.24%
Assuming credits and no
waivers or reimbursements:
Expenses 1.02% 1.03% 1.02% 1.02% 0.99%
Net investment income 5.31% 5.70% 5.39% 5.75% 6.20%
Net assets at end of year (000's) $443,077 $445,566 $445,272 $410,467 $325,273
Portfolio turnover rate 30.93% 31.25% 9.14% 14.93% 17.50%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.91%; prior year numbers have not
been restated to reflect these credits.
Ohio F-261 17
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended August 3, 1993 to
CLASS C May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.43 $ 11.20 $ 11.69
Income from investment operations:
Net investment income 0.55 0.57 0.46
Net realized and unrealized gain
(loss) on securities (0.21) 0.23 (0.49)
TOTAL FROM INVESTMENT OPERATIONS 0.34 0.80 (0.03)
Less distributions:
From net investment income (0.56) (0.57) (0.46)
TOTAL DISTRIBUTIONS (0.56) (0.57) (0.46)
NET ASSET VALUE, END OF PERIOD $ 11.21 $ 11.43 $ 11.20
Total return/(a)/ 3.03% 7.50% (0.17%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.47% 1.50% 1.46%
Net investment income 4.84% 5.21% 4.79%
Assuming credits and no
waivers or reimbursements:
Expenses 1.56% 1.58% 1.60%
Net investment income 4.75% 5.13% 4.65%
Net assets at end of period (000's) $34,939 $28,461 $25,674
Portfolio turnover rate 30.93% 31.25% 9.14%
</TABLE>
(a) The total returns shown do not include the effect of applicable
contingent deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.46%; prior period numbers have not
been restated to reflect these credits.
18 F-262 Ohio
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP OHIO
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship Ohio
Double Tax Exempt Fund as of May 31, 1996, the related statement of operations
for the year then ended, and the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Ohio
Double Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
Ohio F-263 19
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face Face Market
Amount Rate Maturity Value
(000) Description
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$3,000 Allegheny County, PA Higher Education Building Authority Revenue -
Robert Morris College - Series 1996 A 6.250% 02/15/26 $2,793,870
750 Northeastern Pennsylvania Hospital and Education Authority Revenue -
Luzerne County Community College - Series 1994 6.625 08/15/15 790,170
865 Union County, PA Higher Educational Facilities Financing Authority Revenue -
Bucknell University - Series 1996 5.500 04/01/16 818,991
Health Care
--------------------------------------------------------------------------------------------------------------------------
1,000 Butler County, PA Industrial Development Authority - Health Center Revenue -
Sherwood Oaks Project - Series 1993 5.750 06/01/16 922,280
400 Columbia County, PA Industrial Development Authority - Orangeville Nursing Center 9.000 12/01/12 398,980
Hospitals
--------------------------------------------------------------------------------------------------------------------------
200 Allegheny County, PA Hospital Development Authority - St. Margaret Memorial
Hospital - Series 1991A 7.125 10/01/21 205,624
200 Butler County, PA Hospital Authority Revenue - North Hills Passavant Hospital 7.000 06/01/22 216,466
500 Clarion County, PA Hospital Authority Revenue - Clarion Hospital 8.100 07/01/12 516,260
500 Dauphin County, PA Hospital Authority Revenue - Harrisburg Hospital 8.250 07/01/14 529,000
2,300 Doylestown, PA Hospital Authority Revenue - Series 1993 A 5.000 07/01/23 1,980,162
1,000 Lancaster County, PA Hospital Authority Revenue - Health Care Center
Masonic Homes - Series 1994 5.000 11/15/20 864,530
1,200 Lehigh County, PA General Purpose Authority Hospital Revenue -
Lehigh Valley Hospital - Series 1995 B 5.625 07/01/25 1,128,972
1,000 Monroeville, PA Hospital Authority Revenue - Forbes Health System -
Series 1995 6.250 10/01/15 959,860
500 Montgomery County, PA Higher Education and Health Authority Revenue -
Holy Redeemer Hospital 7.625 02/01/20 539,260
2,000 Philadelphia, PA Hospitals and Higher Education Facilities Revenue -
Temple University Hospital - Series 1993 A 6.625 11/15/23 1,996,140
1,750 Westmoreland County, PA Industrial Development Authority Revenue -
Citizens General Hospital - Series 1987 A 8.250 07/01/13 1,814,592
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
500 Bucks County, PA Redevelopment Authority Mortgage Revenue -
Westminster Heights - Series 1992 A 6.875 08/01/23 513,705
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
300 Pennsylvania Housing Finance Agency - Single Family - Series 1989 S 7.600 04/01/16 322,584
250 Pennsylvania Housing Finance Agency - Single Family - Series 1991-30 7.300 10/01/17 268,870
1,000 Pittsburgh, PA Urban Redevelopment Authority - Mortgage Revenue -
Series 1996 A 6.000 04/01/19 960,330
</TABLE>
4 F-264 Pennsylvania
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face Face Market
Amount Rate Maturity Value
(000) Description
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 296 Allegheny County, PA Industrial Development Authority - Solid Waste Disposal -
Conversion Systems, Inc. - Series 1991 8.000% 03/01/98 $ 313,523
1,000 Bradford County, PA Industrial Development Authority - Solid Waste Disposal
Revenue - International Paper Company - Series 1995 B 5.900 12/01/19 952,230
2,000 Cambria County, PA Industrial Development Authority Pollution Control Revenue -
Pennsylvania Electric Company - Series 1995 A and B 5.800 11/01/20 1,936,520
1,500 Lawrence County, PA Industrial Development Authority Pollution Control Revenue -
Pennsylvania Power Company 7.150 03/01/17 1,559,130
550 Lehigh County, PA Industrial Development Authority Pollution Control Revenue -
Pennsylvania Power and Light Company - Series 1995 A 6.150 08/01/29 554,362
1,000 Northampton County, PA Industrial Development Authority Pollution Control
Revenue - Metropolitan Edison - Series 1995 A 6.100 07/15/21 1,001,520
2,000 Pennsylvania Economic Development Financing Authority Revenue -
MacMillan Bloedel Clarion - Series 1995 7.600 12/01/20 2,181,880
1,000 Pennsylvania Economic Development Finance Authority Revenue -
Wastewater Treatment - Sun Company, Incorporated R & M - Series 1994 A 7.600 12/01/24 1,093,450
250 Philadelphia, PA Industrial Development Authority - National Board of Medical
Examiners - Series 1992 6.750 05/01/12 267,222
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
2,545 Reading, PA General Obligation - Parking Authority - Series 1993 0.000 11/15/15 808,750
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
1,400 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 6.375 07/01/26 1,382,374
750 Philadelphia, PA Gas Works Revenue - Fourteenth Series - Series 1993 6.375 07/01/26 772,605
750 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.375 07/01/24 768,150
650 Philadelphia, PA Gas Works Revenue - Twelfth Series 7.000 05/15/20 751,108
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
1,000 Philadelphia, PA Water and Wastewater Revenue - Series 1993 5.250 06/15/23 897,790
1,185 Pittsburgh, PA Water and Sewer Authority - Water and Sewer System Revenue -
Series 1995 B 5.750 09/01/25 1,142,684
920 South Wayne County, PA Water and Sewer Authority Revenue 8.200 04/15/13 969,579
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
750 Central Greene County, PA School District - General Obligation - Series 1996 5.250 02/15/24 673,478
2,195 Montour, Pa School District - General Obligation - Allegheny County -
Series 1993 B 0.000 01/01/14 780,213
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
1,000 Montgomery County, PA Industrial Development Authority Pollution Control
Revenue - Philadelphia Electric - Series A 8.875 06/01/16 1,020,000
500 Pennsylvania State Higher Educational Facilities Authority Revenue -
Lycoming College 8.375 10/01/18 553,890
700 Pennsylvania State Higher Educational Facilities Authority Revenue -
Thomas Jefferson University 8.000 01/01/18 756,259
</TABLE>
Pennsylvania F-265 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
<TABLE>
<CAPTION>
Municipal Bonds (continued)
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 150 Philadelphia, PA Municipal Authority Revenue 7.800% 04/01/18 $ 160,382
1,450 Philadelphia, PA Municipal Authority Revenue 7.800 04/01/18 1,595,667
Resource Recovery
-------------------------------------------------------------------------------------------------------------------------
1,650 Cambria County, PA Industrial Development Authority Resource
Recovery Revenue - Cambria CoGen Project 7.750 09/01/19 1,729,414
400 York County, PA Solid Waste and Refuse Authority Industrial Development
Revenue - Resource Recovery - Series C 8.200 12/01/14 426,039
Special Tax Revenue
-------------------------------------------------------------------------------------------------------------------------
1,500 Pennsylvania Intergovernmental Cooperation Authority - Special Tax Revenue -
Series 1994 7.000 06/15/14 1,704,300
State/Territorial General Obligations
-------------------------------------------------------------------------------------------------------------------------
1,000 * Pennsylvania State General Obligation - Series 1996 5.375 05/15/16 944,470
2,100 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400 07/01/25 1,893,003
Total Investments in Securities - Municipal Bonds (cost $47,130,386) - 98.6% 48,130,638
Excess of Other Assets over Liabilities - 1.4% 702,992
Total Net Assets - 100.0% $48,833,630
</TABLE>
*Securities purchased on a "when-issued" basis.
See notes to financial statements.
6 F-266 Pennsylvania
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $47,130,386) $48,130,638
Receivable for investments sold 2,292,793
Receivable for Fund shares sold 128,413
Interest receivable 976,009
Other 3,314
Total assets 51,531,167
LIABILITIES:
Bank borrowings (Note G) 526,230
Payable for investments purchased 1,886,776
Payable for Fund shares reacquired 476
Distributions payable 236,454
Accrued expenses 47,601
Total liabilities 2,697,537
NET ASSETS: 48,833,630
Class A:
Applicable to 4,441,276 shares of beneficial interest issued and outstanding $44,392,043
Net asset value per share $ 10.00
Class C:
Applicable to 444,517 shares of beneficial interest issued and outstanding $ 4,441,587
Net asset value per share $ 9.99
</TABLE>
[LOGO]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 3,049,939
EXPENSES:
Distribution fees - Class A (Note E) 170,972
Distribution fees - Class C (Note E) 35,903
Investment advisory fees (Note E) 233,274
Custody and accounting fees 50,937
Transfer agents fees 40,720
Registration fees 1,098
Legal fees 61
Audit fees 14,640
Reimbursement of organizational expenses (Note F) 5,244
Trustees' fees 1,316
Shareholder services fees (Note E) 3,566
Other 1,685
Advisory fees waived (Note E) (156,472)
Expense subsidy (Note E) (11,285)
Total expenses before credits 391,659
Custodian fee credit (Note B) (11,012)
Net expenses 380,647
Net investment income 2,669,292
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 714,271
Change in unrealized appreciation (depreciation) of investments (1,775,459)
Net loss on investments (1,061,188)
Net increase in net assets resulting from operations $ 1,608,104
</TABLE>
See notes to financial statements.
PENNSYLVANIA F-267 7
<PAGE>
[LOGO OF SHIP ART]
Statement of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 2,669,292 $ 2,691,538
Net realized gain (loss) on security transactions 714,271 (78,262)
Change in unrealized appreciation (depreciation) of investments (1,775,459) 623,383
Net increase in net assets resulting from operations 1,608,104 3,236,659
Distributions to Class A shareholders:
From net investment income (2,497,316) (2,597,708)
Distributions to Class C shareholders:
From net investment income (199,438) (121,479)
Net decrease in net assets from distributions to shareholders (2,696,754) (2,719,187)
Fund share transactions (Note C):
Proceeds from shares sold 8,804,404 10,848,092
Net asset value of shares issued in reinvestment of distributions 1,323,945 1,278,709
Cost of shares reacquired (5,923,636) (10,849,240)
Net increase in net assets from Fund share transactions 4,204,713 1,277,561
Total increase in net assets 3,116,063 1,795,033
NET ASSETS:
Beginning of year 45,717,567 43,922,534
End of year $48,833,630 $45,717,567
NET ASSETS CONSIST OF:
Paid-in surplus $47,936,238 $43,754,125
Undistributed net investment income 4,862
Accumulated net realized gain (loss) on security transactions (102,860) (817,131)
Unrealized appreciation (depreciation) of investments 1,000,252 2,775,711
$48,833,630 $45,717,567
</TABLE>
See notes to financial statements.
8 F-268 Pennsylvania
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Pennsylvania Triple Tax Exempt Fund (Fund), is a sub-trust of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Fund commenced investment operations on October 29,
1986. On February 2, 1994, the Fund began to offer Class C shares to the
investing public. Class A shares are sold with a front-end sales charge.
Class C shares are sold with no front-end sales charge but are assessed a
contingent deferred sales charge if redeemed within one year from the time of
purchase. Both classes of shares have identical rights and privileges except
with respect to the effect of sales charges, the distribution and/or service
fees borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore,
no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Pennsylvania F-269 9
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it
earns custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were $950,110 "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- -------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 715,960 $ 7,326,760 948,108 $ 9,405,651
Shares issued on reinvestment 117,434 1,199,201 120,686 1,191,490
Shares reacquired (562,674) (5,744,061) (1,093,815) (10,689,804)
Net increase (decrease) 270,720 $ 2,781,900 (25,021) $ (92,663)
Class C:
Shares sold 144,791 $ 1,477,644 144,307 $ 1,442,441
Shares issued on reinvestment 12,212 124,744 8,840 87,219
Shares reacquired (17,822) (179,575) (16,468) (159,436)
Net increase 139,181 $ 1,422,813 136,679 $ 1,370,224
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,868,512 and $29,642,173, respectively. At May 31, 1996, cost
for federal income tax purposes is $47,081,602 and net unrealized
appreciation aggregated $1,049,036, of which $1,645,841 related to
appreciated securities and $596,805 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $102,100 to offset future net capital gains in the amounts of
$12,400 through May 31, 1999, $60,900 through May 31, 2002, and $28,800
through May 31, 2003.
10 F-270 Pennsylvania
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $156,472 of its
advisory fees. Also, under an agreement with the Fund, the Advisor may
subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $15,105 and $3,492 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $107,100 for the year ended May 31, 1996, of which
approximately $92,900 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $900 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Organizational Expenses
The organizational expenses incurred on behalf of the reorganization
(approximately $63,000) are being reimbursed to the Advisor on a straight-
line basis over a period of five years. As of May 31, 1996, $5,244 has been
reimbursed. In the event that the Advisor's current investment in the Trust
falls below $100,000 prior to the full reimbursement of the organizational
expenses, then it will forego any further reimbursement.
G. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$61,700, at a weighted average annualized interest rate of 6.75%. At May 31,
1996, the Fund had $526,230 outstanding under the line of credit.
Pennsylvania F-271 11
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.21 $ 10.06 $ 10.38 $ 9.90 $ 9.60
Income from investment operations:
Net investment income 0.59 0.60 0.61 0.62 0.63
Net realized and unrealized gain (loss) on
securities (0.20) 0.16 (0.32) 0.47 0.30
Total from investment operations 0.39 0.76 0.29 1.09 0.93
Less distributions:
From net investment income (0.60) (0.61) (0.61) (0.61) (0.63)
Total distributions (0.60) (0.61) (0.61) (0.61) (0.63)
Net asset value, end of year $ 10.00 $ 10.21 $ 10.06 $ 10.38 $ 9.90
Total return(a) 3.83% 7.90% 2.70% 11.34% 9.98%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses(b) 0.79% 0.89% 0.91% 0.92% 0.83%
Net investment income 5.76% 6.08% 5.80% 6.07% 6.47%
Assuming credits and no waivers or
reimbursements:
Expenses 1.13% 1.29% 1.17% 1.32% 1.31%
Net investment income 5.42% 5.68% 5.55% 5.67% 5.99%
Net assets at end of year (000's) $44,392 $42,600 $42,226 $40,705 $36,917
Portfolio turnover rate 64.54% 49.86% 20.70% 22.69% 41.33%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.77%; prior year numbers have not
been restated to reflect these credits.
12 F-272 Pennsylvania
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended February 2, 1994 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.21 $10.06 $ 10.71
Income from investment operations:
Net investment income 0.53 0.54 0.16
Net realized and unrealized gain
(loss) on securities (0.21) 0.16 (0.64)
Total from investment operations 0.32 0.70 (0.48)
Less distributions:
From net investment income (0.54) (0.55) (0.17)
Total distributions (0.54) (0.55) (0.17)
Net asset value, end of period $ 9.99 $10.21 $ 10.06
Total return/(a)/ 3.16% 7.31% (13.46%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 1.34% 1.39% 1.41%
Net investment income 5.19% 5.50% 4.91%
Assuming credits and no
waivers or reimbursements:
Expenses 1.68% 1.84% 1.68%
Net investment income 4.85% 5.05% 4.64%
Net assets at end of period (000's) $4,442 $3,118 $ 1,697
Portfolio turnover rate 64.54% 49.86% 20.70%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.32%; prior period numbers have not
been restated to reflect these credits.
Pennsylvania F-273 13
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
...............................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP PENNSYLVANIA
TRIPLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Pennsylvania Triple Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Pennsylvania Triple Tax Exempt Fund at May 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
14 F-274 Pennsylvania
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
...............................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 400 Coastal Carolina University Revenue - South Carolina - Series 1994 6.800% 06/01/19 $ 430,976
350 Commonwealth of Puerto Rico Industrial, Medical and Environmental - Pollution Control
Facilities Financing Authority - Catholic University of
Puerto Rico Project - Series 1993 5.600 12/01/07 347,658
Health Care
---------------------------------------------------------------------------------------------------------------------------
250 Spartanburg County, SC Health Services District, Incorporated - Hospital Revenue -
Series 1995 5.200 04/15/07 245,148
Hospitals
----------------------------------------------------------------------------------------------------------------------------
200 Greenville, SC Hospital System Board of Trustees - Hospital Facilities Revenue -
Series 1990 6.000 05/01/20 199,736
250 Greenville, SC Hospital System Board of Trustees - Hospital Revenue -
Series 1996 A and B 5.250 05/01/17 227,810
250 Greenwood County, SC Hospital Revenue - Self Memorial Hospital - Series 1993 5.875 10/01/17 244,480
250 South Carolina Jobs - Economic Development Authority Hospital Revenue -
Tuomey Regional Medical Center - Series 1995 A and B 5.750 11/01/15 242,595
Housing/Multifamily
----------------------------------------------------------------------------------------------------------------------------
300 South Carolina Regional Housing Development Corporation -
Number 1 Multifamily Revenue - Redwood - Series A 6.625 07/01/17 305,700
250 South Carolina State Housing Finance And Development Authority Revenue -
Multifamily - Runaway Bay Apartments - Series 1995 6.125 12/01/15 246,782
Housing/Single Family
----------------------------------------------------------------------------------------------------------------------------
250 South Carolina State Housing Finance and Development Authority Revenue -
Series 1994 A 6.150 07/01/08 256,020
250 South Carolina State Housing Finance And Development Authority -
Mortgage Revenue - Series 1996 A 6.350 07/01/25 248,015
Industrial Development and Pollution Control
---------------------------------------------------------------------------------------------------------------------------
500 Darlington County, SC Industrial Development Revenue - Sonoco Products
Company Project - Series 1996 6.000 04/01/26 482,810
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------------------------
250 Berkeley County, SC School District - Certificates of Participation -
Berkeley School Facilities Group, Incorporated - Series 1994 6.250 02/01/12 256,538
250 Berkeley County, SC School District - Certificates of Participation - Berkeley
School Facilities Group, Incorporated - Series 1994 6.300 02/01/16 255,782
10 Charleston County, SC Public Facilities Corporation - Certificates of Participation -
Series 1994 B 6.875 06/01/14 10,729
400 Chesterfield County, SC School District Facilities, Incorporated - Certificates of
Participation - Series 1995 6.000 07/01/15 401,260
250 Greenville County, SC Public Facilities Corporation - Certificates of Participation -
Courthouse and Detention Center Facilities - Series 1995 5.500 04/01/12 241,272
250 Hilton Head Island, SC Public Facilities Corporation - Certificates of Participation -
Series 1995 5.750 03/01/14 244,808
</TABLE>
4 F-275 South Carolina
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 185 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.125% 07/01/08 $ 190,528
300 South Carolina State Public Service Authority Revenue - Series 1992 A 5.700 07/01/01 311,079
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------------------------
250 Columbia, SC Waterworks and Sewer Revenue - Series 1993 5.375 02/01/12 241,132
190 Columbia, SC Waterworks and Sewer Revenue - Series 1991 6.300 02/01/00 200,233
250 Georgetown County, SC Water and Sewer District - Water and Sewer System
Revenue - Series 1995 6.500 06/01/25 242,090
250 Hilton Head, SC Number 1 Public Service District - Waterwork and Sewer
System Revenue - Series 1995 5.500 08/01/15 239,975
250 Myrtle Beach, SC Waterworks and Sewer System Revenue - Series 1995 5.250 03/01/13 234,095
250 York County, SC Water and Sewer Revenue - Series 1995 6.500 12/01/25 242,049
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
250 Anderson County, SC School District Number 4 - General Obligation -
Series 1995 5.400 03/01/15 239,188
200 Chester County, SC School District General Obligation - Series 1995 5.250 02/01/10 190,244
225 Dorchester County, SC School District Number 2 - General Obligation - Series 1996 6.500 02/01/02 243,299
225 Dorchester County, SC School District Number 2 - General Obligation - Series 1996 6.500 02/01/03 244,712
250 Lexington County, SC General Obligation - Series 1995 6.300 02/01/10 262,042
250 Richland-Lexington, SC Airport District Revenue - Columbia Metropolitan Airport
- Series 1995 6.000 01/01/15 246,955
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
240 Charleston County, SC Public Facilities Corporation - Certificates of Participation -
Series 1994 B 6.875 06/01/14 271,841
100 Commonwealth of Puerto Rico Electric Power Authority - Series M 8.000 07/01/08 109,587
Resource Recovery
--------------------------------------------------------------------------------------------------------------------------
250 Charleston County, SC Solid Waste User Fee - Resources Recovery Revenue -
Series 1994 6.000 01/01/14 250,372
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
500 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.400 07/01/11 516,845
250 South Carolina State Highway - General Obligation - Series 1996 A 5.000 02/01/05 249,810
250 South Carolina State Highway - General Obligation - Series 1996 A 5.000 02/01/06 247,905
Student Loan Revenue Bonds
--------------------------------------------------------------------------------------------------------------------------
500 South Carolina State Education Assistance Authority Revenue - Student Loan -
Series 1994 6.300 09/01/08 501,675
Total Investments in Securities - Municipal Bonds (cost $10,209,469) - 98.4% 10,363,775
Excess of Other Assets over Liabilities - 1.6% 169,971
Total Net Assets - 100.0% $10,533,746
See notes to financial statements.
</TABLE>
South Carolina F-276 5
<PAGE>
<TABLE>
<CAPTION>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
............................................................................................
<S> <C>
ASSETS:
Investments, at market value (cost $10,209,469) $10,363,775
Receivable from Fund shares sold 48,449
Interest receivable 209,445
Other 619
Total assets 10,622,288
LIABILITIES:
Bank overdraft 18,553
Distributions payable 46,080
Accrued expenses 23,909
Total liabilities 88,542
NET ASSETS:
Applicable to 1,135,602 shares of beneficial interest issued and outstanding $10,533,746
Net asset value per share $ 9.28
</TABLE>
<TABLE>
<CAPTION>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
............................................................................................
<S> <C>
INVESTMENT INCOME - INTEREST $ 530,865
EXPENSES:
Distribution fees (Note E) 37,304
Investment advisory fees (Note E) 46,785
Custody and accounting fees 42,826
Transfer agent's fees 12,355
Registration fees 1,069
Legal fees 77
Audit fees 10,980
Trustees' fees 366
Shareholder services fees (Note E) 794
Other 462
Advisory fees waived (Note E) (46,785)
Expense subsidy (Note E) (40,103)
Total expenses before credits 66,130
Custodian fee credit (Note B) (10,401)
Net expenses 55,729
Net investment income 475,136
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 35,339
Change in unrealized appreciation (depreciation) of investments (201,666)
Net loss on investments (166,327)
Net increase in net assets resulting from operations $ 308,809
See notes to financial statements.
</TABLE>
6 F-277 South Carolina
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 475,136 $ 416,264
Net realized gain (loss) on security transactions 35,339 (272,777)
Change in unrealized appreciation (depreciation) of investments (201,666) 579,007
Net increase in net assets resulting from operations 308,809 722,494
Distributions to shareholders:
From net investment income (493,565) (414,509)
Net decrease in net assets from distributions to shareholders (493,565) (414,509)
Net increase in net assets from Fund share transactions (Note C) 1,705,122 2,421,809
Total increase in net assets 1,520,366 2,729,794
NET ASSETS:
Beginning of year 9,013,380 6,283,586
End of year $ 10,533,746 $ 9,013,380
NET ASSETS CONSIST OF:
Paid-in surplus $ 10,698,388 $ 8,996,503
Undistributed net investment income 15,192
Accumulated net realized gain (loss) on security transactions (318,948) (354,287)
Unrealized appreciation (depreciation) of investments 154,306 355,972
$ 10,533,746 $ 9,013,380
</TABLE>
See notes to financial statements.
South Carolina F-278 7
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. DESCRIPTION OF BUSINESS
The Flagship South Carolina Double Tax Exempt Fund (Fund) is a sub-trust of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced investment operations on July 6, 1993.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
8 F-279 South Carolina
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were no "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 296,613 $ 2,795,355 320,800 $2,874,732
Shares issued on reinvestment 38,643 365,824 34,512 311,960
Shares reacquired (153,132) (1,456,057) (84,566) (764,883)
NET INCREASE 182,124 $ 1,705,122 270,746 $2,421,809
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $8,429,465 and $6,952,584, respectively. At May 31, 1996, cost for
federal income tax purposes is $10,209,469 and net unrealized appreciation
aggregated $154,306, of which $198,545 related to appreciated securities and
$44,239 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $318,900 to offset future net capital gains expiring on May 31,
2003.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived all of its advisory
fees amounting to $46,785. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's shares. The maximum amount payable for these expenses on an annual
basis is .40% of the Fund's average daily net assets. Included in accrued
expenses at May 31, 1996, are accrued distribution fees of $3,440. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $47,900 for the year ended May 31, 1996, of which approximately
$40,100 was paid to other dealers. Certain officers and trustees of the Trust
are also officers and/or directors of the Distributor and/or Advisor.
SOUTH CAROLINA F-280 9
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund (approximately
$35,400) will be reimbursed to the Advisor on a straight-line basis over a
period of three years beginning June 1, 1996. In the event that the
Advisor's current investment in the Trust falls below $100,000 prior to the
full reimbursement of the organizational expenses, then it will forego any
further reimbursement.
10 F-281 South Carolina
<PAGE>
[Logo of Ship art]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended July 6, 1993 to
May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.45 $ 9.20 $ 9.58
Income from investment operations:
Net investment income 0.48 0.50 0.42
Net realized and unrealized gain
(loss) on securities (0.15) 0.25 (0.38)
TOTAL FROM INVESTMENT OPERATIONS 0.33 0.75 0.04
Less distributions:
From net investment income (0.50) (0.50) (0.39)
In excess of net capital gains (0.03)
TOTAL DISTRIBUTIONS (0.50) (0.50) (0.42)
NET ASSET VALUE, END OF PERIOD $9.28 $9.45 $9.20
Total return(a) 3.53% 8.54% 0.15%
Ratios to average net
assets (annualized where
appropriate):
Actual net of waivers
and reimbursements:
Expenses(b) 0.71% 0.40% 0.40%
Net investment income 4.98% 5.54% 4.82%
Assuming credits and no
waivers or reimbursements:
Expenses 1.53% 1.86% 2.12%
Net investment income 4.16% 4.08% 3.10%
Net assets at end of period (000's) 10,534 $9,013 $6,284
Portfolio turnover rate 75.76% 86.81% 87.96%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.60%; prior period numbers have not
been restated to reflect these credits.
South Carolina F-282 11
<PAGE>
[logo of Ship art] Independent Auditor's Report
...............................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP SOUTH CAROLINA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship South
Carolina Double Tax-Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
May 31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship South
Carolina Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
12 F-283 South Carolina
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue - Vanderbilt University
- Series A 7.625% 05/01/08 $ 1,072,210
2,850 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue - Vanderbilt University
- Series A 7.625 05/01/16 3,048,730
125 Tennessee State School Bond Authority - Higher Educational
Facilities 7.000 05/01/20 133,231
3,705 Tennessee State School Bond Authority - Higher Educational
Facilities - Series 1992 A 6.250 05/01/22 3,791,104
Health Care
--------------------------------------------------------------------------------------------------------
995 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue - Bethany Health
Care Center 7.100 07/01/14 1,001,458
1,245 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue - Mur-Ci Homes Project
- Series 1992A 9.000 10/01/22 1,328,876
Hospitals
--------------------------------------------------------------------------------------------------------
1,265 Bristol, TN Health and Educational Facilities Board Revenue
- Bristol Memorial Hospital - Series 1993 6.750 09/01/10 1,410,348
1,500 Bristol, TN Health and Educational Facilities Board Revenue
- Bristol Memorial Hospital - Series 1993 5.125 09/01/13 1,372,215
2,000 Chattanooga-Hamilton County, TN Hospital Authority
- Erlanger Medical Center - Series 1993 5.500 10/01/23 1,831,260
2,300 Chattanooga-Hamilton County, TN Hospital Authority
- Erlanger Medical Center 5.500 10/01/23 2,134,584
1,930 Chattanooga, TN Health, Education and Housing Facility
Board Revenue - Memorial Hospital - Series A 6.600 09/01/12 2,059,966
1,000 Clarksville, TN Hospital and Improvement Revenue - Clarksville
Memorial Project - Series 1993 6.250 07/01/08 1,013,760
1,775 Clarksville, TN Hospital and Improvement Revenue - Clarksville
Memorial Project - Series 1993 6.250 07/01/13 1,715,307
1,250 Clarksville, TN Hospital and Improvement Revenue - Clarksville
Memorial Project - Series 1993 6.375 07/01/18 1,206,212
4,550 Cookeville, TN Industrial Development Board Hospital Revenue
- Cookeville General Hospital - Series 1993 5.750 10/01/10 4,291,014
9,850 Jackson, TN Hospital Revenue - Jackson-Madison County
General Hospital - Series 1995 5.625 04/01/15 9,478,655
3,500 Johnson City, TN Health and Educational Facilities Board Revenue
- Johnson Medical Center Hospital - Series 1994 5.000 07/01/13 3,149,720
2,090 Johnson City, TN Health and Educational Facilities Board Revenue
- Johnson Medical Center Hospital - Series 1991 6.750 07/01/16 2,232,245
1,790 Knox County, TN Health, Education and Housing Facilities
Board Hospital Revenue - Fort Sanders Regional Medical
Center - Series 1988 8.000 01/01/08 1,909,142
2,000 Knox County, TN Health, Education and Housing Facilities
Board Hospital Revenue - Mercy Health System - Series
1993 B 5.875 09/01/15 1,964,760
1,000 Knox County, TN Health, Education and Housing Facilities
Board Hospital Revenue - Fort Sanders Alliance
Obligated Group - Series 1993 A 6.250 01/01/13 1,055,130
3,000 Knox County, TN Health, Education and
Housing Facilities Board Hospital Revenue - Fort Sanders
Alliance Obligated Group - Series 1993 A 5.250 01/01/15 2,803,980
1,250 Metropolitan Nashville and Davidson County, TN Health
and Educational Facilities Board Revenue - Adventist
Health System/Sunbelt - Series 1995 5.750 11/15/25 1,205,338
</TABLE>
4 F-284 Tennessee
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$2,395 Metropolitan Nashville and Davidson
County - Tennessee Health and Educational Facilities Board
Revenue - Adventist/Sunbelt Systems 7.000% 11/15/16 $ 2,608,538
4,500 Shelby County, TN Health, Educational and Housing Facilities
Board Revenue - Methodist Health System - Series 1995 5.250 08/01/15 4,137,480
2,000 Sullivan County, TN Health, Educational and Housing Facilities
Board - Hospital Revenue - Holston Valley Health Care -
Series 1993 5.750 02/15/13 1,970,280
2,500 Sumner County, TN Health, Educational and Housing Facilities
Board Revenue - Sumner Regional Health Systems - Series
1994 7.500 11/01/14 2,718,000
Housing/Multifamily
--------------------------------------------------------------------------------------------------------
1,200 Chattanooga, TN Health, Education and Housing Facility
Board Revenue - Windridge Apartments - Series 1993A 5.950 07/01/14 1,180,368
250 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue -
Herman Street Apartments - Series 1992 7.000 06/01/17 267,012
495 Metropolitan Nashville and Davidson County - Tennessee Health
and Educational Facilities Board Revenue - Herman Street
Apartments - Series 1992 7.250 06/01/32 528,333
1,250 Metropolitan Nashville and Davidson County - Tennessee
Industrial Development Board - Multifamily Housing
Revenue - St. Paul Retirement 8.125 10/01/28 1,331,912
Housing/Single Family
--------------------------------------------------------------------------------------------------------
335 Hamilton County, TN Single Family Revenue 8.000 09/01/23 352,531
700 Tennessee Housing Development Agency - Homeownership
Program - Issue J 7.750 07/01/17 737,772
500 Tennessee Housing Development Agency - Homeownership
Program - Issue L 8.125 07/01/12 517,040
2,000 Tennessee Housing Development Agency - Homeownership
Program - Issue O 7.750 07/01/20 2,087,140
970 Tennessee Housing Development Agency - Homeownership
Program - Issue P 7.700 07/01/16 1,013,815
135 Tennessee Housing Development Agency - Homeownership
Program - Issue U 7.400 07/01/16 141,332
3,900 Tennessee Housing Development Agency - Homeownership
Program - Issue T 7.375 07/01/23 4,035,135
2,820 Tennessee Housing Development Agency - Homeownership
Program - Issue WR 6.800 07/01/17 2,913,455
450 Tennessee Housing Development Agency - Homeownership
Program - Issue XR 6.875 07/01/22 462,150
1,000 Tennessee Housing Development Agency - Mortgage Finance
Program - Series 1994 A 6.900 07/01/25 1,027,690
Industrial Development Pollution Control
--------------------------------------------------------------------------------------------------------
3,000 Chattanooga, TN Industrial Development Board - Pollution
Control Revenue - DuPont - Series 1993 A 6.350 07/01/22 3,102,300
12,000 Humphreys County, TN Industrial Development Board Facility
Revenue -E.I. Du Pont De Nemours and Company -Series 1994 6.700 05/01/24 12,556,320
4,500 Loudon County, TN Industrial Development Board - Solid
Waste Disposal Revenue - Kimberly-Clark Corporation - Series 1993 6.200 02/01/23 4,489,065
6,000 Maury County, TN Industrial Development Board - Interchangeable
Rate Pollution Control Revenue - Saturn Corporation
Project - Series 1994 6.500 09/01/24 6,124,740
2,500 McMinn County, TN Industrial Development Board - Pollution
Control Revenue - Bowater Incorporated Project 7.625 03/01/16 2,654,100
3,000 McMinn County, TN Industrial Development Board - Solid
Waste Recycling Facilities Revenue - Calhoun Newsprint
Company - Bowater Incorporated Project - Series 1992 7.400 12/01/22 3,182,250
5,545 Memphis-Shelby County, TN Airport Authority Special Facilities
and Project Revenue - Federal Express 7.875 09/01/09 6,133,269
4,100 Memphis-Shelby County, TN Airport Authority Special Facilities
and Project Revenue - Federal Express - Series 1992 6.750 09/01/12 4,227,387
</TABLE>
Tennessee F-285 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
..............................................................................
Municipal Bonds (Continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 250 Memphis-Shelby County, TN Industrial Development Board
Revenue - Colonial Baking Company Project 9.500% 04/01/01 $ 293,502
1,245 South Fulton, TN Industrial Development Board Revenue - Tyson
Foods - Series 1995 6.400 10/01/20 1,232,450
Municipal Appropriation Obligations
--------------------------------------------------------------------------------------------------------
2,660 Tennessee State Local Development Authority Revenue
- Community Provider Pooled Loan Program - Series 1992 7.000 10/01/21 2,846,360
1,500 Wilson County, TN Educational Facilities Corporation
- Certificates of Participation - Series 1994 6.125 06/30/10 1,488,045
1,500 Wilson County, TN Educational Facilities Corporation
- Certificates of Participation - Series 1994 6.250 06/30/15 1,486,710
Municipal Revenue/Transportation
--------------------------------------------------------------------------------------------------------
145 Metropolitan Nashville Airport Authority - Tennessee Airport
Improvement Revenue - Series C 6.625 07/01/07 155,410
6,285 Metropolitan Nashville Airport
Authority - Tennessee Airport Improvement Revenue - Series C 6.600 07/01/15 6,670,585
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------
1,650 Harpeth Valley, TN Utilities District
of Davidson and Williamson Counties - Utilities Revenue
- Series 1993 5.500 09/01/11 1,614,872
315 Jackson, TN Electric System Revenue - Series E 6.300 08/01/09 326,998
335 Jackson, TN Electric System Revenue - Series E 6.300 08/01/10 346,527
355 Jackson, TN Electric System Revenue - Series E 6.300 08/01/11 366,282
380 Jackson, TN Electric System Revenue - Series E 6.300 08/01/12 391,081
1,220 Madison, TN Suburban Utility District - Water Revenue - Series 1995 5.750 02/01/12 1,218,646
5,000 Madison, TN Suburban Utility District - Water Revenue - Series 1995 5.000 02/01/19 4,463,950
4,250 Metropolitan Government of Nashville and Davidson County, TN
Electric System Revenue - Series 1996 A and B 0.000 05/15/11 1,781,218
3,500 Metropolitan Government of Nashville and Davidson County, TN
Electric System Revenue - Series 1996 A and B 0.000 05/15/12 1,373,365
1,000 Middle Tennessee Utility District - Gas System Revenue -
Cannon, Cumberland, Dekalb, Putnam, Rhea, Rutherford, Smith,
Warren, White and Wilson Counties 6.250 10/01/12 1,039,350
3,525 Commonwealth of Puerto Rico Electric
Power Authority Revenue - Series 1995 Z 5.500 07/01/16 3,285,652
1,200 Commonwealth of Puerto Rico Electric
Power Authority Revenue - Series 1995 Z 5.250 07/01/21 1,068,360
1,000 Commonwealth of Puerto Rico Electric
Power Authority Revenue - Series 1995 Z 5.500 07/01/14 936,840
Municipal Revenue/Water & Sewer
--------------------------------------------------------------------------------------------------------
500 Clarksville, TN Water, Sewer and Gas Revenue - Series 1992 6.125 02/01/12 514,565
1,520 Clarksville, TN Water, Sewer and Gas Revenue - Series 1992 0.000 02/01/16 463,585
525 Clinton, TN Water and Sewer System Revenue 6.300 12/01/10 545,953
395 Clinton, TN Water and Sewer System Revenue 6.300 12/01/11 409,544
1,125 Eastside Utility District of Hamilton
County, TN Water System Revenue - Series 1992 6.750 11/01/11 1,172,104
2,490 Metropolitan Nashville and Davidson
County - Tennessee Water and Sewer Revenue - Series 1993 5.100 01/01/16 2,276,557
1,000 Milcrofton, TN Utility District
Waterworks Revenue - Williamson County, Tennessee - Series 1996 6.000 02/01/24 933,290
</TABLE>
6 F-286 Tennessee
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (Continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$1,020 Mt. Juliet, TN Public Building
Authority Revenue - Utility District 7.550% 02/01/19 $ 1,103,834
1,500 Northeast Knox County, TN Utility
District - Water Revenue 7.000 01/01/20 1,616,205
1,325 Tennessee State Local Development
Authority Revenue - State Loan Program - Series A 7.000 03/01/12 1,428,575
1,175 Tennessee State Local Development Authority Revenue
- State Loan Program - Series A 7.000 03/01/21 1,266,850
2,300 White House, TN Water and Improvement
Revenue - Utility District of Robertson and Sumner Counties
- Series 1992B 6.375 01/01/22 2,363,043
1,500 Wilson County, TN Water and Wastewater
Authority - Waterworks Improvement Revenue - Series 1993 6.000 03/01/14 1,470,975
Non-State General Obligations
--------------------------------------------------------------------------------------------------------
2,025 Hamilton County, TN General Obligation - Series 1995 6.300 02/01/25 2,081,781
1,490 Hamilton County, TN General Obligation - Series 1995 6.250 02/01/20 1,531,884
5,000 Johnson City, TN School Sales Tax and
Unlimited Tax Revenue - Series 1994 6.700 05/01/21 5,289,050
1,435 Memphis, TN Airport Revenue - Series 1991 B 7.050 07/01/10 1,494,811
525 Rhea County, TN General Obligation - Series 1992 6.250 03/01/09 551,633
550 Rhea County, TN General Obligation - Series 1992 6.350 03/01/10 578,946
550 Rhea County, TN General Obligation - Series 1992 6.400 03/01/11 578,886
600 Rhea County, TN General Obligation - Series 1992 6.400 03/01/12 629,400
500 Shelby County, TN General Obligation - Series 1995 A 5.800 04/01/18 495,920
1,000 Shelby County, TN General Obligation - Series 1995 A 5.625 04/01/14 980,620
4,350 Shelby County, TN General Obligation - Series 1992 A 0.000 05/01/07 2,318,028
3,560 Shelby County, TN General Obligation - Series 1994 A 5.950 03/01/18 3,584,742
1,790 Shelby County, TN General Obligation - Series 1994 A 5.950 03/01/19 1,798,485
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------
2,400 Anderson County, TN Health and
Educational Facilities Revenue Hospital Improvement
- Methodist Medical Center 8.125 07/01/08 2,629,416
250 Anderson County, TN Health and
Educational Facilities Revenue Hospital Improvement
- Methodist Medical Center 8.125 07/01/08 274,002
2,250 Bristol, TN Health and Educational
Facilities Board Revenue - Bristol Memorial Hospital 7.000 09/01/11 2,498,805
7,375 Bristol, TN Health and Educational
Facilities Board Revenue - Bristol Memorial Hospital 7.000 09/01/21 8,190,528
300 Chattanooga, TN Municipal Public
Improvement - Sewage Facility 8.000 06/01/10 330,057
1,200 Chattanooga, TN Municipal Public
Improvement - Sewage Facility 8.000 06/01/11 1,320,228
1,000 Chattanooga, TN General Obligation 7.250 05/01/12 1,106,490
500 Chattanooga, TN General Obligation 7.000 05/01/13 548,825
1,700 Clarksville, TN Water, Sewer and Gas Revenue 7.700 02/01/18 1,832,209
1,455 Gladeville, TN Utility District Waterworks Revenue 7.400 10/01/10 1,608,226
1,615 Johnson City, TN Health and Educational
Facilities Board Revenue - Johnson
Medical Center Hospital - Series 1994 6.750 07/01/16 1,782,395
3,000 Knox County, TN Health, Education and
Housing Facilities Board Hospital Revenue - Mercy Health System 7.600 09/01/19 3,330,660
3,065 Knox County, TN Health, Education and
Housing Facilities Board Hospital Revenue - Fort Sanders Alliance 7.000 01/01/15 3,349,922
2,205 Metropolitan Nashville and Davidson
County - Tennessee Health and Educational Facilities Board
Revenue - Volunteer Healthcare - Series 1988 0.000 06/01/21 386,316
</TABLE>
Tennessee F-287 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
<C> <S> <C> <C> <C>
$ 335 Metropolitan Nashville and Davidson County - Tennessee Water and Sewer
Revenue 7.000% 01/01/14 $ 342,464
545 Metropolitan Nashville Airport Authority - Tennessee Airport Improvement Revenue -
Series 1991B 6.500 07/01/11 594,889
2,500 Mt. Juliet, TN Public Building Authority Revenue - Utility District 7.800 02/01/19 3,106,225
1,365 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 1,494,416
1,000 Commonwealth of Puerto Rico Highway Authority Revenue - Series 1988 P 8.125 07/01/13 1,098,340
950 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series H 7.875 07/01/16 1,010,486
1,000 Commonwealth of Puerto Rico Electric Power Authority - Series M 8.000 07/01/08 1,095,870
400 Commonwealth of Puerto Rico Electric Power Authority - Series P 7.000 07/01/21 447,468
865 Selmer, TN General Obligation 8.200 07/01/13 946,595
200 Sevier County, TN Public Building Authority - Solid Waste Facility -
Series 1991 6.750 08/01/09 214,098
500 Shelby County, TN General Obligation - Series A 6.500 03/01/11 534,535
390 Shelby County, TN Health, Educational and Housing Facilities Board Revenue -
LeBonheur Children's Medical Center - Series 1993 D 5.500 08/15/19 371,799
1,000 Shelby County, TN Health, Educational and Housing Facilities Board Revenue -
LeBonheur Children's Medical Center 7.625 08/15/09 1,089,810
2,000 Shelby County, TN Health, Educational and Housing Facilities Board Revenue -
LeBonheur Children's Medical Center 7.600 08/15/19 2,178,480
4,000 Sullivan County, TN Health, Educational and Housing Facilities Board Revenue -
Holston Valley Health 7.250 02/15/20 4,414,480
1,000 West Knox Utility District of Knox County, TN - Water and Sewer
Improvement Revenue 7.750 12/01/08 1,100,240
1,000 Wilson County, TN Water and Wastewater Authority - Waterworks Improvement
Revenue 7.875 03/01/09 1,104,110
950 Wilson County, TN Water and Wastewater Authority - Waterworks Improvement
Revenue 8.000 03/01/14 1,051,812
Special Tax Revenue
- -----------------------------------------------------------------------------------------------------------------------------------
1,000 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/15 943,580
1,500 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1993 W 5.500 07/01/15 1,458,495
State/Territorial General Obligations
- -----------------------------------------------------------------------------------------------------------------------------------
385 Commonwealth of Puerto Rico - General Obligation - Series 1988 8.000 07/01/07 417,702
1,200 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series 1993 M 5.750 07/01/15 1,143,852
16,300 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series M 5.500 07/01/21 15,189,155
1,285 Tennessee State General Obligation - Series 1994 A 5.700 03/01/14 1,287,943
Total Investments in Securities - Municipal Bonds (cost $253,535,262) - 98.9% 263,399,051
Excess of Other Assets over Liabilities - 1.1% 2,970,632
Total Net Assets - 100.0% $266,369,683
</TABLE>
See notes to financial statements.
8 F-288 Tennessee
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $253,535,262) $263,399,051
Receivable for Fund shares sold 393,335
Interest receivable 4,816,469
Other 14,658
Total assets 268,623,513
LIABILITIES:
Bank borrowings (Note F) 672,142
Payable for Fund shares reacquired 137,747
Distributions payable 1,208,589
Accrued expenses 235,352
Total liabilities 2,253,830
NET ASSETS 266,369,683
Class A:
Applicable to 23,162,716 shares of beneficial interest issued and outstanding $250,886,326
Net asset value per share $ 10.83
Class C:
Applicable to 1,430,401 shares of beneficial interest issued and outstanding $ 15,483,357
Net asset value per share $ 10.82
</TABLE>
[LOGO FOR SHIP ART]
Statement of Operations For the year ended May 31, 1996
...............................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 16,171,040
EXPENSES:
Distribution fees - Class A (Note E) 988,749
Distribution fees - Class C (Note E) 134,450
Investment advisory fees (Note E) 1,310,550
Custody and accounting fees 104,922
Transfer agent's fees 164,420
Registration fees 14,621
Legal fees 6,758
Audit fees 19,525
Trustees' fees 6,588
Shareholder services fees (Note E) 21,500
Other 7,901
Advisory fees waived (Note E) (389,150)
Total expenses before credits 2,390,834
Custodian fee credit (Note B) (56,972)
Net expenses 2,333,862
Net investment income 13,837,178
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions 7,163
Change in unrealized appreciation (depreciation) of investments (4,307,255)
Net loss on investments (4,300,092)
Net increase in net assets resulting from operations $ 9,537,086
</TABLE>
See notes to financial statements.
Tennessee F-289 9
<PAGE>
[LOGO FOR SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 13,837,178 $ 13,695,801
Net realized gain (loss) on security transactions 7,163 (1,931,572)
Change in unrealized appreciation (depreciation) of investments (4,307,255) 6,499,989
Net increase in net assets resulting from operations 9,537,086 18,264,218
Distributions to Class A shareholders:
From net investment income (13,267,447) (13,101,540)
Distributions to Class C shareholders:
From net investment income (682,508) (583,052)
Net decrease in net assets from distributions to shareholders (13,949,955) (13,684,592)
Fund share transactions (Note C):
Proceeds from shares sold 39,204,201 32,082,821
Net asset value of shares issued in reinvestment of distributions 7,501,429 7,353,697
Cost of shares reacquired (30,194,633) (36,625,736)
Net increase in net assets from Fund share transactions 16,510,997 2,810,782
Net increase in net assets 12,098,128 7,390,408
NET ASSETS:
Beginning of year 254,271,555 246,881,147
End of year $266,369,683 $254,271,555
NET ASSETS CONSIST OF:
Paid-in surplus $262,095,133 $245,685,704
Undistributed net investment income 11,209
Accumulated net realized gain (loss) on security transactions (5,589,239) (5,596,402)
Unrealized appreciation (depreciation) of investments 9,863,789 14,171,044
$266,369,683 $254,271,555
</TABLE>
See notes to financial statements.
10 F-290 Tennessee
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Tennessee Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on November 2, 1987. On
October 4, 1993, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ. Security Valuations: Portfolio securities for
which market quotations are readily available are valued on the basis of
prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining the values. If market quotations are not readily available from
such pricing service, securities are valued at fair value as determined under
procedures established by the Trustees. Short-term securities are stated at
amortized cost, which is equivalent to fair value. The Fund must maintain a
diversified investment portfolio as a registered investment company, however,
the Fund's investments are primarily in the securities of its state. Such
concentration subjects the Fund to the effects of economic changes occurring
within that state. Federal Income Taxes: It is the Fund's policy to comply
with the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute to its shareholders all of its tax
exempt net investment income and net realized gains on security transactions.
Therefore, no federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Tennessee F-291 11
<PAGE>
Notes to Financial Statements
...............................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
------------------------- --------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 3,011,203 $ 33,202,281 2,599,849 $ 27,606,878
Shares issued on reinvestment 636,833 7,027,667 654,188 6,930,735
Shares reacquired (2,452,182) (27,004,837) (3,192,266) (33,357,985)
Net increase 1,195,854 $ 13,225,111 61,771 $ 1,179,628
Class C:
Shares sold 542,572 $ 6,001,920 420,452 $ 4,475,943
Shares issued on reinvestment 42,969 473,762 39,944 422,962
Shares reacquired (290,776) (3,189,796) (312,865) (3,267,751)
Net increase 294,765 $ 3,285,886 147,531 $ 1,631,154
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $112,977,150 and $96,720,502, respectively. At May 31, 1996, cost
for federal income tax purposes is $253,604,604 and net unrealized
appreciation aggregated $9,794,447, of which $11,051,617 related to
appreciated securities and $1,257,170 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $5,519,900 to offset future net capital gains expiring on May
31, 2003.
12 F-292 Tennessee
<PAGE>
Notes to Financial Statements
................................................................................
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $389,150 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $81,380. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares, respectively.
Included in accrued expenses at May 31, 1996 are accrued distribution fees of
$85,165 and $12,487 for Class A and Class C shares, respectively. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $639,000 for the year ended May 31, 1996, of which
approximately $550,600 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $18,400 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $12 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$407,400, at a weighted average annualized interest rate of 6.85%. At May 31,
1996, the Fund had $672,142 outstanding under the line of credit.
Tennessee F-293 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.01 $ 10.78 $ 11.23 $ 10.56 $ 10.34
Income from investment operations:
Net investment income 0.59 0.60 0.61 0.62 0.65
Net realized and unrealized gain (loss) on
securities (0.18) 0.23 (0.43) 0.68 0.22
Total from investment operations 0.41 0.83 0.18 1.30 0.87
Less distributions:
From net investment income (0.59) (0.60) (0.61) (0.63) (0.65)
In excess of net realized capital gains (0.02)
Total distributions (0.59) (0.60) (0.63) (0.63) (0.65)
Net asset value, end of year $ 10.83 $ 11.01 $ 10.78 $ 11.23 $ 10.56
Total return/(a)/ 3.78% 8.04% 1.55% 12.60% 8.66%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.88% 0.89% 0.76% 0.88% 0.84%
Net investment income 5.30% 5.64% 5.42% 5.66% 6.18%
Assuming credits and no waivers or
reimbursements:
Expenses 1.01% 1.07% 1.02% 1.05% 1.04%
Net investment income 5.17% 5.46% 5.16% 5.49% 5.98%
Net assets at end of year (000's) $250,886 $241,778 $236,230 $191,811 $126,833
Portfolio turnover rate 37.57% 23.38% 16.93% 15.07% 34.57%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.86%; prior year numbers have not
been restated to reflect these credits.
14 F-294 Tennessee
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended October 4, 1993 to
CLASS C May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 11.00 $ 10.78 $ 11.61
Income from investment operations:
Net investment income 0.53 0.54 0.35
Net realized and unrealized gain (loss) on securities (0.18) 0.22 (0.83)
Total from investment operations 0.35 0.76 (0.48)
Less distributions:
From net investment income (0.53) (0.54) (0.34)
In excess of net realized capital gains (0.01)
Total distributions (0.53) (0.54) (0.35)
Net asset value, end of period $ 10.82 $ 11.00 $ 10.78
Total return/(a)/ 3.22% 7.35% (5.92%)
Ratios to average net assets (annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses/(b)/ 1.43% 1.44% 1.23%
Net investment income 4.75% 5.08% 4.80%
Assuming credits and no waivers or reimbursements:
Expenses 1.56% 1.62% 1.63%
Net investment income 4.62% 4.90% 4.40%
Net assets at end of period (000's) $15,483 $12,494 $10,652
Portfolio turnover rate 37.57% 23.38% 16.93%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.41%; prior period numbers have not
been restated to reflect these credits.
Tennessee F-295 15
<PAGE>
[LOGO OF SHIP ART]
Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP TENNESSEE
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Tennessee Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Tennessee Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-296 Tennessee
<PAGE>
LOGO OF SHIP ART
Statement of Investments in Securities and Net Assets May 31, 1996
- --------------------------------------------------------------------------------
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
--------------------------------------------------------------------------------------------------------------------------
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Hampton Roads, VA Medical College Revenue - Series 1991A 6.875% 11/15/16 $ 531,830
500 Loudoun County, VA Industrial Development Authority -
George Washington University 6.250 05/15/12 506,535
1,225 Loudoun County, VA Industrial Development Authority -
George Washington University 6.250 05/15/22 1,234,102
1,250 Rockingham County, VA Industrial Development Authority Revenue -
Bridgewater College - Series 1993 6.000 10/01/23 1,143,738
2,000 University of Virginia - Rector and Visitors General Pledge - Series 1993B 5.375 06/01/20 1,866,120
750 Virginia College Building Authority Educational Facilities Revenue -
Washington and Lee University - Series 1992 6.400 01/01/12 779,108
2,000 Virginia College Building Authority Educational Facilities Revenue -
Roanoke College - Series 1992 6.625 10/15/12 2,026,040
3,250 Virginia College Building Authority Educational Facilities Revenue -
Hampton University - Series 1993 5.750 04/01/14 3,089,840
775 Winchester, VA Industrial Development Authority Educational Facilities
Revenue - Shenandoah University - Series 1994 6.750 10/01/19 819,198
1,800 Winchester, VA Industrial Development Authority Educational Facilities
Revenue - Shenandoah University - Series 1994 6.700 10/01/14 1,894,373
Health Care
--------------------------------------------------------------------------------------------------------------------------
715 Albemarle County, VA Industrial Development Authority - First Mortgage
Revenue 8.900 07/15/26 792,370
500 Front Royal & Warren County, VA Industrial Development Authority Revenue -
Heritage Hall 9.450 07/15/24 555,500
1,195 Henrico County, VA Industrial Development Authority - Nursing Facility -
Cambridge Manor Nursing Home - Series 1993 5.875 07/01/19 1,125,272
3,500 Norfolk, VA Industrial Development Authority Revenue - James Barry-
Robinson Institute Project 7.700 10/01/06 3,623,375
400 Richmond, VA Industrial Development Authority Revenue -
Richmond Metropolitan Blood Service 7.125 02/01/11 418,004
Hospitals
--------------------------------------------------------------------------------------------------------------------------
1,125 Albemarle County, VA Industrial Development Authority Revenue -
University of Virginia Health Services Foundation - Series 1992 6.500 10/01/22 1,143,664
1,000 Alexandria, VA Industrial Development Authority - Alexandria Community
Healthcare - Series 1993B 5.500 07/01/14 948,390
1,185 Buena Vista, VA Industrial Development Authority - Stonewall Jackson Hospital 8.375 11/01/14 1,241,738
2,000 Fairfax County, VA Industrial Development Authority - Health Care Revenue -
Inova Health System Project - Series 1996 6.000 08/15/26 1,951,320
2,000 Hanover County, VA Industrial Development Authority Hospital Revenue -
Memorial Regional Medical Center - Series 1995 6.375 08/15/18 2,150,180
2,000 Hanover County, VA Industrial Development Authority Hospital Revenue -
Bon Secours Health System - Series 1995 5.500 08/15/25 1,862,780
1,000 Harrisonburg, VA Industrial Development Authority Hospital Revenue -
Rockingham Memorial Hospital - Series 1993 5.250 12/01/22 885,430
2,000 Loudoun County, VA Industrial Development Authority Revenue -
Loudoun Hospital Center - Series 1995 5.800 06/01/20 1,946,980
</TABLE>
4 F-297 Virginia
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
-------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250 Martinsville, VA Industrial Development Authority Hospital Facility Revenue -
Memorial Hospital Martinsville and Henry 7.000% 01/01/11 $ 261,090
1,150 Norfolk, VA Industrial Development Authority Revenue - Children's Hospital
of The King's Daughters - Series 1991 6.500 06/01/21 1,187,110
2,000 Peninsula Ports Authority Revenue-Virginia Hospital Facility -
Mary Immaculate Hospital - Series 1994 7.000 08/01/17 2,050,880
2,000 Prince William County, VA Industrial Development Authority Revenue -
Hospital Facility - Potomac Hospital - Series 1995 6.850 10/01/25 2,096,180
2,000 Roanoke, VA Industrial Development Authority Hospital Revenue -
Roanoke Memorial Hospital - Community Hospital of Roanoke Valley Franklin
Memorial Hospital - Saint Albans Psychiatric Hospital - Series 5.000 07/01/24 1,725,100
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
1,750 Alexandria, VA Redevelopment and Housing Authority - Arha Apartments 8.600 07/20/29 1,824,235
2,475 Harrisonburg, VA Redevelopment and Housing Authority - Multifamily
Housing Revenue - United Dominion - Series 1992 7.100 12/01/15 2,562,664
1,750 Harrisonburg, VA Redevelopment and Housing Authority - Multifamily
Housing Revenue - United Dominion - Series 1992 7.000 12/01/08 1,828,505
2,000 Newport News, VA Redevelopment and Housing Authority - Mortgage Revenue -
Berkley West Apartments - Series 1992A 6.550 07/01/24 2,035,080
1,500 Richmond, VA Redevelopment and Housing Authority Revenue - Old Manchester -
Series 1994 6.800 03/01/15 1,567,275
700 Virginia State Housing Development Authority Revenue - Multifamily -
Series 1991 F 7.000 05/01/04 745,703
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
490 Commonwealth of Puerto Rico Housing Authority - Single Family - Series B 7.650 10/15/22 512,476
200 Virginia State Housing Development Authority - Commonwealth Mortgage -
Series 1989 D 7.500 07/01/17 208,230
1,000 Virginia State Housing Development Authority - Commonwealth Mortgage -
Series 1992 A 7.100 01/01/22 1,051,870
3,000 Virginia State Housing Development Authority - Commonwealth Mortgage -
Series 1992 A 7.100 01/01/17 3,161,160
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
2,000 Covington-Alleghany County, VA Industrial Development Authority Revenue -
Pollution Control Facilities - Westvaco Corporation - Series 1994 6.650 09/01/18 2,095,100
2,000 Henrico County, VA Industrial Development Authority - Solid Waste Disposal
Revenue - Browning-Ferris Industries of South Atlantic, Incorporated -
Series 1996 A 5.450 01/01/14 1,893,440
3,545 Isle of Wight County, VA Industrial Development Authority - Solid Waste
Disposal Facilities - Union Camp - Series 1994 6.550 04/01/24 3,650,180
300 Loudoun County, VA Industrial Development Authority - Air Cargo Facility
Revenue - Washington Dulles - Series 1992 6.625 01/01/00 305,655
3,000 Loudoun County, VA Industrial Development Authority - Air Cargo Facility
Revenue - Washington Dulles - Series 1992 7.000 01/01/09 3,038,310
2,500 Mecklenburg County, VA Industrial Development Authority Revenue -
Mecklenburg Cogeneration 7.350 05/01/08 2,645,600
</TABLE>
Virginia F-298 5
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$2,000 Puerto Rico Ports Authority - Special Facilities Revenue -
American Airlines, Incorporated Project - Series 1996 A 6.250% 06/01/26 $1,957,600
1,000 Russell County, VA Industrial Development Authority Pollution Control Revenue -
Appalachian Power Company 7.700 11/01/07 1,087,260
Municipal Appropriation Obligations
----------------------------------------------------------------------------------------------------------------------------
2,300 Big Stone Gap, VA Redevelopment and Housing Authority -
Correctional Facility Lease Revenue - Wallens Ridge Development - Series 1995 5.500 09/01/15 2,172,028
1,435 Fairfax County, VA Redevelopment and Housing Authority Revenue -
Office Building - Series 1992 A 7.500 06/15/18 1,483,101
2,000 Henrico County, VA Industrial Development Authority Revenue -
Henrico County Regional Jail - Series 1994 7.000 08/01/13 2,228,640
750 Loudoun County, VA Certificates of Participation 7.200 10/01/10 869,535
2,000 Virginia State Transportation Board - U.S. Route 58 Corridor Development
Program - Series 1993B 5.500 05/15/18 1,892,760
Municipal Revenue/Transportation
----------------------------------------------------------------------------------------------------------------------------
1,500 Peninsula Airport Commission - Virginia Airport Improvement Revenue -
Series 1991 7.300 07/15/21 1,627,680
Municipal Revenue/Utility
----------------------------------------------------------------------------------------------------------------------------
2,110 Halifax County, VA Industrial Development
Revenue - Old Dominion Electric Cooperative - Series 1992 6.500 12/01/12 2,170,684
1,865 Commonwealth of Puerto Rico Electric Power Authority - Series O 0.000 07/01/17 525,072
1,000 Commonwealth of Puerto Rico Electric Power Authority - Series 1992 R 6.250 07/01/17 1,007,490
2,000 Commonwealth of Puerto Rico Electric Power Authority Revenue - Series 1995 Z 5.500 07/01/16 1,864,200
Municipal Revenue/Water & Sewer
----------------------------------------------------------------------------------------------------------------------------
1,000 Blacksburg, VA Polytechnic Institute Sanitation Authority - Sewer System
Revenue - Series 1992 6.250 11/01/12 1,007,730
1,000 Fairfax County, VA Water Authority Revenue - Series 1992 6.000 04/01/22 990,830
1,000 Frederick-Winchester Service Authority, VA Regional Sewer System Revenue -
Series 1993 5.750 10/01/15 972,640
750 Henry County, VA Public Service Authority Water and Sewer Revenue 6.250 11/15/19 763,095
2,215 Upper Occoquan, VA Sewage Authority Revenue - Regional Sewerage System -
Series 1995 A and B 5.150 07/01/20 2,005,350
1,000 Virginia State Resource Authority - Sewer System Revenue - Harrisonburg-
Rockingham - Series 1992 A 6.000 05/01/22 965,570
1,000 Virginia Resources Authority - Water and Sewer System Revenue -
Sussex County Project - Series 1995 A 5.600 10/01/25 926,880
500 Virginia Resources Authority - Water and Sewer System Revenue - Lot 7 7.125 10/01/16 534,955
1,500 Virginia State Resource Authority - Water and Sewer System Revenue - Lot 9 -
Frederick County Sanitation 6.000 10/01/12 1,473,840
1,500 Virginia Resources Authority - Water and Sewer System Revenue - Series 1992A 6.125 04/01/19 1,482,585
</TABLE>
6 F-299 Virginia
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 730 Danville, VA General Improvement Revenue 6.500% 05/01/12 $ 764,901
1,500 Portsmouth, VA Public Utility General Obligation - Series 1993 5.500 08/01/19 1,419,180
1,000 Richmond, VA General Obligation - Public Improvement Revenue - Series 1995 B 5.000 01/15/21 874,460
1,000 Virginia Public School Authority - School Financing - Series 1994 A 6.200 08/01/13 1,034,180
1,000 Virginia Public School Authority - School Financing - Series 1995 B 5.750 08/01/15 986,210
1,210 Virginia Public School Authority - School Financing - Series 1995 B 5.625 08/01/16 1,175,116
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
500 Fairfax County, VA Redevelopment and Housing Authority Revenue -
Vinson Pravalion - Series A 7.500 11/01/19 555,070
100 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities - Series G 7.875 07/01/16 106,367
200 Commonwealth of Puerto Rico Electric Power Authority - Series K 9.375 07/01/17 215,806
500 Strasburg, VA General Obligation 7.875 03/01/19 519,650
1,000 Virginia College Building Authority Educational Facilities Revenue -
Hampton University - Series A 7.750 04/01/14 1,100,840
3,000 Virginia State Public Building Authority Revenue - Series 1994 A 6.250 08/01/15 3,251,910
105 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series A 8.125 11/01/16 112,955
110 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series A 8.125 11/01/16 120,534
120 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series A 8.125 11/01/16 133,307
130 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series A 8.125 11/01/16 147,399
140 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series A 8.125 11/01/16 161,748
275 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series 1986 A 7.600 11/01/16 296,994
305 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series 1986 A 7.600 11/01/16 329,394
410 Virginia Resources Authority - Water and Sewer System Revenue -
Pooled Loan Program - Series 1986 A 7.650 11/01/16 454,665
Resource Recovery
--------------------------------------------------------------------------------------------------------------------------
2,000 Roanoke, VA Valley Resource Authority - Solid Waste System Revenue -
Series 1992 5.750 09/01/12 1,932,240
1,000 Virginia State Resource Authority Solid Waste Disposal System Revenue -
Series 1992 B 6.750 11/01/12 1,055,210
</TABLE>
Virginia F-300 7
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
State/Territorial General Obligations
---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,250 Commonwealth of Puerto Rico Public Improvement - General Obligation -
Series 1996 A 5.400% 07/01/25 $ 3,831,078
2,575 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.450 07/01/17 2,651,735
2,500 Commonwealth of Puerto Rico - General Obligation - Series 1994 6.500 07/01/23 2,583,825
2,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue -
Series 1995 5.000 07/01/15 1,757,920
Total Investments in Securities - Municipal Bonds (cost $123,450,281) - 98.4% 126,563,949
Excess of Other Assets over Liabilities - 1.6% 2,091,384
Total Net Assets - 100.0% $128,655,333
</TABLE>
See notes to financial statements.
8 F-301 Virginia
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
...............................................................................
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $123,450,281) $126,563,949
Cash 484,558
Receivable for Fund shares sold 329,136
Interest receivable 2,338,380
Other 7,259
Total assets 129,723,282
LIABILITIES:
Payable for Fund shares reacquired 354,710
Distributions payable 590,897
Accrued expenses 122,342
Total liabilities 1,067,949
NET ASSETS 128,655,333
Class A:
Applicable to 11,320,384 shares of beneficial interest
issued and outstanding $117,677,212
Net asset value per share $ 10.40
Class C:
Applicable to 1,056,634 shares of beneficial interest issued and
outstanding $ 10,978,121
Net asset value per share $ 10.39
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<S> <C>
INVESTMENT INCOME - INTEREST $ 7,751,940
EXPENSES:
Distribution fees - Class A (Note E) 464,378
Distribution fees - Class C (Note E) 75,853
Investment advisory fees (Note E) 622,309
Custody and accounting fees 99,226
Transfer agent's fees 83,650
Registration fees 4,628
Legal fees 3,313
Audit fees 15,738
Trustees' fees 3,415
Shareholder services fees (Note E) 12,078
Other 3,910
Advisory fees waived (Note E) (312,111)
Total expenses before credits 1,076,387
Custodian fee credit (Note B) (34,171)
Net expenses 1,042,216
Net investment income 6,709,724
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on security transactions 1,352,908
Change in unrealized appreciation (depreciation) of
investments (3,368,259)
Net loss on investments (2,015,351)
Net increase in net assets resulting from operations $ 4,694,373
</TABLE>
See notes to financial statements.
Virginia F-302 9
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income $ 6,709,724 $ 6,511,077
Net realized gain (loss) on security transactions 1,352,908 (2,300,229)
Change in unrealized appreciation (depreciation) of investments (3,368,259) 4,479,267
Net increase in net assets resulting from operations 4,694,373 8,690,115
Distributions to Class A shareholders:
From net investment income (6,371,930) (6,193,219)
Distributions to Class C shareholders:
From net investment income (393,250) (290,174)
Net decrease in net assets from distributions to shareholders (6,765,180) (6,483,393)
Fund share transactions (Note C):
Proceeds from shares sold 19,415,807 15,736,060
Net asset value of shares issued in reinvestment of distributions 3,681,025 3,679,719
Cost of shares reacquired (11,550,452) (14,703,916)
Net increase in net assets from Fund share transactions 11,546,380 4,711,863
Total increase in net assets 9,475,573 6,918,585
NET ASSETS:
Beginning of year 119,179,760 112,261,175
End of year $128,655,333 $119,179,760
NET ASSETS CONSIST OF:
Paid-in surplus $126,593,242 $115,074,634
Undistributed net investment income 27,684
Accumulated net realized gain (loss) on security transactions (1,051,577) (2,404,485)
Unrealized appreciation (depreciation) of investments 3,113,668 6,481,927
$128,655,333 $119,179,760
</TABLE>
See notes to financial statements.
10 F-303 Virginia
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Virginia Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on March 27, 1986. On
October 4, 1993, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent
deferred sales charge if redeemed within one year from the time of purchase.
Both classes of shares have identical rights and privileges except with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on
matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Virginia F-304 11
<PAGE>
Notes to Financial Statements
................................................................................
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trust's ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that
class as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
---------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,315,390 $ 13,890,308 1,189,750 $ 12,128,107
Shares issued on reinvestment 328,665 3,474,566 344,907 3,497,701
Shares reacquired (989,759) (10,468,801) (1,243,117) (12,549,022)
Net increase 654,296 $ 6,896,073 291,540 $ 3,076,786
Class C:
Shares sold 521,385 $ 5,525,499 355,128 $ 3,607,953
Shares issued on reinvestment 19,541 206,459 17,948 182,018
Shares reacquired (103,572) (1,081,651) (213,209) (2,154,894)
Net increase 437,354 $ 4,650,307 159,867 $ 1,635,077
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,221,244 and $21,355,355, respectively. At May 31, 1996, cost
for federal income tax purposes is $123,506,356 and net unrealized
appreciation aggregated $3,057,593, of which $4,252,146 related to
appreciated securities and $1,194,553 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $995,600 to offset future net capital gains expiring on May 31,
2003.
12 F-305 Virginia
<PAGE>
Notes to Financial Statements
................................................................................
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived $312,111 of its
advisory fees. Included in accrued expenses at May 31, 1996 are accrued
advisory fees of $27,204. Also, under an agreement with the Fund, the Advisor
may subsidize certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund has adopted a plan to
reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of all classes of the Fund's shares. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Fund's average daily net assets for Class A and Class C shares,
respectively. Included in accrued expenses at May 31, 1996 are accrued
distribution fees of $39,897 and $8,620 for Class A and Class C shares,
respectively. Certain non-promotional expenses directly attributable to
current shareholders are aggregated by the Distributor and passed through to
the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
shares of approximately $311,100 for the year ended May 31, 1996, of which
approximately $285,200 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,700 of contingent deferred
sales charges on redemptions of shares. Certain officers and trustees of the
Trust are also officers and/or directors of the Distributor and/or Advisor.
F. Line of Credit
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $6 million under the line of credit. Borrowings are
collateralized with pledged securities and are due on demand with interest at
1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$98,900, at a weighted average annualized interest rate of 6.65%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
Virginia F-306 13
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the year.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Class A May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.56 $ 10.36 $ 10.82 $ 10.24 $ 9.97
Income from investment operations:
Net investment income 0.57 0.59 0.60 0.62 0.63
Net realized and unrealized gain (loss) on
securities (0.15) 0.20 (0.31) 0.62 0.27
Total from investment operations 0.42 0.79 0.29 1.24 0.90
Less distributions:
From net investment income (0.58) (0.59) (0.60) (0.62) (0.63)
From net realized capital gains (0.11) (0.04)
In excess of net realized capital gains (0.04)
Total distributions (0.58) (0.59) (0.75) (0.66) (0.63)
Net asset value, end of year $ 10.40 $ 10.56 $ 10.36 $ 10.82 $ 10.24
Total return/(a)/ 4.03% 7.99% 2.62% 12.41% 9.37%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses/(b)/ 0.83% 0.79% 0.64% 0.68% 0.75%
Net investment income 5.41% 5.81% 5.53% 5.82% 6.28%
Assuming credits and no waivers or
reimbursements:
Expenses 1.06% 1.10% 1.06% 1.07% 1.14%
Net investment income 5.18% 5.50% 5.11% 5.43% 5.89%
Net assets at end of year (000's) $117,677 $112,643 $107,502 $96,105 $64,628
Portfolio turnover rate 17.47% 50.17% 17.37% 30.33% 26.59%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.80%; prior year numbers have not
been restated to reflect these credits.
14 F-307 Virginia
<PAGE>
[LOGO OF SHIP ART]
Financial Highlights Selected data for each share of beneficial
interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended October 4, 1993 to
Class C May 31, 1996 May 31, 1995 May 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.56 $10.36 $11.24
Income from investment operations:
Net investment income 0.51 0.53 0.34
Net realized and unrealized gain
(loss) on securities (0.16) 0.20 (0.78)
Total from investment operations 0.35 0.73 (0.44)
Less distributions:
From net investment income (0.52) (0.53) (0.34)
From net realized capital gains (0.07)
In excess of net realized capital gains (0.03)
Total distributions (0.52) (0.53) (0.44)
Net asset value, end of period $10.39 $10.56 $10.36
Total return/(a)/ 3.37% 7.40% (7.13%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses/(b)/ 1.38% 1.34% 1.14%
Net investment income 4.84% 5.24% 4.85%
Assuming credits and no
waivers or reimbursements:
Expenses 1.60% 1.65% 1.79%
Net investment income 4.62% 4.93% 4.20%
Net assets at end of period (000's) $10,978 $6,537 $4,759
Portfolio turnover rate 17.47% 50.17% 17.37%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.35%; prior period numbers have not
been restated to reflect these credits.
Virginia F-308 15
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP VIRGINIA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Virginia Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the Flagship
Virginia Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
16 F-309 Virginia
<PAGE>
[LOGO OF SHIP ART]
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds
<TABLE>
<CAPTION>
Face
Amount Face Market
(000) Description Rate Maturity Value
Education
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 175 University of Puerto Rico System Revenue -
Series 1995 M 5.500% 06/01/15 $ 168,808
325 University of Puerto Rico System Revenue -
Series 1995 N 5.250 06/01/25 297,505
Hospitals
--------------------------------------------------------------------------------------------------------------------------
575 Commonwealth of Puerto Rico Industrial,
Tourist, Educational, Medical and
Environmental Control Facilities Financing
Authority Revenue - Hospital Auxilio Mutuo -
Series 1995 6.250 07/01/24 591,094
300 Commonwealth of Puerto Rico Industrial,
Tourist, Educational, Medical and
Environmental Control Facilities Financing
Authority Revenue - Doctor Pila Hospital -
Series 1995 5.875 08/01/12 300,561
100 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.300 05/01/04 101,350
210 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.300 11/01/04 212,835
300 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.500 11/01/06 298,179
150 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.600 11/01/07 151,827
175 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.700 11/01/09 176,209
170 Superior, WI Redevelopment Authority Revenue -
Superior Memorial Hospital - Series 1994 5.800 05/01/10 171,535
Housing/Multifamily
--------------------------------------------------------------------------------------------------------------------------
25 Dane County, WI Housing Authority Revenue -
Forest Harbor Apartments - Series 1994 5.900 07/01/12 25,208
50 Dane County, WI Housing Authority Revenue -
Forest Harbor Apartments - Series 1994 5.950 07/01/13 49,999
50 Dane County, WI Housing Authority Revenue -
Forest Harbor Apartments - Series 1994 6.000 07/01/14 49,562
425 Madison, WI Community Development Authority
Revenue - Multifamily Housing - Nichols
Station II - Series 1995 4.950 12/01/07 421,676
Housing/Single Family
--------------------------------------------------------------------------------------------------------------------------
300 Puerto Rico Housing Bank and Finance Agency -
Single Family Mortgage Revenue - Portfolio I 6.250 04/01/29 301,281
300 Virgin Islands Housing Finance Authority
Revenue - Single Family - Series 1995 A and B 6.450 03/01/16 302,274
Industrial Development and Pollution Control
--------------------------------------------------------------------------------------------------------------------------
255 Menomonee Falls, WI Community Development
Authority Revenue - Herker Industries, Inc.
Project - Series 1996 5.200 03/01/07 250,308
300 Menomonee Falls, WI Community Development
Authority Revenue - Herker Industries, Inc.
Project - Series 1996 5.250 03/01/08 295,794
500 Puerto Rico Ports Authority - Special
Facilities Revenue - American Airlines,
Incorporated Project - Series 1996 A 6.250 06/01/26 489,400
</TABLE>
4 F-310 Wisconsin
<PAGE>
Statement of Investments in Securities and Net Assets May 31, 1996
................................................................................
Municipal Bonds (continued)
<TABLE>
<CAPTION>
Face Face Market
Amount Description Rate Maturity Value
(000)
Municipal Revenue/Other
--------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,500 Cudahy, WI Community Development Authority -
Redevelopment Lease Revenue - Series 1995 6.000% 06/01/11 $ 1,494,135
300 Madison, WI Community Development Authority
Revenue - Monona Terrace Community and
Convention Center - Series 1995 6.100 03/01/10 314,889
Municipal Revenue/Utility
--------------------------------------------------------------------------------------------------------------------------
315 Guam Power Authority Revenue - Series 1992 A 6.300 10/01/22 304,378
285 Guam Power Authority Revenue - Series 1993 A 5.250 10/01/23 237,496
125 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.375 07/01/24 128,025
115 Commonwealth of Puerto Rico Electric Power Authority - Series 1994 T 6.000 07/01/16 113,410
400 Commonwealth of Puerto Rico Electric Power Authority - Series 1995 X 5.500 07/01/25 365,968
300 Commonwealth of Puerto Rico Electric Power Authority Revenue - Series 1995 Z 5.250 07/01/21 267,090
125 Commonwealth of Puerto Rico Telephone Authority Revenue - Series 1993 M 5.400 01/01/08 123,386
Non-State General Obligations
--------------------------------------------------------------------------------------------------------------------------
150 Commonwealth of Puerto Rico Municipal Finance Agency - Series A 8.250 07/01/08 163,479
650 Commonwealth of Puerto Rico Municipal Finance Agency - Series 1994 A 6.000 07/01/14 661,765
Pre-refunded or Escrowed
--------------------------------------------------------------------------------------------------------------------------
790 Commonwealth of Puerto Rico - Public Improvement - Series 1992 6.800 07/01/21 880,810
625 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue -
Series 1992 T 6.500 07/01/22 686,431
125 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public Education and
Health Facilities - Series K 6.875 07/01/21 140,189
Special Tax Revenue
--------------------------------------------------------------------------------------------------------------------------
300 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series V 6.625 07/01/12 316,326
400 Commonwealth of Puerto Rico Highway and Transportation Authority Revenue - Series 1993W 5.500 07/01/15 388,932
600 Wisconsin Center District - Junior Dedicated Tax Revenue - Series 1996 B 5.700 12/15/20 579,483
State/Territorial General Obligations
--------------------------------------------------------------------------------------------------------------------------
100 Commonwealth of Puerto Rico - Public Improvement - General Obligation -
Series 1995 5.375 07/01/22 93,553
Total Investments in Securities - Municipal Bonds (cost $11,829,063) - 96.3% 11,915,150
Excess of Other Assets over Liabilities - 3.7% 454,995
Total Net Assets - 100.0% $ 12,370,145
See notes to financial statements.
</TABLE>
WISCONSIN F-311 5
<PAGE>
[LOGO OF SHIP ART]
Statement of Assets and Liabilities May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at market value (cost $11,829,063) $ 11,915,150
Cash 98,196
Receivable for Fund shares sold 209,045
Interest receivable 241,958
Other 303
Total assets 12,464,652
LIABILITIES:
Payable for Fund shares reacquired 19,595
Distributions payable 53,573
Accrued expenses 21,339
Total liabilities 94,507
NET ASSETS:
Applicable to 1,287,769 shares of beneficial interest issued
and outstanding $ 12,370,145
Net asset value per share $ 9.61
</TABLE>
[LOGO OF SHIP ART]
Statement of Operations For the year ended May 31, 1996
................................................................................
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME - INTEREST $ 625,748
EXPENSES:
Distribution fees (Note E) 44,164
Investment advisory fees (Note E) 55,421
Custody and accounting fees 41,870
Transfer agent's fees 18,330
Registration fees 3,606
Legal fees 774
Audit fees 5,475
Trustees' fees 229
Shareholder services fees (Note E) 2,922
Other 387
Advisory fees waived (Note E) (55,421)
Expense subsidy (Note E) (47,172)
Total expenses before credits 70,585
Custodian fee credit (Note B) (6,490)
Net expenses 64,095
Net investment income 561,653
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions (9,379)
Change in unrealized appreciation (depreciation) of investments (229,560)
Net loss on investments (238,939)
Net increase in net assets resulting from operations $ 322,714
</TABLE>
See notes to financial statements.
6 F-312 WISCONSIN
<PAGE>
[LOGO OF SHIP ART]
Statements of Changes in Net Assets
................................................................................
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS Year Ended Year Ended
Operations: May 31, 1996 May 31, 1995
<S> <C> <C>
Net investment income $ 561,653 $ 231,737
Net realized gain (loss) on security transactions (9,379) (53,926)
Change in unrealized appreciation (depreciation) of investments (229,560) 315,647
Net increase in net assets resulting from operations 322,714 493,458
Distributions to shareholders:
From net investment income (567,424) (227,772)
Net decrease in net assets from distributions to shareholders (567,424) (227,772)
Net increase in net assets from Fund share transactions (Note C) 4,336,613 8,012,556
Total increase in net assets 4,091,903 8,278,242
NET ASSETS:
Beginning of year 8,278,242
End of year $12,370,145 $ 8,278,242
NET ASSETS CONSIST OF:
Paid-in surplus $12,347,363 $ 8,012,556
Undistributed net investment income 3,965
Accumulated net realized gain (loss) on security transactions (63,305) (53,926)
Unrealized appreciation (depreciation) of investments 86,087 315,647
$12,370,145 $ 8,278,242
</TABLE>
See notes to financial statements.
Wisconsin F-313 7
<PAGE>
[LOGO OF SHIP ART]
Notes to Financial Statements
................................................................................
A. Description of Business
The Flagship Wisconsin Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund commenced investment operations on June 1, 1994.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Fund.
Estimates: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and
make estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. The financial
statements reflect these inherent valuations, estimates and assumptions, and
actual results could differ.
Security Valuations: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities
and various relationships between securities in determining the values. If
market quotations are not readily available from such pricing service,
securities are valued at fair value as determined under procedures
established by the Trustees. Short-term securities are stated at amortized
cost, which is equivalent to fair value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
Federal Income Taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute to its shareholders all of its tax exempt net investment income
and net realized gains on security transactions. Therefore, no federal income
tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses
on security transactions are determined on the identified cost basis.
Interest income is recorded on the accrual basis. The Fund amortizes original
issue discounts and premiums paid on purchases of portfolio securities on the
same basis for both financial reporting and tax purposes. Market discounts,
if applicable, are recognized as ordinary income upon disposition or
maturity.
Investment Income, Expenses and Distributions: Interest income and estimated
expenses are accrued daily. Daily dividends are declared from net investment
income and paid monthly. Net realized gains from security transactions, to
the extent they exceed available capital loss carryforwards, are distributed
to shareholders at least annually.
Expense Allocation: Shared expenses incurred by the Trust are allocated among
the sub-trusts based on each sub-trusts ratio of net assets to the combined
net assets. Specifically identified direct expenses are charged to each sub-
trust as incurred.
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which
offset custodian fees that may be charged to the Fund, are based on 80% of
the daily effective federal funds rate.
8 F-314 WISCONSIN
<PAGE>
Notes to Financial Statements
...............................................................................
Securities Purchased on a "When-issued" Basis: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when-issued" basis. These securities are registered by a
municipality or government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when-issued" purchase commitments
included in the statement of investments at May 31, 1996.
C. Fund Shares
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
--------------------- ----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 548,166 $ 5,370,133 870,892 $8,245,900
Shares issued on reinvestment 34,403 338,221 9,567 89,742
Shares reacquired (140,063) (1,371,741) (35,196) (323,086)
Net increase 442,506 $ 4,336,613 845,263 $8,012,556
</TABLE>
D. Purchases and Sales of Municipal Bonds
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $9,210,335 and $5,106,880, respectively. At May 31, 1996, cost for
federal income tax purposes is $11,829,063 and net unrealized appreciation
aggregated $86,087, of which $181,588 related to appreciated securities and
$95,501 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $63,300 to offset future net capital gains in the amounts of
$53,900 through May 31, 2003 and $9,400 through May 31, 2004.
E. Transactions with Investment Advisor and Distributor
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to
the Fund, receives fees computed monthly on the average daily net assets of
the Fund at an annualized rate of 1/2 of 1%. During the year ended May 31,
1996, the Advisor, at its discretion, permanently waived all of its advisory
fees amounting to $55,421. Also, under an agreement with the Fund, the
Advisor may subsidize certain expenses excluding advisory and distribution
fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's shares and in that capacity is responsible for all
sales and promotional efforts including printing of prospectuses and reports
used for sales purposes. Pursuant to Rule 12b-1 under the Investment Company
Act of 1940, the Fund has adopted a plan to reimburse the Distributor for its
actual expenses incurred in the distribution and promotion of the Fund's
shares. The maximum amount payable for these expenses on an annual basis is
.40% of the Fund's average daily net assets. Included in accrued expenses at
May 31, 1996 are accrued distribution fees of $4,105. Certain non-promotional
expenses directly attributable to current shareholders are aggregated by the
Distributor and passed through to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $169,600 for the year ended May 31, 1996, of which
approximately $148,300 was paid to other dealers. Certain officers and
trustees of the Trust are also officers and/or directors of the Distributor
and/or Advisor.
Wisconsin F-315 9
<PAGE>
Notes to Financial Statements
...............................................................................
F. Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$98,000) is being reimbursed to the Advisor on a straight-line basis over a
period of three years beginning June 1, 1996. In the event that the
Advisor's current investment in the Trust falls below $100,000 prior to the
full reimbursement of the organizational expenses, then it will forego any
further reimbursement.
10 F-316 Wisconsin
<PAGE>
[LOGO OF SHIP ART] Selected data for each share of beneficial
Financial Highlights interest outstanding throughout the period.
................................................................................
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net asset value beginning of year $ 9.79 $ 9.58
Income from investment operations:
Net investment income 0.50 0.49
Net realized and unrealized gain
(loss) on securities (0.18) 0.21
Total from investment operations 0.32 0.70
Less distributions:
From net investment income (0.50) (0.49)
Total distributions (0.50) (0.49)
Net asset value at end of year $ 9.61 $ 9.79
Total return/(a)/ 3.35% 7.36%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses/(b)/ 0.64% 0.39%
Net investment income 5.02% 5.25%
Assuming credits and no
waivers or reimbursements:
Expenses 1.51% 2.31%
Net investment income 4.15% 3.33%
Net assets at end of year (000's) $12,370 $8,278
Portfolio turnover rate 46.99% 51.74%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.58%; prior period numbers have not
been restated to reflect these credits.
Wisconsin F-317 11
<PAGE>
[LOGO OF SHIP ART] Independent Auditors' Report
................................................................................
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP WISCONSIN
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Wisconsin Double Tax Exempt Fund as of May 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Wisconsin Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
12 F-318 Wisconsin
<PAGE>
APPENDIX I
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable Stan-
dard & Poor's Ratings Group rating symbols and their meanings (as published by
Standard & Poor's Corporation) follows:
A Standard & Poor's corporate or municipal debt rating is a current assess-
ment of the creditworthiness of an obligor with respect to a specific debt ob-
ligation. This assessment may take into consideration obligors such as guaran-
tors, insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security, in-
asmuch as it does not comment as to market price or suitability for a particu-
lar investor.
The ratings are based on current information furnished by the issuer and ob-
tained 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.
1. Long-term municipal 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>
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 provision-
al. A provisional rating assumes the successful completion of the project be-
ing financed by the bonds being rated and indicates that payment of debt serv-
ice requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
I-1
<PAGE>
2. Short-term tax exempt notes
Standard & Poor's tax exempt note ratings are generally given to such notes
that mature in three years or less. The three rating categories are as fol-
lows:
SP-1Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics will be given a plus (+)
designation.
SP-2Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3Speculative capacity to pay principal and interest.
3. Tax-exempt commercial paper
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 165 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
<TABLE>
<C> <S>
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designation 1, 2, and 3 to indicate the relative degree of
safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having speculative capacity for timely
payment.
C&D These ratings indicate that the issue is either in default or expected
to be in default upon maturity.
</TABLE>
MOODY'S INVESTORS SERVICE, INC.--A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
1. Long-term municipal 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 sta-
ble, margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are more unlikely to im-
pair the fundamentally strong position of such issues. With the occasional ex-
ception 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 stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than the Aaa Securi-
ties. 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 secu-
rity 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 fre-
quently move in parallel with Aaa and Aa obligations, with the occasional ex-
ception of oversupply in a few specific instances.
I-2
<PAGE>
Baa--Bonds which are rated Baa are considered as lower medium grade obliga-
tions, i.e., they are neither highly protected nor poorly secured. Interest
payments but certain protective elements may be lacking or may be characteris-
tically unreliable of over any great length of time. Such bonds lack outstand-
ing investment characteristics and in fact have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to change in eco-
nomic 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 po-
sition 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 stand-
ing. 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 ob-
ligations which are speculative in a high degree. Such issues are often in de-
fault or have other marked shortcomings. Bonds which are rated C are the low-
est rated class of bonds, and issues so rated can be regarded as having ex-
tremely 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 1 indicates that the bond ranks at the
high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Con.--Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of pro-
jects unseasoned in operating experience, (c) rentals which begin when facili-
ties are completed, or (d) payments to which some other limiting condition at-
taches. Parenthetical rating denotes probable credit status upon completion of
construction or elimination of basis of condition.
2. Short-term tax exempt notes
SHORT-TERM NOTES. The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3, and MIG 4; MIG 1 denotes "best quality, enjoying strong pro-
tection from established cash flows"; MIG 2 denotes "high quality" with "ample
margins of protection"; MIG 3 notes are of "favorable quality...but lacking
the undeniable strength of the preceding grades"; MIG 4 notes are of "adequate
quality, carrying specific risk but having protection...and not distinctly or
predominantly speculative".
3. Tax-exempt commercial paper
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in ex-
cess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating catego-
ries.
FITCH INVESTORS SERVICE, INC.--A brief description of the applicable Fitch
Investors Service, Inc. rating symbols and their meanings follows:
1. Long-term municipal 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.
</TABLE>
I-3
<PAGE>
<TABLE>
<C> <S>
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-1+'.
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-4
<PAGE>
APPENDIX II
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the various series' de-
fensive 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 de-
signed 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 series'
existing or anticipated holdings of long-term debt securities. When a series
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the series'
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 series must make ad-
ditional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the series may close out its position at
any time prior to expiration of the financial future by taking an opposite po-
sition. At closing a final determination of debits and credits is made, addi-
tional cash is paid by or to the series to settle the final determination and
the series 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 series' exist-
ing or anticipated holdings of long-term debt securities. For example, if a
series 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 series' portfolio would decline, but the value of the
series' financial futures would be expected to increase at approximately the
same rate thereby keeping the net asset value of the series from declining as
much as it otherwise would have.
Among the risks associated with the use of financial futures by the Fund's
series as a hedging device, perhaps the most significant is the imperfect cor-
relation 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 finan-
cial futures. Conversely, the series may enter into fewer financial futures if
the historical volatility of the price of the securities being hedged is less
than the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The series might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures. The Fund's series 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 re-
spect 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 series 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 ef-
fected.
INDEX CONTRACTS
Index Futures. A tax-exempt bond index which assigns relative values to the
tax-exempt bonds included in the index is traded on the Chicago Board of
Trade. The index fluctuates with changes in the market values of all tax-ex-
empt bonds included rather than a single bond. An index future is a bilateral
agreement pursuant to
II-1
<PAGE>
which two parties agree to take or make delivery of an amount of cash--rather
than any security--equal to specified dollar amount times the difference be-
tween 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 fu-
ture is similar to traditional financial futures except that settlement is
made in cash.
Index Options. The Fund's series may also purchase put or call options on
U.S. Government or tax-exempt bond index futures and enter into closing trans-
actions with respect to such options to terminate an existing position. Op-
tions 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 under-
lying security at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the option on the
index future.
Bond index futures and options transactions would be subject to risks simi-
lar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Manager's opinion, the market for
such instruments has developed sufficiently.
REPURCHASE AGREEMENTS
A series may invest temporarily up to 5% of its assets in repurchase agree-
ments, which are agreements pursuant to which securities are acquired by the
series from a third party with the understanding that they will be repurchased
by the seller at a fixed price on an agreed date. These agreements may be made
with respect to any of the portfolio securities in which the series is autho-
rized to invest. Repurchase agreements may be characterized as loans secured
by the underlying securities. The series may enter into repurchase agreements
with (i) member banks of the Federal Reserve System having total assets in ex-
cess of $500 million and (ii) securities dealers, provided that such banks or
dealers meet the creditworthiness standards established by the Fund's board of
trustees ("Qualified Institutions"). The Manager will monitor the continued
creditworthiness of Qualified Institutions, subject to the oversight of the
series board of trustees.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or oth-
erwise, the series will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to liqui-
dation or reorganization under applicable bankruptcy or other laws, the se-
ries' ability to dispose of the underlying securities may be restricted. Fi-
nally, it is possible that the series may not be able to substantiate its in-
terest in the underlying securities. To minimize this risk, the securities un-
derlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued inter-
est. 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 Series to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
II-2
<PAGE>
Investor Guide
Flagship's
National
Tax Exempt Funds(SM)
.Limited Term Fund
.Intermediate Fund
.All-American Fund
A Conservative Approach
to Tax-Free Income
[LOGO OF FLAGSHIP]
THIS BROCHURE INCLUDES A PROSPECTUS WHICH DESCRIBES IN DETAIL THE FUNDS'
OBJECTIVES, INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES, AND OTHER MATTERS
OF INTEREST. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
National Investor Guide:
Outside Cover
A - Multigenerational family photo
B - US map outline with stars and stripes like US flag
C - Stars used as bullet points
D - Clipper ship
Page 1
E - Older woman reading to two young children photo
F - American flag
Page 2
G - Professional man and woman walking with two children photo
H - Bond Yield vs. Maturity chart
<TABLE>
<CAPTION>
Bond Maturity Percent of 30 year Bond Yield
in Years Yield Curve Limited Term Intermediate Term Long Term
<S> <C> <C> <C> <C>
1 year 24 N/A N/A N/A
5 years 79 79 N/A N/A
10 years 89 N/A 89 N/A
15 years 92 N/A N/A N/A
20 years 95 N/A N/A N/A
25 years 97 N/A N/A 97
30 years 100 N/A N/A 100
</TABLE>
I - American flag
Page 3
J - Relative Bond Price Change graph
Line graph illustrating the relationship of bond prices going down as
interest rates go up. No specific plot points are used. Limited Term 5 years;
Intermediate Term 10 years; and All-American 25 years are used as samples with
arrows pointed down.
K - Risk and Reward chart
<TABLE>
<CAPTION>
Maturity Risk Reward
<S> <C> <C>
Limited term
5-Year Bond 36% 79%
Intermediate term
10-Year Bond 60% 89%
Long term
25-Year Bond 95% 97%
30-Year Bond 100% 100%
</TABLE>
L - American flag
Page 4
M - Taxable vs. Tax-Free Yield chart
<TABLE>
<CAPTION>
Tax-Free Yield for a Fund Taxable Equivalent Yield for a Fund
<S> <C>
4% 6.3%
5% 7.8%
6% 9.4%
</TABLE>
N - Growth of a $10,000 Investment graph
<TABLE>
<CAPTION>
Value of a Tax Exempt Investment Value of Fully Taxable Investment
<S> <C> <C>
0 years $10,000 $10,000
5 years $13,489 $12,007
10 years $18,194 $14,416
15 years $24,541 $17,309
20 years $33,102 $20,782
25 years $44,650 $24,953
</TABLE>
O - American flag
Page 5
P - Multigenerational family washing car photo
Q - American flag
Inside back cover
R - Investment Policy Committee photo
S - Flagship service seal with Flagship clipper ship; Flagship and words
performance, service and reliability around seal
T - American flag
Back Cover
U - Screen of American flag
V - Clipper ship
<PAGE>
As an investor in the Funds, you are buying a professionally managed,
diversified portfolio of America.
Pursue High Tax-Free Income By Investing In America
Keeping More of What You Earn
As you and your broker plan your investment strategy, you must evaluate the wide
range of investments available today. This means examining each specific
investment's characteristics, including its relative safety, focus on
preservation of capital, role in your portfolio, liquidity* and return.
Flagship's national municipal bond mutual funds have all of these
characteristics, plus their dividends are free from federal** taxes. You see the
real advantage in this investment--the opportunity to keep more of what you
earn. After all, what you keep is what really matters.
Investing in America
Flagship's National Tax Exempt Funds invest primarily in high investment quality
municipal bonds which are debt obligations of a state, county, other issuing
agency or political subdivision. Proceeds from the bonds are used for schools,
hospitals, airports and roads. Because the bonds are issued to finance public
projects, their dividends are free from federal income taxes. As an investor in
the Funds, you are buying a professionally managed, diversified portfolio of
America. Not only will you be helping to improve the quality of life across the
United States, you may be earning a high, current tax-free yield from your
investment.
[PHOTO APPEARS HERE]
*Shares, when redeemed, may be worth more or less than their original cost.
Investment in the Funds are not FDIC insured. The value of the Funds may
fluctuate. The return on the investment is not guaranteed. **Certain investors
may be subject to the federal alternative minimum tax and/or local taxes.
Not a part of the prospectus
<PAGE>
Taking Advantage of the Yield Curve
[PHOTO APPEARS HERE]
The Funds
Flagship offers three national funds, each with a nationally diversified
portfolio of investment quality or better municipal bonds. Because income from
municipal bonds is free from federal taxes, investors in the Funds keep more of
what they earn. To limit price changes, the Funds utilize defensive hedging and
other specialized techniques.
The Funds seek to provide:
. High, Current Tax-Free Income
. Monthly Dividends Free from Federal Income Taxes
. Daily Liquidity, with Free Reinvestment
. High Quality, Diversified Portfolios of Municipal Bonds
. Attentive, Professional Management
The Limited Term Fund
With a five-year average maturity, this Fund seeks to provide higher yields than
short-term bonds with less price fluctuation than longer-term bonds. Its shorter
average maturity reduces price volatility, compared to longer-term bond funds.
The Intermediate Fund
With a five to ten-year average maturity, this Fund seeks to provide slightly
higher yields than shorter-term bonds but less than longer-term bonds. Its
intermediate maturity may result in relatively less change in the fund's share
price, compared to longer-term bond funds.
The All-American Fund
With a 15 to 25-year average maturity, this Fund pursues the highest yields and
is the most actively managed of Flagship's national funds. The Fund seeks to
provide higher returns than shorter-term funds, however, it has the potential
for more change in the fund's share price.
Bond Yield vs. Maturity
[GRAPH APPEARS HERE]
Bond Maturity in Years
The illustration of the traditional yield curve indicates the average maturity
of the individual bonds in each category. As you can see, each investment may
provide an attractive tax-free return. But remember, each will react to interest
rate movement according to its maturity structure. The limited term investment
should fluctuate less, given a change in interest rates, the longer-term more.
This chart is for illustrative purposes only and is not indicative of past or
future performance of any investment offered by Flagship. Source: Flagship
internal research based on historical data from J.J. Kenny, Inc.
[FLAGSHIP LOGO APPEARS HERE]
Not a part of the prospectus
<PAGE>
Your Investment Objectives
You and your broker can select the combination of funds which balances your
desire for tax-free income with your comfort level for price changes.
Maturity and Interest Rates
In order to structure the portfolio that best suits your objectives, you need a
clear understanding of how a bond's price will react to interest rate movement.
Many investors look at a bond's maturity when considering the effects of
interest rates on its price. Bond prices are affected by interest rate changes,
therefore the value of your investment may change. As one goes up, the other
goes down-by how much is determined by a security's maturity. The table below
illustrates the yield and the potential change in value of different maturity
bonds relative to a 30-year bond. For example, a 1% change in interest rates
might alter the value of a 30-year bond by as much as 10% while it would only
alter the value of a five-year bond by 2% to 3%.
Laddering to Minimize
Price Changes
Flagship's National Tax Exempt Funds offer different maturity structures. By
purchasing shares of each Fund, investors can seek to minimize normal price
fluctuations over economic cycles. This approach is called laddering, and
eliminates the need to second-guess the economy or forecast interest rates.
Instead, you can maintain a desired average maturity over time, in all sorts of
interest rate environments.
Relative Bond Price Change
[GRAPH APPEARS HERE]
Risk & Reward
<TABLE>
<CAPTION>
- --------------------------------------------
MATURITY RISK/1/ REWARD/2/
- --------------------------------------------
<S> <C> <C>
Limited term
5-Year Bond 36% 79%
Intermediate term
10-Year Bond 60% 89%
Long term
25-Year Bond 95% 97%
30-Year Bond 100% 100%
</TABLE>
1 Risk equals the percentage of a 30-year bond's price fluctuation given a 1%
change in interest rates.
2 Reward equals the percentage of a traditionally higher yielding 30-year bond's
yield.
Source: Flagship internal research based on historical data from J.J. Kenny,
Inc.
[FLAGSHIP LOGO APPEARS HERE]
Not a part of the prospectus
<PAGE>
Tax-Free Income and The Power
of Compounding
The Tax-Free Advantage
Your tax obligation can take a huge bite out of your investment returns. You may
be writing checks to the government for 40% or more of your taxable investment
income. You would have to earn significantly more from a taxable investment to
equal the tax-free return from a Flagship fund.
Taxable Vs. Tax-Free Yield
[GRAPH APPEARS HERE]
Because you pay no federal income taxes on the fund's dividends, you would have
to earn 9.4% on a taxable investment to earn the same amount of income from a
tax-free return of 6%. This chart assumes a 36% tax rate and is for illustrative
purposes only. It is not indicative of past or future performance of any
investment offered by Flagship.
Growth of A $10,000 Investment
[GRAPH APPEARS HERE]
Note: Assumes $10,000 of principal is invested at a nominal annual interest rate
of 6.0% compounded monthly (6.17% equivalent effective yield). This rate is for
illustrative purposes only and is not meant to be indicative of the Fund's
actual return, which will vary. On a fully taxable investment, an investor is
assumed to pay taxes at a 39.6% rate on the total amount of interest credited to
the account.
The Power of
Tax-Free Compounding
Compound your tax-free earnings even faster by using Flagship's free monthly
dividend reinvestment plan. With this plan, dividends are automatically
reinvested in additional shares of your fund. The accompanying chart compares
the value over time of a hypothetical investment.
If the opportunity for high, current tax-free returns, monthly income and
professional management fit within your investment strategy, these Flagship
funds may be for you.
[FLAGSHIP LOGO]
Not a part of the prospectus
<PAGE>
The Benefits of Professional Management
A Professional, Team Approach
Flagship's success in the municipal bond market is a direct result of our
portfolio management team's ability to expertly manage fixed income securities.
Through a team structure with lead managers, the Flagship portfolio management
and credit research teams remain intimately involved with each portfolio. They
work together, from investment policy and economic outlook formulation, to
strategy implementation and trading execution.
Credit Research and Surveillance
The municipal bond market is vast and complex. With thousands of issues of
municipal bonds in fifty states and three territories, Flagship portfolio
managers augment information from both rating agencies and their own credit
research team to carefully identify the individual bonds which best meet the
standards of the funds' portfolios. The team of highly skilled and experienced
financial analysts maintains vigilant surveillance of each issue. Flagship's
research, a disciplined combination of its people, systems and documentation, is
a focused effort. Flagship's research staff, a recognized leader in the credit
field, reviews municipal bonds using a distinctive credit model for each of the
16 portfolio sectors. Flagship funds benefit from the improved performance which
may come from our credit insight and portfolio management expertise.
[PHOTO APPEARS HERE]
[FLAGSHIP LOGO]
Not a part of the prospectus
<PAGE>
THE FUNDS' INVESTMENT ADVISOR
Flagship
Flagship was originally founded in 1970 as the money management division of The
Mead Corporation, the forest products company. Since the launch of Flagship and
its family of specialty fixed income mutual funds, assets under management have
grown to nearly $4.5 billion with a shareholder base of over 100,000. The
company is based in Dayton, Ohio.
Performance
As a specialist in fixed income portfolio management, Flagship is well
positioned to uncover investment opportunities as it seeks to enhance
shareholder value. Flagship's portfolio management team utilizes an active
strategy to anticipate the changing economic conditions, as well as state and
federal tax laws, as they seek to achieve your investment objectives.
Service
Flagship's well-trained, responsive customer service team exists solely to meet
your needs. Their goal is to give every shareholder request individualized
attention, promptly providing accurate information and requested services.
Reliability
The investment strategies and disciplines of the portfolio management team are
supported by the company-wide commitment to provide consistently reliable
performance. Flagship's professional staff is focused on meeting investor
expectations and in fulfilling their mission: to seek to provide superior
investment returns on the assets they manage for clients.
[Photo appears here]
Flagship's Investment Policy Committee: (Seated from left to right) Bruce P.
Bedford - Chairman, Richard P. Davis - President. (Standing from left to right)
Michael D. Kalbfleisch - Chief Financial Officer, Michael S. Davern, Richard A.
Huber, Jan E. Terbrueggen, Walter K. Parker - Portfolio Managers.
[Flagship Logo]
Not a part of the prospectus
<PAGE>
[LOGO OF FLAGSHIP]
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
This brochure is authorized for distribution only when accompanied or preceded
by an effective prospectus.
(C)1995, Flagship Funds Inc. NF-A-100 (09-14-95)
<PAGE>
Investor Guide
Flagship
Ohio Double Tax Exempt Fund(SM)
Tax-Free Income is Just
One of the Benefits of
Investing Where You Live
[LOGO OF FLAGSHIP]
THIS BROCHURE INCLUDES A PROSPECTUS WHICH DESCRIBES IN DETAIL THE FUND'S
OBJECTIVES, INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES, AND OTHER MATTERS
OF INTEREST. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
Ohio Investor Guide:
Outside Cover
A - Multigenerational family photo
B - Outline of state of Ohio with stars and stripes like US flag
C - Clipper ship
Page 1
D - American flag
Page 2
E - Older couple sitting on porch swing photo
F - Taxable vs. Tax-Free Yield chart
<TABLE>
<CAPTION>
Tax-Free Yield for a Fund Taxable Equivalent Yield for a Fund
<S> <C>
4% 6.3%
5% 7.8%
6% 9.4%
</TABLE>
G - American flag
Page 3
H - Growth of a $10,000 Investment graph
<TABLE>
<CAPTION>
Value of a Tax Exempt Investment Value of Fully Taxable Investment
<S> <C> <C>
0 years $10,000 $10,000
5 years $13,489 $12,007
10 years $18,194 $14,416
15 years $24,541 $17,309
20 years $33,102 $20,782
25 years $44,650 $24,953
</TABLE>
I - Risk and Reward chart
<TABLE>
<CAPTION>
Maturity Risk Reward
<S> <C> <C>
Limited term
5-Year Bond 36% 79%
Intermediate term
10-Year Bond 60% 89%
Long term
25-Year Bond 95% 97%
30-Year Bond 100% 100%
</TABLE>
J - American flag
Page 4
K - Young family with soccer ball photo
L - American flag
Page 5
M - Multigenerational family washing car photo
N - American flag
Inside back cover
O - Investment Policy Committee photo
P - Flagship service seal with Flagship clipper ship; Flagship and words
performance, service and reliability around seal
Q - American flag
Back Cover
R - Screen of American flag
S - Clipper ship
National Tax Equivalent Yield Card
A - Outline of US map with stars and stripes like American flag
Ohio Tax Equivalent Yield Card
A - Outline of Ohio map with stars and stripes like American flag
<PAGE>
The Flagship Ohio Double Tax Exempt Fund invests primarily in high investment
quality municipal bonds which are issued to finance public projects such as
roads, bridges and schools in Ohio.
Flagship Ohio Double
Tax Exempt Fund
Keeping More of What You Earn
As you and your broker plan your investment strategy, you must evaluate the wide
range of investments available today. This means examining each specific
investment's characteristics, including its relative safety, focus on
preservation of capital, role in your portfolio, liquidity* and return. The
Flagship Ohio Double Tax Exempt Fund has all of these characteristics, plus its
dividends are free from both state and federal** taxes. You see the real
advantage in this investment--the opportunity to keep more of what you earn.
After all, what you keep is what really matters.
Investing in Ohio
The Flagship Ohio Double Tax Exempt Fund invests primarily in high investment
quality municipal bonds which are debt obligations of the state of Ohio, its
counties, other issuing agencies or political subdivisions within the state.
Proceeds from the bonds are used for schools, hospitals, airports, and other
public works. Because the bonds are issued to finance public projects, their
dividends are free from federal and state income taxes. Not only will you be
helping to improve the quality of life in Ohio, you may be earning a high,
current tax-free yield from your investment.
Examine these key features of the Fund. You'll see that it can pay to invest
where you live--and it's double tax free.
. Seeks High, Current After-Tax Income
. Dividends Free from Federal Income Taxes
. Dividends Free from Ohio Income Taxes
. Monthly Dividends, with Free Reinvestment
. High Quality, Diversified Portfolio of Municipal Bonds
[FLAGSHIP LOGO APPEARS HERE]
Not a part of the prospectus
<PAGE>
Your Investment Objectives
If you are seeking to earn a high, current investment return, pay lower taxes
and keep more of what you earn--even 100%--Flagship's tax exempt funds may be
for you. Flagship's funds are investments which seek to provide high, current
tax-free income while preserving your capital.
Flagship's mutual funds are professionally managed, high investment quality
portfolios of municipal bonds. Because of the special focus given to generating
tax-free income, dividends from the funds are 100% yours. And, by purchasing
shares of a fund, you provide financing for public projects in the state where
you live.
The Tax-Free Advantage
Tax obligations may take a huge bite out of your investment returns. You may be
writing checks to the government for as much as 30% to 40% or more of your
taxable investment income. With this kind of tax bite you would have to earn
significantly more from a taxable investment to equal the tax-free return from a
Flagship fund.
Taxable Vs. Tax-Free Yield
<TABLE>
<S> <C> <C> <C>
Taxable Equivalent Yield For A Fund 6.3% 7.8% 9.4%
Tax-Free Yield For A Fund 4.0% 5.0% 6.0%
</TABLE>
Because you pay no federal income taxes on the fund's dividends, you would have
to earn 9.4% on a taxable investment to earn the same amount of income from a
tax-free return of 6%. This chart assumes a 36% tax rate and is for
illustrative purposes only. It is not indicative of past or future performance
of any investment offered by Flagship.
We wanted the opportunity to earn higher tax-free yields and the flexibility to
make decisions consistent with our comfort level. Our broker helped us choose
Flagship as part of our financial future.
[LOGO OF FLAG]
*Shares, when redeemed, may be worth more or less than their original cost.
Investment in the Fund is not FDIC insured. The value of the Fund may
fluctuate. The return on the investment is not guaranteed.
**Certain investors may be subject to the federal alternative minimum tax and/or
local taxes.
Not a part of the prospectus
<PAGE>
The Flagship Fund Advantage
The Power of Compounding
Flagship offers a free monthly dividend reinvestment plan to enable investors to
compound their tax-free earnings even faster. In this plan, dividends are
automatically reinvested in additional shares of your fund. The chart at the
right compares the value over time of a tax-free investment with dividends
reinvested to a fully taxable investment.
Maturity and Interest Rates
In order to structure to portfolio that best suits your objectives, you need a
clear understanding of how a bond's price will react to interest rate movement.
Many investors look at a bond's maturity when considering the effects of
interest rates on its price. Bond prices are affected by interest rate changes,
therefore the value of your investment may change. As one goes up, the other
goes down--by how much is determined by a security's maturity. The table at the
left illustrates the yield and the potential change in value of different
maturity bonds relative to a 30-year bond. For example, a 1% change in interest
rates might alter the value of a 30-year bond by as much as 10% while it would
only alter the value of a five-year bond by 2% to 3%.
<TABLE>
<CAPTION>
Growth of a $10,000 Investment 25 Years
--------
<S> <C>
Value of Tax Exempt Investment $39,000
Value of Fully Taxable Investment 21,000
</TABLE>
Note: Assumes $10,000 of principal is invested at a nominal annual interest
rate of 6.0% compounded monthly (6.17% equivalent effective yield). This rate
is for illustrative purposes only and is not meant to be indicative of the
Fund's actual return, which will vary. On a fully taxable investment, an
investor is assumed to pay taxes at a 39.6% rate on the total amount of interest
credited to the account.
<TABLE>
<CAPTION>
Risk & Reward
Maturity Risk/1/ Reward/2/
<S> <C> <C>
Limited term
5-Year Bond 36% 79%
Intermediate term
10-Year Bond 60% 89%
Long term
25-Year Bond 95% 97%
30-Year Bond 100% 100%
</TABLE>
/1/ Risk equals the percentage of a 30-year bond's price fluctuation given a 1%
change in interest rates.
/2/ Reward equals the percentage of a traditionally higher yielding 30-year
bond's yield.
Source: Flagship internal research based on historical data from J.J. Kenny,
Inc.
Not a part of the prospectus
If the opportunity for high, current tax-free returns, monthly income and
professional management fit your investment strategy, Flagship funds may be for
you.
[LOGO OF FLAG]
<PAGE>
PRESERVATION OF CAPITAL AND CONVENIENCE
As an active manager, Flagship can react to economic and interest rate activity
to help preserve your capital as it seeks to enhance your return. Flagship can
consistently focus on the growth of your investment by taking a defensive
posture to minimize the potential share price depreciation associated with
rising interest rates.
Purchasing shares of a Flagship fund enables you to benefit from professional
management, as well as convenience. To make changes in your mutual fund
investment all you have to do is call your broker.
[PHOTOGRAPH APPEARS HERE]
The benefits of purchasing shares of a Flagship fund are:
. Attentive, Professional Management
. Convenience and Daily Liquidity at the Then Current Net Asset Value
. No Administrative Burdens
. No Transaction Costs Associated with Purchasing and Holding Individual
Bonds
. Ability to Buy or Sell Shares or Make Additional Investments in a Fund any
Business Day
Demand for municipal bonds is expected to remain strong since it is one of the
few investments which may provide both competitive yields and tax advantages.
Not a part of the prospectus
<PAGE>
THE BENEFITS OF PROFESSIONAL
MANAGEMENT
A PROFESSIONAL, TEAM APPROACH
Flagship's success in the municipal bond market is a direct result of our
portfolio management team's ability to expertly manage fixed income securities.
Through a team structure with lead managers, the Flagship portfolio management
and credit research teams remain intimately involved with each portfolio. They
work together, from investment policy and economic outlook formulation, to
strategy implementation and trading execution.
[PHOTOGRAPH APPEARS HERE]
CREDIT RESEARCH AND SURVEILLANCE
The municipal bond market is vast and complex. With thousands of issues of
municipal bonds in fifty states and three territories, Flagship portfolio
managers augment information from both rating agencies and their own credit
research team to carefully identify the individual bonds which best meet the
standards of the fund's portfolios. The team of highly skilled and experienced
financial analysts maintains vigilant surveillance of each issue. Flagship's
research, a disciplined combination of its people, systems and documentation, is
a focused effort. Flagship's research staff, a recognized leader in the credit
field, reviews municipal bonds using a distinctive credit model for each of the
16 portfolio sectors. Flagship funds benefit from the improved performance
which may come form our credit insight and portfolio management expertise.
[LOGO OF FLAG APPEARS HERE]
Not a part of the prospectus
<PAGE>
The Funds' Investment Advisor
Flagship
Flagship was originally founded in 1970 as the money management division of The
Mead Corporation, the forest products company. Since the launch of Flagship and
its family of specialty fixed income mutual funds, assets under management have
grown to nearly $4.5 billion with a shareholder base of over 100,000. The
company is based in Dayton, Ohio.
Performance
As a specialist in fixed income portfolio management, Flagship is
well positioned to uncover investment opportunities as it seeks to enhance
shareholder value. Flagship's portfolio management team utilizes an active
strategy to anticipate the changing economic conditions, as well as state and
federal tax laws, as they seek to achieve your investment objectives.
Service
Flagship's well-trained, responsive customer service team exists solely to meet
your needs. Their goal is to give every shareholder request individualized
attention, promptly providing accurate information and requested services.
Reliability
The investment strategies and disciplines of the portfolio management team are
supported by the company-wide commitment to provide
consistently reliable performance. Flagship's professional staff is focused on
meeting investor expectations and in fulfilling their mission: to seek to
provide superior investment returns on the assets they manage for clients.
[FLAGSHIP PHOTO]
Flagship's Investment Policy Committee: (Seated from left to right) Bruce P.
Bedford - Chairman, Richard P. Davis - President. (Standing from left to right)
Michael D. Kalbfleisch - Chief Financial Officer, Michael S. Davern, Richard A.
Huber, Jan E. Terbrueggen, Walter K. Parker - Portfolio Managers.
[FLAGSHIP LOGOS]
Not a part of the prospectus
<PAGE>
[LOGO OF FLAGSHIP]
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
This brochure is authorized for distribution only when accompanied or preceded
by an effective prospectus.
(C)1995, Flagship Funds Inc. OH-L-100 (09-14-95)
<PAGE>
FLAGSHIP NATIONAL
TAX EXEMPT
FUNDS/SM/
To use this table, simply find your taxable income in the appropriate taxable
income column and read across to determine your marginal tax rate and the
taxable equivalent for different tax-free yields. Then you will see the
potential benefit of investing in a fund where interest income is tax exempt
from federal income taxes.
TAXABLE EQUIVALENT YIELD TABLE 1996 TAX RATES
<TABLE>
<CAPTION>
STATE TAXPAYER INCOME A TAX-FREE YIELD OF:
===================================================================================================
EFFECTIVE 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
COMBINED
NEW TAX RATES 1996 TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 40,100 - 96,900 28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03
JOINT $ 96,900 - 147,700 31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42
RETURN $147,700 - 263,750 36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16
$263,750 & Over 39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76
- ---------------------------------------------------------------------------------------------------
$ 24,000 - 58,150 28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.02
SINGLE $ 58,150 - 121,300 31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42
RETURN $121,300 - 263,750 36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16
$263,750 & Over 39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76
===================================================================================================
</TABLE>
FLAGSHIP
<PAGE>
[FLAGSHIP LOGO]
FLAGSHIP
NATIONAL
TAX EXEMPT
FUNDS
THE FUNDS
Flagship National Tax Exempt Funds are municipal bond funds which invest in
high investment grade securities. Their objectives are to earn a tax-free, high
current yield for taxpayers consistent with preservation of the investor's
capital.
THE KEY FEATURES
. Three Funds, Each with a Different Maturity Structure
. Seek High Current Yields
. Tax-Free Income Opportunities
. Investment Quality Portfolios
. Commitment to Capital Preservation
. Attentive, Professional Management
The table on the back assumes the taxpayer's highest tax rate is applicable to
the entire amount of any decrease or increase in taxable income resulting from a
switch from taxable to tax-free securities or vice versa. Joint return assumes a
married couple with no dependents. Certain investors may be subject to the
federal alternative minimum tax and/or local taxes. The table is provided for
illustrative purposes only and does not reflect the past or future performance
of any Flagship fund. For more information, call your broker or write for an
effective prospectus which describes management fees, charges and expenses. Read
it carefully before you invest or send money. (C) 1996, Flagship Funds Inc.
NF-A-3003 (1/22/96)
<PAGE>
FLAGSHIP
OHIO
DOUBLE TAX
EXEMPT FUND/SM/
To use this table, simply find your taxable income in the appropriate taxable
income column and read across to determine your marginal tax rate and the
taxable equivalent for different tax-free yields. Then you will see the
potential benefit of investing in a fund where interest income is double tax
exempt from both Ohio and federal income taxes.
FLAGSHIP
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT YIELD TABLE 1996 TAX RATES
STATE TAXPAYER INCOME A TAX-FREE YIELD OF:
==================================================================================================
EFFECTIVE 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
COMBINED
NEW TAX RATES 1996 TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF:
==================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 40,100 - 80,000 31.74% 5.13 5.86 6.59 7.33 8.06 8.79 9.52
JOINT $ 80,000 - 96,900 32.28% 5.17 5.91 6.64 7.38 8.12 8.86 9.60
RETURN $ 96,900 - 100,000 35.10% 5.39 6.16 6.93 7.70 8.47 9.25 10.02
$100,000 - 147,700 35.76% 5.45 6.23 7.01 7.78 8.56 9.34 10.12
$147,700 - 200,000 40.42% 5.87 6.71 7.55 8.39 9.23 10.07 10.91
$200,000 - 263,750 40.80% 5.91 6.76 7.60 8.45 9.29 10.14 10.98
$263,750 & Over 44.13% 6.26 7.16 8.05 8.95 9.84 10.74 11.63
- --------------------------------------------------------------------------------------------------
$ 24,000 - 40,000 31.21% 5.09 5.81 6.54 7.27 8.00 8.72 9.45
SINGLE $ 40,000 - 58,150 31.74% 5.13 5.86 6.59 7.33 8.06 8.79 9.52
RETURN $ 58,150 - 80,000 34.59% 5.35 6.12 6.88 7.64 8.41 9.17 9.94
$ 80,000 - 100,000 35.10% 5.39 6.16 6.93 7.70 8.47 9.25 10.02
$100,000 - 121,300 35.76% 5.45 6.23 7.01 7.78 8.56 9.34 10.12
$121,300 - 200,000 40.42% 5.87 6.71 7.55 8.39 9.23 10.07 10.91
$200,000 - 263,750 40.80% 5.91 6.76 7.60 8.45 9.29 10.14 10.98
$263,750 & Over 44.13% 6.26 7.16 8.05 8.95 9.84 10.74 11.63
==================================================================================================
</TABLE>
<PAGE>
[FLAGSHIP LOGO]
FLAGSHIP
OHIO
DOUBLE TAX
EXEMPT FUND
THE FUND
Flagship Ohio Double Tax Exempt Fund is a municipal bond fund which invests in
high investment grade securities. Its objective is to earn a double tax-free,
high current yield for taxpayers consistent with preservation of the investor's
capital.
THE KEY FEATURES
. Seeks High Current Yield
. Tax-Free Income Opportunity
. Investment Quality Portfolio
. Commitment to Capital Preservation
. Attentive, Professional Management
The table on the back assumes the taxpayer's highest tax rate is applicable to
the entire amount of any decrease or increase in taxable income resulting from a
switch from taxable to tax-free securities or vice versa. Joint return assumes a
married couple with no dependents. Certain investors may be subject to the
federal alternative minimum tax and/or local taxes. The table is provided for
illustrative purposes only and does not reflect the past or future performance
of any Flagship fund. For more information, call your broker or write for an
effective prospectus which describes management fees, charges and expenses. Read
it carefully before you invest or send money. (C) 1996, Flagship Funds Inc.
OH-L-3003 (1/22/96)
<PAGE>
5 YEAR ROLLING STUDY
A. Name of the Fund
Outperformed Individual Bonds
B. Three lines stating: The actively managed (Name of the Fund) has outperformed
the buy and hold strategy of a 5 year "AAA" bond (#) out of (#) rolling 5
year periods, or (%) of the time, based on total return through (month and
year of most recent quarter end) including maximum sales charge.
C. Columns listing 5 Year Period, 5 Year AAA Bond Yields, (Fund's) 5 Year
Return, and The Flagship Advantage - the difference between the 5 Year AAA
Bond and the (Fund's) 5 Year Return.
D. Yellow circle stating "Flagship Averaged (%) More Per Year Than the 5 Year
Muni!"
E. Disclosure reads: Name of the Fund
For the period ending (recent quarter end) including
maximum sales charge of (maximum sales charge), the average
annual total returns for the Class A for one, five, ten
years and since inception (inception date) are (1 yr.
Return), (5 yr. Return), (10 yr. Return) and (since
inception Return). The SEC yield of (SEC yield) is based on
the maximum offer price as of (recent quarter end). Yield
reflects fee waiver of (fee waiver) basis points by the
Manager.
The Fund has an average maturity of (average maturity)
years and an average quality of (average quality) as of
(recent quarter end) and also benefitted from the positive
yield curve spread over the 5 year "AAA" bonds. The
analysis reflects a period of generally falling interest
rates, which gave the Fund substantial principal
appreciation. The Fund also had greater price fluctuation
than the 5 year bonds. The performance data quoted
represents past performance, which is not a guarantee of
future performance. The analysis assumes income for the
Fund is reinvested at NAV and for the 5 year "AAA" bonds at
yield to maturity. Municipal Market Data provided the 5
year bond information.
Certain investors may be subject to the federal alternative
minimum tax. The investment return, principal and yield of
an investment will fluctuate in response to interest rates
and other market conditions, so that investor's shares,
when redeemed, may be worth more of less than their
original cost. Longer maturity bonds generally offer higher
yields although they are subject to greater market
fluctuation. The performance data quoted represents past
performance. This material is authorized for distribution
only when accompanied or preceded by an effective
prospectus, which describes the management fees, charges
and expenses. Read it carefully before you invest or send
money.
<PAGE>
FLAGSHIP'S LIMITED TERM FUND
OUTPERFORMED INDIVIDUAL BONDS
The actively managed Flagship Limited Term has outperformed the buy and hold
strategy of a 5 year "AAA" bond 40 out of 45 rolling 5 year periods, or 89% of
the time, based on total return through June, 1996 including maximum sales
charge.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
5 YEAR PERIOD 5 YEAR AAA FLAGSHIP LIMITED TERM THE FLAGSHIP
BOND 5 YEAR RETURN ADVANTAGE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/31/87 - 10/31/92 6.20% 7.31% 1.11%
11/30/87 - 11/30/92 6.00% 7.35% 1.35%
12/31/87 - 12/31/92 6.00% 7.42% 1.42%
01/31/88 - 01/31/93 5.60% 7.15% 1.55%
02/29/88 - 02/28/93 5.60% 7.53% 1.93%
03/31/88 - 03/31/93 5.90% 7.52% 1.62%
04/30/88 - 04/30/93 5.80% 7.54% 1.74%
05/31/88 - 05/31/93 6.20% 7.60% 1.40%
06/30/88 - 06/30/93 6.20% 7.74% 1.54%
07/31/88 - 07/31/93 6.20% 7.63% 1.43%
08/31/88 - 08/31/93 6.35% 7.95% 1.60%
09/30/88 - 09/30/93 6.25% 7.89% 1.64%
10/31/88 - 10/31/93 6.15% 7.80% 1.65%
11/30/88 - 11/30/93 6.25% 7.78% 1.53%
12/31/88 - 12/31/93 6.30% 7.95% 1.65%
01/31/89 - 01/31/94 6.30% 7.89% 1.59%
02/28/89 - 02/28/94 6.70% 7.68% 0.98%
03/31/89 - 03/31/94 6.90% 7.30% 0.40% Flagship Averaged
04/30/89 - 04/30/94 6.75% 7.10% 0.35% .77% More Per Year
05/31/89 - 05/31/94 6.45% 6.94% 0.49% Than the 5 year
06/30/89 - 06/30/94 6.30% 6.69% 0.39% Muni!
07/31/89 - 07/31/94 6.10% 6.68% 0.58%
08/31/89 - 08/31/94 6.20% 6.80% 0.60%
09/30/89 - 09/30/94 6.35% 6.61% 0.26%
10/31/89 - 10/31/94 6.30% 6.35% 0.05%
11/30/89 - 11/30/94 6.20% 5.93% -0.27%
12/31/89 - 12/31/94 6.00% 5.87% -0.13%
01/31/90 - 01/31/95 6.15% 6.14% -0.01%
02/28/90 - 02/28/95 6.15% 6.25% 0.10%
03/31/90 - 03/31/95 6.50% 6.38% -0.12%
04/30/90 - 04/30/95 6.65% 6.50% -0.15%
05/31/90 - 05/31/95 6.30% 6.66% 0.36%
06/30/90 - 06/30/95 6.30% 6.58% 0.28%
07/31/90 - 07/31/95 6.20% 6.44% 0.24%
08/31/90 - 08/31/95 6.35% 6.68% 0.33%
09/30/90 - 09/30/95 6.35% 6.73% 0.38%
10/31/90 - 10/31/95 6.15% 6.73% 0.58%
11/30/90 - 11/30/95 5.80% 6.58% 0.78%
12/31/90 - 12/31/95 5.95% 6.61% 0.66%
01/31/91 - 01/31/96 5.75% 6.55% 0.80%
02/28/91 - 02/29/96 5.60% 6.34% 0.74%
03/31/91 - 03/31/96 5.75% 6.11% 0.36%
04/30/91 - 04/30/96 5.65% 5.95% 0.30%
05/31/91 - 05/31/96 5.60% 5.86% 0.26%
06/30/91 - 06/30/96 5.80% 5.91% 0.11%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
FLAGSHIP LIMITED TERM TAX EXEMPT FUND
For the period ending 6/30/96 including maximum sales charge of 2.50%, the
average annual total returns for the Class A shares for one, five, ten years and
share inception (10/19/87) are 1.81%, 5.90%, n/a/, and 6.44%.
The SEC yield of 4.21% is based on the maximum offer price as of 6/30/96. Yield
reflects fee waiver of 5 basis points by the Manager.
The Fund has an average maturity of 5.26 years and an average quality of AA- as
of 6/30/96 and also benefited from the positive yield spread over the 5 year
"AAA" bonds. The analysis reflects a period of generally falling interest rates,
which gave the Fund substantial principal appreciation. The Fund also had
greater price fluctuation than the 5 year bonds. The performance data quoted
represents past performance, which is not a guarantee of future performance. The
analysis assumes income for the Fund is reinvested at NAV and for the 5 year
"AAA" bonds at yield to maturity. Municipal Market Data provided the 5 year bond
information.
Certain investors may be subject to the federal alternative minimum tax. The
investment return, principal and yield of an investment will fluctuate in
response to interest rates and other market conditions, so that investor's
shares, when redeemed, may be worth more or less than their original cost.
Longer maturity bonds generally offer higher yields although they are subject to
greater market fluctuation. The performance data quoted represents past
performance. This material is authorized for distribution only when accompanied
or preceded by an effective prospectus, which describes the management fees,
charges and expenses. Read it carefully before you invest or send money.
Flagship Funds Inc. LT L 3034 (6-30-96)
<PAGE>
FLAGSHIP PRICE HISTORY
A. Name of Fund
B. Current Date
C. (Class) Shares-Price & Dividend History
D. List Dates (Inception date and consecutive month ends) with corresponding
NAV, Maximum Offer Price, Monthly Dividend, Capital Gain, Share Balance
(Beginning with 1000 shares) and Redeemable Value.
E. Chart showing Average Annualized Total Returns* through (most recent quarter
end). Shows Class of shares, 1 Year, 5 Year, 10 Year and Since Inception
returns with Inception date.
F. Disclosure reads: *Redeemable value and total returns include maximum sales
charge of (maximum sales charge) for A shares and 1% CDSC if redeemable within
one year from date of purchase for C shares, if applicable. Long-term Class C
shareholders could pay more than the economic equivalent of the maximum front
end sales charge for Class A shares. Certain investors may be subject to the
federal alternative minimum tax and/or state and local taxes. The performance
data quoted represents past performance an does not indicate future results. The
investment return and principal value will fluctuate in response to interest
rates and other influences, so that an investors shares, when redeemed, may be
worth more of less than their original cost. Must be preceded or accompanied by
the Fund's current prospectus before it can be given to any prospective
investor. The prospectus contains more information regarding sales charges,
expenses and fees. Read it carefully before you invest or send money.
G. Flagship Logo
H. For more information, please contact (sales representative)
Address of Firm
Phone number of Firm
FLAGSHIP KENTUCKY LTD
MUNICIPAL BOND FUND
8/2/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES - PRICE & DIVIDEND HISTORY
- --------------------------------------------------------------------------------
MAXIMUM MONTHLY CAPITAL SHARE REDEEMABLE
DATE NAV OFFER DIVIDEND GAINS BALANCE VALUE*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
9/14/95 $ 9.75 $10.00 1,000.00 $ 9,750.00
9/30/95 $ 9.79 $10.04 $.036904110 1,003.77 $ 9,826.90
10/31/95 $ 9.85 $10.10 $.038134247 1,007.66 $ 9,925.41
11/30/95 $ 9.91 $10.16 $.036904110 1,011.41 $10,023.05
12/31/95 $ 9.94 $10.19 $.038134247 1,015.29 $10,091.97
1/31/96 $10.00 $10.26 $.038030056 1,019.15 $10,191.49
2/29/96 $ 9.97 $10.23 $.035576504 1,022.79 $10,197.18
3/31/96 $ 9.85 $10.10 $.038030056 1,026.74 $10,113.34
4/30/96 $ 9.81 $10.06 $.036803280 1,030,59 $10,110.06
5/31/96 $ 9.79 $10.04 $.038030056 1,034.59 $10,128.64
6/30/96 $ 9.81 $10.06 $.036803280 1,038.47 $10,187.41
7/31/96 $ 9.84 $10.09 $.038030056 1,042.49 $10,258.05
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS 1 YEAR 5 YEAR SINCE INCEPTION INCEPTION
----- ------ ------ --------------- ---------
<S> <C> <C> <C> <C> <C>
Average Annualized Total
Returns* through 6/30/96 A 1.87% 9/14/95
C 3.22% 9/14/95
</TABLE>
*Redeemable value and total returns include maximum sales charge of 2.50 for A
shares and 1% CDSC if redeemed within one year from date of purchase for C
shares, if applicable. Long-term Class C shareholders could pay more than the
economic equivalent of the maximum front end sales charges for Class A shares.
Certain investors may be subject to the federal alternative minimum tax and/or
state and local taxes. The performance data quoted represents past performance
and does not indicate future results. The investment return and principal value
will fluctuate in response to interest rates and other influences, so that an
investors shares, when redeemed, may be worth more or less than their original
cost. Must be preceded or accompanied by the Fund's current prospectus before
it can be given to any prospective investor. The prospectus contains more
information regarding sales charges, expenses and fees. Read it carefully before
you invest or send money.
For more information, please contact
One Dayton Centre - One S. Main St.
Dayton, Ohio 45402-2030 1-800-227-4648
FLAGSHIP
Flagship Funds, Inc.
<PAGE>
FLAGSHIP TEMPLATE
A. Name of the Fund
B. Current Date
C. List Quotron Symbol, NAV, Maximum Offer Price, Average Maturity, Average
Duration/1/, Average Quality, Net Assets in millions, Annualized Dividend
and Number of Holdings for each class of shares.
Disclosure for/1/ -- Duration is a measurement of the volatility of the fund
given a change in interest rates. Investment in Flagship fund is not FDIC
insured nor is it guaranteed by any bank.
D. Block showing Why A Flagship Fund
- Interest Free from Federal Income Taxes*
- 100% Investment Grade Portfolio
- Commitment to Capital Preservation
- Nationally Diversified Portfolio
- Attentive, Professional Management
- Monthly Dividends/Free Reinvestment
Footnote at* - Certain investors may be subject to the federal alternative
minimum tax and/or local taxes.
E. Graph showing Quality Analysis
- Breakdown of quality between AAA, AA, A, BBB, NR (non-rated) and below
investment grade bonds.
F. Chart showing Fund Performance which includes distribution yield*, and Tax
equivalent yield** of both classes of funds.
Disclosure reads: *Distribution yield is annualized dividend divided by
maximum offer price as of (current date).
SEC yield is (Class A SEC yield for last month end) for
Class A and (Class C SEC yield for last month) for Class C
for the period ending (last month) including maximum sales
charge of (maximum sales charge for the fund) for A shares
and 1% CDSC for C shares. Yield may reflect expense waiver
and subsidization.
**Tax equivalent yield is calculated from the distribution
yield and based on the 36% federal tax rate and maximum
state rate (if applicable). May vary depending on family
size and nature and amount of itemized deductions.
The tax equivalent yield based on the SEC yield is (Tax
Equivalent Yield for Class A Shares) for Class A and (Tax
Equivalent Yield for Class C) for Class C.
Authorized for use only when preceded or accompanied by
the Fund's current prospectus.
G. Chart showing Average Annual Total Return** which includes one year, three
years, ten years and since inception* of both classes of funds -- Class A***,
Class C****.
Disclosure reads: *Since the inception date of the funds: (date of A
shares) for A shares; (date of C shares) for C shares.
**For the period ending (last month end)
***Including maximum sales charge of (maximum sales
charge for the fund)
****No initial sales load; 1% CDSC if redeemed within 1
year of purchase. Returns assume reinvestment of
dividends and capital gains and reflect past
investment results. Past performance does not indicate
future results. The investment return and principal
will fluctuate with market conditions so that shares,
upon redemption, may be worth more or less than the
original cost. Long term Class C investors could pay
more than the economic equivalent of the maximum front
end sales charge for Class A shares.
H. Graph showing NAV price movement over time. The Y axis shows price and the
X axis shows time in months.
Disclosure reads: Must be proceeded or accompanied by the Fund's current
prospectus before it can be given to any prospective
investor. The prospectus contains more information
regarding sales charges, expenses and fees.
I. Pie graph showing sector analysis. Sectors are broken down into education,
health care, hospitals, housing, industrial dev. rev. and PCR, muni
appropriation obligation, municipal revenue, non-state general obligation,
pollution control, pre-refunded or escrowed, resource recovery, special tax
revenue, state general obligations and student loan revenue bonds.
J. Chart Showing Why Professional Management
- Over 1,500,000 municipal issues outstanding from over 50,000 issuers*
- Compared to 5,000 investment grade, corporate bonds
- Lack of data available on issuers
- Inefficient market
- Negotiable market
- No centralized exchange
- Lack of availability
- Most new issues purchased by institutions
Disclosure reads: *Source: "The Trouble With Munis", Business Week, 9/6/93
K. Logo
L. Address and Telephone Number
FLAGSHIP ALL-AMERICAN
TAX EXEMPT FUND
Thursday, August 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
QUOTRON MAXIMUM AVERAGE AVERAGE AVERAGE NET ASSETS ANNUALIZED NUMBER OF
SYMBOL NAV OFFER MATURITY DURATION/1/ QUALITY (MILLIONS) DIVIDEND HOLDINGS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A FLAAX $ $ years years A $ $
- -------------------------------------------------------------------------------------------------------------------
C FAACX $ $ years years A $ $
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Why a Flagship Fund?
- --------------------------------------------------------------------------------
. Dividends Free from Federal Income Taxes*
. 100% Investment Grade Portfolio
. Commitment to Capital Preservation
. Nationally Diversified Portfolio
. Attentive, Professional Management
. Monthly Dividends/Free Reinvestment
*Certain investors may be subject to the federal alternative minimum tax.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quality Analysis
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
A AA AAA BBB NR
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund Performance A C
- --------------------------------------------------------------------------------
<S> <C> <C>
Distribution Yield* % %
- --------------------------------------------------------------------------------
Tax Equivalent Yield** % %
- --------------------------------------------------------------------------------
</TABLE>
*Distribution yield is annualized dividend divided by maximum offer price as of
08/28/96.
**SEC yield is % for Class A and % for Class C for the period ending
including maximum sales charge of 4.20% for A shares and a 1% CDSC for
C shares. Yield may reflect expense waiver and subsidization.
**Tax equivalent yield is calculated from the distribution yield and based on
the 36.0% federal tax rate and maximum state rate (if applicable). May vary
depending on family size and nature and amount of itemized deductions.
The tax equivalent yield based on the SEC yield is % for Class A and %
for Class C.
Authorized for use only when preceeded or accompanied by the Fund's current
prospectus.
- --------------------------------------------------------------------------------
1 Duration is a measurement of the volatility of the fund given a change in
interest rates.
Investment in a Flagship fund is not FDIC insured nor is it guaranteed by any
bank.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return** A*** C****
- --------------------------------------------------------------------------------
<S> <C> <C>
One Year % %
- --------------------------------------------------------------------------------
Three Years % %
- --------------------------------------------------------------------------------
Five Years % n/a
- --------------------------------------------------------------------------------
Ten Years n/a n/a
- --------------------------------------------------------------------------------
Since Inception* % %
- --------------------------------------------------------------------------------
</TABLE>
*Since the inception date of the funds: for A shares; for C
shares.
**For the period ending
***Including maximum sales charge of 4.20%.
****No initial sales load; 1% CDSC if redeemed within 1 year of purchase.
Returns assume reinvestment of dividends and capital gains and reflect past
investment results. Past performance does not indicate future results. The
investment return and principal will fluctuate with market conditions so that
shares, upon redemption, may be worth more or less than the original cost.
Flagship Funds, Inc.
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
Flagship Funds
.Today.
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
NAV
- --------------------------------------------------------------------------------
9-------------------------------------------------------------------------------
8-------------------------------------------------------------------------------
7-------------------------------------------------------------------------------
6-------------------------------------------------------------------------------
5-------------------------------------------------------------------------------
4-------------------------------------------------------------------------------
3---------- ---------------------------------------------------------------
1/1/92 1/3/92
1/2/92
Must be proceeded or accompanied by the Fund's current prospectus before it can
be given to any prospective investor. The prospectus contains more information
regarding sales charges, expenses and fees.
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
- --------------------------------------------------------------------------------
Sector Analysis
- --------------------------------------------------------------------------------
x1 ( %)
x2 ( %)
x3 ( %)
Flagship Funds, Inc.
FLAGSHIP (formula)
<PAGE>
[LOGO]
Flagship Funds
.Today.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Why Professional Management?
- --------------------------------------------------------------------------------
. Over 1,500,000 municipal issues outstanding from over 50,000 issuers*
- Compared to 5,000 investment grade, corporate bonds
. Lack of data available on issuers
. Inefficient market
- Negotiable market
- No centralized exchange
. Lack of availability
- Most new issues purchased by institutions
*Source: "The Trouble With Munis", Business Week, 9/6/93
- --------------------------------------------------------------------------------
Flagship Funds, Inc.
FLAGSHIP (formula)
<PAGE>
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
List all financial statements and exhibits as part of the Registration
Statement.
(a) FINANCIAL STATEMENTS:
(1) The condensed financial information for each subtrust is included
in Part A of the Registration Statement under the heading
"Financial Highlights ".
(2) The audited financial statements for each subtrust for the period
ended May 31, 1996, are included in Part B of the Registration
Statement.
(b) EXHIBITS
<TABLE>
<C> <S>
(1)(a) Declaration of Trust as amended*
(b) Form of Designation of Sub-Trust**
(2) By-Laws*
(4) Form of Certificate of unit of interest*
(5) Form of Investment Advisory Agreements*
(5)(a) Form of Advisory Agreement for Limited Term Series*
(6)(a) Form of Distribution Agreement*
(b) Form of Selling Agreement*
(c) Form of Multiple Class Distribution Plan and Agreements*
(8)(a) Custodian Agreement as amended**
(b) Transfer Agency Agreement*
(c) Form of Bank Clearing Agreement*
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher &
Flom*
(11)(a) Opinion and Consent of Deloitte & Touche as to tax mat-
ters*
(b) Consent of Deloitte & Touche**
(13) Letter of understanding relating to initial capital*
(15)(a) Distribution Plan*
(b) Form of Distribution Agreements*
(c) Form of Selling Agreement*
(d) Form of Service Agreement*
(16) Total Return Calculations*
(17) Financial Data Schedules**
(18) Letter of Transmittal for Exchange*
(19) Power of Attorney*
(20) Application Form*
(21) Code of Ethics as amended*
</TABLE>
- --------
* Previously filed.
** To be filed.
C-1
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Insofar as the following registered investment companies have identical
Boards of Directors or Trustees, as the case may be, they may be deemed to be
under common control with Registrant: Flagship Admiral Funds Inc.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 31, 1996:
<TABLE>
<CAPTION>
(1) (2)
NUMBER OF
RECORD
TITLE OF CLASS HOLDERS
-------------- ---------
<S> <C>
Shares of beneficial interest, without par value................ 64,534
</TABLE>
ITEM 27. INDEMNIFICATION.
Please see Section 5.3 of the Registrant's Declaration of Trust (Exhibit
1(a)).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant and the investment advisor and distributor pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling person
or the Distributor in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
See "Officers and Trustees" in the Statement of Additional Information.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Flagship Admiral Funds Inc.
(b) See "Officers and Trustees" in the Statement of Additional Information
constituting Part B of this Registration Statement.
(c) Not applicable. The Registrant's only principal underwriter is an
affiliated person of an affiliated person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of Flagship Tax Exempt Funds Trust, located at One
Dayton Centre, One South Main Street, Dayton, Ohio 45402-2030, or at the State
Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts.
C-2
<PAGE>
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Distributor" and "Investment
Advisor" in the Prospectus constituting Part A of this Registration Statement,
the Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
1. With respect to any new series of the Registrant, Registrant will file a
post-effective amendment containing unaudited financial statements of each
such series within four to six months after the commencement of the public
offering of such series' shares.
2. Registrant undertakes that if it does not hold annual meetings that it
will abide by section 16(c) of the 1940 Act which provides certain rights to
shareholders.
3. Registrant hereby undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant (certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and) has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dayton, and State of
Ohio, on the 4th day of September, 1996.
Flagship Tax Exempt Funds Trust
/s/ Richard P. Davis
By___________________________________
Richard P. Davis
President
POWER OF ATTORNEY
Know all Men by These Presents, that each person whose name appears below
constitutes and appoints Bruce Paul Bedford and Richard P. Davis, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement and to file the same,
with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed to be an original, but which taken together shall
constitute one instrument.
Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bruce Paul Bedford* Chairman and Trustee September 4, 1996
____________________________________
Bruce Paul Bedford
/s/ Richard P. Davis President and Trustee September 4, 1996
____________________________________
Richard P. Davis
/s/ Michael D. Kalbfleisch* Treasurer September 4, 1996
____________________________________
Michael D. Kalbfleisch
/s/ Robert P. Bremner* Trustee September 4, 1996
____________________________________
Robert P. Bremner
/s/ Joseph F. Castellano* Trustee September 4, 1996
____________________________________
Joseph F. Castellano
/s/ Paul F. Nezi* Trustee September 4, 1996
____________________________________
Paul F. Nezi
/s/ William J. Schneider* Trustee September 4, 1996
____________________________________
William J. Schneider
</TABLE>
- --------
* Signed by Richard P. Davis pursuant to a power of attorney.
C-4
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
------- ------- ------
<C> <S> <C>
(1)(a) Declaration of Trust as amended *
(b) Form of Designation of Sub-Trust **
(2) By-Laws *
(4) Form of Certificate of unit of interest *
(5) Form of Investment Advisory Agreement *
(a) Form of Investment Advisory Agreement for Limited Term Se-
ries *
(6)(a) Form of Distribution Agreements *
(b) Form of Selling Agreement *
(c) Form of Multiple Class Distribution Plan and Agreements *
(8)(a) Custodian Agreement as amended **
(b) Transfer Agency Agreement *
(c) Form of Bank Clearing Agreement *
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom *
(11)(a) Opinion and consent of Deloitte & Touche as to tax matters *
(b) Consent of Deloitte & Touche LLP **
(13) Letter of understanding relating to initial capital *
(15)(a) Distribution Plan *
(b) Form of Distribution Agreements *
(c) Form of Selling Agreement *
(d) Form of Service Agreement *
(16) Total Return Calculation *
(17) Financial Data Schedules **
(18) Letter of Transmittal for Exchange *
(19) Power of Attorney *
(20) Application Form *
(21) Code of Ethics as amended *
</TABLE>
- --------
* Previously filed.
** To be filed
C-5
<PAGE>
FLAGSHIP TAX EXEMPT FUNDS TRUST
ESTABLISHMENT AND DESIGNATION
OF FUNDS
The undersigned, being a majority of the Trustees of Flagship Tax Exempt
Funds Trust, a Massachusetts business trust (the "Trust"), acting pursuant to
Section 6.2 of the Declaration of Trust dated March 8, 1985 (the "Declaration"),
do hereby divide the shares of beneficial interest of the Trust, without par
value ("Shares"), to create separate series and sub-trusts thereof, within the
meaning of said Section 6.2 as follows:
1. The Series, hereinafter referred to as the "New Funds", are
hereby designated as follows:
Flagship California Intermediate Tax Exempt Fund
Flagship North Dakota Tax Exempt Fund
Flagship High Yield Municipal Bond Fund
2. Shares of the New Funds shall be entitled to all of the rights
and preferences accorded to all other Shares under the Declaration.
3. The initial purchase price of Shares of the New Funds; the
method of determination of net asset value; the price, terms, and manner of
redemption of Shares; and the relative dividend rights of holders of Shares of
the New Funds shall be established by the Trustees of the Trust in accordance
with the provisions of the Declaration and shall be set forth in the currently
effective prospectus of the New Funds, as amended from time to time, under the
Securities Act of 1933, as amended.
4. This Establishment and Designation of Funds may be executed in
multiple counterparts, each of which shall be deemed as original, but taken all
together shall constitute one instrument.
<PAGE>
/s/ Bruce P. Bedford
_________________________________________
Bruce P. Bedford
/s/ Robert P. Bremner
________________________________________
Robert P. Bremner
/s/ Joseph F. Castellano
________________________________________
Joseph F. Castellano
/s/ Richard P. Davis
________________________________________
Richard P. Davis
/s/ Paul F. Nezi
________________________________________
Paul F. Nezi
/s/ William J. Schneider
________________________________________
William J. Schneider
<PAGE>
[LOGO OF STATE STREET]
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
FLAGSHIP TAX EXEMPT FUNDS
FLAGSHIP ADMIRAL SERIES
SEE SCHEDULE A
EFFECTIVE JANUARY 1, 1996 - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
I. ADMINISTRATION
--------------
Custody, Portfolio and Fund Accounting Services - Maintain custody of
fund assets. Settle portfolio purchases and sales. Report buy and sell
fails. Determine and collect portfolio income. Make cash disbursements
and report cash transactions. Maintain investment ledgers, provide
selected portfolio transactions, position and income reports. Prepare
daily trial balance. Calculate net asset value daily. Provide selected
general ledger reports. Securities yield or market value quotations will
be provided to State Street by the fund.
The administration fee shown below is annual charge, billed and payable
monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
-------------------------
Custody, Portfolio
Fund Net Assets and Fund Accounting
- --------------- -------------------
First $50 Million 1/15 of 1%
Next $100 Million 1/30 of 1%
Excess 1/100 of 1%
Minimum: Monthly Charges
Portfolios Under $30 Million $3,000
Portfolios Over $30 Million $3,500
II. PORTFOLIO TRANSACTIONS - FOR EACH LINE ITEM PROCESSED
-----------------------------------------------------
State Street Bank Repos $ 7.00
Fed Book Entry $12.00
Maturity Collections $ 8.00
All other trades $20.00
<PAGE>
[LOGO OF STATE STREET]
III. OPTIONS
-------
Option charge for each option written or
closing contract, per issue, per broker $ 25.00
Option expiration charge, per issue, per broker $ 15.00
Option exercised charge, per issue, per broker $ 15.00
IV. LENDING OF SECURITIES
---------------------
Deliver loaned securities versus cash collateral $ 20.00
Deliver loaned securities versus securities collateral $ 30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $ 30.00
Deliver cash collateral versus receipt of loaned
securities $ 25.00
Loan administration -- mark to market per day, per loan $ 3.00
V. INTEREST RATE FUTURES
---------------------
Transaction -- no security movement $ 10.00
VI. COUPON BONDS
------------
Monitoring for calls and processing coupons --
for each coupon issue held -- monthly charge $ 5.00
VII. NAVIGATOR AUTOMATED PRICING FEE SCHEDULE
----------------------------------------
Monthly Base Charge $375.00
Monthly Quote Charge:
Municipal Bonds via Kenny/S & P or Muller Data $ 16.00
Corporate, Municipal, Convertible, Government Bonds
and Adjustable Rate Preferred Stocks Via IDSI $ 13.00
Government, Corporate Bonds via Kenny/S & P or Muller $ 11.00
Government, Corporate and Convertible
Bonds via Merrill Lynch $ 11.00
Foreign Bonds via Extel $ 10.00
Options, Futures and Private Placements $ 6.00
Listed Equities (including International) and OTC Equities $ 6.00
For billing purposes, the monthly quote charge will be based on the
average number of positions in the portfolio at month end.
VIII. HOLDING CHARGE
--------------
For each issue maintained monthly charge $ 3.75
<PAGE>
[LOGO OF STATE STREET]
IX. PRINCIPAL REDUCTION PAYMENTS
----------------------------
Per paydown $10.00
X. EARNINGS CREDIT
---------------
An earning credit will be applied toward custodian balances held on
deposit with State Street Bank and Trust Company. The earnings credit
will be based on 80% of the daily effective Federal Funds rate on the
first business day of the month and will be applied against the above
custodian fees. The earnings credit will be cumulative to offset month to
month custodian fees, however, may not be carried over the calendar year
end (December 31).
XI. SPECIAL SERVICES
----------------
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation. Fees for tax
accounting recordkeeping for options, financial futures, and other
special items will be negotiated separately.
XII. OUT-OF-POCKET EXPENSES
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($3.85 per wire and $3.70 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund records
Rush Transfer -- $8.00 Each
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
Affirmations - $1.00
XIII. PAYMENT
-------
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices.
FLAGSHIP TAX EXEMPT FUNDS STATE STREET BANK AND TRUST CO.
FLAGSHIP ADMIRAL SERIES FUNDS
BY: /s/ Michael D. Kalbfleisch BY: /s/ M.L. Summers
--------------------------- --------------------------------
TITLE: Treasurer TITLE: Vice President
------------------------ -----------------------------
DATE: 1/25/96 DATE: 1/18/96
------------------------- ------------------------------
<PAGE>
[LOGO OF STATE STREET]
SCHEDULE A
----------
FLAGSHIP TAX EXEMPT FUNDS
FLAGSHIP ALABAMA DOUBLE TAX EXEMPT FUND
FLAGSHIP ALL-AMERICAN TAX EXEMPT FUND
FLAGSHIP ARIZONA DOUBLE TAX EXEMPT FUND
FLAGSHIP COLORADO DOUBLE TAX EXEMPT FUND
FLAGSHIP CONNECTICUT DOUBLE TAX EXEMPT FUND
FLAGSHIP FLORIDA DOUBLE TAX EXEMPT FUND
FLAGSHIP FLORIDA INTERMEDIATE TAX EXEMPT FUND
FLAGSHIP GEORGIA DOUBLE TAX EXEMPT FUND
FLAGSHIP INTERMEDIATE TAX EXEMPT FUND
FLAGSHIP KANSAS DOUBLE TAX EXEMPT FUND
FLAGSHIP KENTUCKY LIMITED TERM TAX EXEMPT FUND
FLAGSHIP KENTUCKY TRIPLE TAX EXEMPT FUND
FLAGSHIP LIMITED TERM TAX EXEMPT FUND
FLAGSHIP LOUISIANA DOUBLE TAX EXEMPT FUND
FLAGSHIP MICHIGAN TRIPLE TAX EXEMPT FUND
FLAGSHIP MISSOURI TAX EXEMPT FUND
FLAGSHIP NEW JERSEY DOUBLE TAX EXEMPT FUND
FLAGSHIP NEW JERSEY INTERMEDIATE TAX EXEMPT FUND
FLAGSHIP NEW MEXICO DOUBLE TAX EXEMPT FUND
FLAGSHIP NEW YORK TAX EXEMPT FUND
FLAGSHIP NORTH CAROLINA TRIPLE TAX EXEMPT FUND
FLAGSHIP OHIO DOUBLE TAX EXEMPT FUND
FLAGSHIP PENNSYLVANIA TRIPLE TAX EXEMPT FUND
FLAGSHIP SOUTH CAROLINA DOUBLE TAX EXEMPT FUND
FLAGSHIP TENNESSEE DOUBLE TAX EXEMPT FUND
FLAGSHIP VIRGINIA DOUBLE TAX EXEMPT FUND
FLAGSHIP WISCONSIN DOUBLE TAX EXEMPT FUND
FLAGSHIP ADMIRAL SERIES
FLAGSHIP UTILITY INCOME FUND
FLAGSHIP GOVERNMENT LIMITED TERM
FLAGSHIP GOVERNMENT INTERMEDIATE FUND
<PAGE>
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
----------------------------------------------------
AGREEMENT between Flagship (the "Customer") and State Street Bank and Trust
Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets of
the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of April 30, 1985.
WHEREAS, State Street has developed and utilizes proprietary accounting and
other systems, including State Street's proprietary Multicurrency HORIZON/R/
Accounting System, in its role as custodian of the Customer, and maintains
certain Customer-related data ("Customer Data") in databases under the control
and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data Access
Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this Agreement, State
Street hereby agrees to provide the Customer with access to State Street's
Multicurrency HORIZON/R/ Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports, solely on computer hardware, system software
and telecommunication links of the Customer, as listed in Attachment B and
solely with respect to the Customer (the "Configuration") or on any designated
substitute or back-up equipment configuration with State Street's written
consent, such consent not to be unreasonably withheld.
b. Data Access Services. State Street agrees to make available to the
Customer the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of the Customer to originate
electronic instructions to State Street on behalf of the Customer in order to
(i) effect the transfer or movement of cash or securities held under custody by
State Street or (ii) transmit accounting or other information (such transactions
are referred to herein as "Client Originated Electronic Financial
Instructions"), and (iii) access data for the purpose of reporting and analysis,
shall be deemed to be Data Access Services for purposes of this Agreement.
1
<PAGE>
c. Additional Services. State Street may from time to time agree to make
available to the Customer additional Systems that are not described in the
attachments to this Agreement. In the absence of any other written agreement
concerning such additional systems, the term "System" shall include, and this
Agreement shall govern, the Customer's access to and use of any additional
System made available by State Street and/or accessed by the Customer.
2. NO USE OF THIRD PARTY SOFTWARE
State Street and the Customer acknowledge that in connection with the Data
Access Services provided under this Agreement, the Customer will have access,
through the Data Access Services, to Customer Data and to functions of State
Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment; Designated Location. The System and the Data
Access Services shall be used and accessed solely on and through the Designated
Configuration at the offices of the Customer located in Dayton, Ohio
("Designated Location").
b. Designated Configuration; Trained Personnel. State Street shall be
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this Agreement. State
Street agrees to use commercially reasonable efforts to maintain the System so
that it remains serviceable, provided, however, that State Street does not
guarantee or assure uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and the Data Access
Services only for the processing of securities transactions, the keeping of
books of account for the Customer and accessing data for the purposes of
reporting and analysis. The Customer shall not, and shall cause its employees
and agents not to (i) permit any third party to use the System or the Data
Access Services, (ii) sell, rent, license or otherwise use the System or the
Data Access Services for any purposes other than as expressly authorized under
this Agreement, (iii) allow access to the System or the Data Access Services
through terminals or any other computer or telecommunications facilities located
outside the Designated Locations, (iv) allow or cause any information (other
than portfolio holdings, valuations of portfolio holdings, and other
information reasonably necessary for the management or distribution of the
assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or
2
<PAGE>
other device for other than use for or on behalf of the Customer (v) modify the
System in any way, including without limitation, developing any software for or
attaching any devices or computer programs to any equipment, system, software or
database which forms a part of or is resident on the Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a planned
System shutdown, the Customer's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, the Customer may use any back-up site
agreed to by State Street, which agreement will not be unreasonably withheld.
The Customer may secure from State Street the right to access the System or the
Data Access Services through computer and telecommunications facilities or
devices complying with the Designated Configuration at additional locations only
upon the prior written consent of State Street and on terms to be mutually
agreed upon by the parties.
e. Title. Title and all ownership and proprietary rights to the System,
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. No Modification. Without prior written consent of State Street, the
Customer shall not modify, enhance or otherwise create derivative works based
upon the System, nor shall the Customer reverse engineer, decompile or otherwise
attempt to secure the source code for all or any part of the System.
g. Security Procedures. The Customer shall comply with data access
operating standards and procedures and with user identification or other
password control requirements and other security procedures as may be issued
from time to time by State Street for use of the System on a remote basis and to
access the Data Access Services. The Customer shall have access only to the
Customer Data and authorized transactions agreed upon from time to time by State
Street and, upon notice from State Street, the Customer shall discontinue remote
use of the System and access to Data Access Services for any security reasons
cited by State Street; provided, that, in such event, State Street shall, for a
period not less than 180 days (or such other shorter period specified by the
Customer) after such discontinuance, assume responsibility to provide accounting
services under the terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the use of
the System and the Data Access Services by the Customer and the Investment
Advisor to ensure compliance with this Agreement. The on-site inspections shall
be upon prior written notice to Customer and the Investment Advisor and at
reasonably convenient times and frequencies so as not to result in an
unreasonable disruption of the Customer's or the Investment Advisor's business.
<PAGE>
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and State
Street represents that the System and the databases, computer programs, screen
formats, report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in confidence and secure and protect it in a manner
consistent with its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or agreement with its
employees who are permitted access to the Proprietary Information to satisfy its
obligations hereunder. The Customer shall use all commercially reasonable
efforts to assist State Street in identifying and preventing any unauthorized
use, copying or disclosure of the Proprietary Information or any portions
thereof or any of the logic, formats or designs contained herein.
b. Cooperation. Without limitation of the forgoing, the
Customer shall advise State Street immediately in the event the Customer learns
or has reason to believe that any person to whom the Customer has given access
to the Proprietary Information, or any portion thereof, has violated or intends
to violate the terms of this Agreement, and the Customer will, at its expense,
cooperate with State Street in seeking injunctive or other equitable relief in
the name of the Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the
disclosure of any Proprietary Information, or of any information which at law or
equity ought to remain confidential, will immediately give rise to continuing
irreparable injury to State Street inadequately compensable in damages at law.
In addition, State Street shall be entitled to obtain immediate injunctive
relief against the breach or threatened breach of any of the forgoing
undertakings, in addition to any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall survive the
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The
Customer agrees any liability of State Street to the Customer or any third party
arising out of State Street's provision of Data Access Services or the System
under this Agreement shall be limited to the amount paid by the Customer for the
preceding 24 months for such services. In no event shall State Street be liable
to the Customer or any other party for any special, indirect, punitive or
consequential damages even if advised of the possibility of such damages. No
action, regardless of form, arising out of this Agreement may be brought by
4
<PAGE>
the Customer more than two years after the Customer has knowledge that the cause
of action has arisen.
b. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, ARE MADE BY STATE STREET. IN NO EVENT WILL STATE STREET BE
LIABLE TO THE CUSTOMER OR ANY OTHER PARTY FOR ANY CONSEQUENTIAL OR INCIDENTAL
DAMAGES WHICH MAY ARISE FROM THE CUSTOMER'S ACCESS TO THE SYSTEM OR USE OF
INFORMATION OBTAINED THEREBY.
c. Third-Party Data. Organizations from which State Street may obtain
certain data included in the System or the Data Access Services are solely
responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and the Customer,
the Customer shall be solely responsible for the accuracy of any accounting
statements or reports produced using the Data Access Services and the System and
the conformity thereof with any requirements of law.
e. Force Majeure. Neither party shall be liable for any costs or damages
due to delay or nonperformance under this Agreement arising out of any cause or
event beyond such party's control, including without limitation, cessation of
services hereunder or any stoppage, power or other mechanical failure, computer
virus, natural disaster, governmental action, or communication disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from any
loss, damage or expense including reasonable attorney's fees, (a "loss")
suffered by State Street arising from (i) the negligence or willful misconduct
in the use by the Customer of the Data Access Services or the System, including
any loss incurred by State Street resulting from a security breach at the
Designated Location or committed by the Customer's employees or agents of the
Customers and (ii) any loss resulting from incorrect Client Originated
Electronic Financial Instructions. State Street shall be entitled to rely on the
validity and authenticity of Client Originated Electronic Financial Instructions
without undertaking any further inquiry as long as such instructions is
undertaken in conformity with security procedures established by State Street
from time to time.
5
<PAGE>
7. FEES
Fees and charges for the use of the System and the Data Access Services and
related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time between the parties (the "Fee Schedule"). Any tariffs,
duties or taxes imposed or levied by any government or governmental agency by
reason of the transactions contemplated by this Agreement, including, without
limitation, federal, state and local taxes, use, value added and personal
property taxes (other than income, franchise or similar taxes which may be
imposed or assessed against State Street) shall be borne by the Customer. Any
claim exemption from such tariffs, duties or taxes shall be supported by proper
documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a designated
State Street training facility or at the Designated Location, to the Customer's
personnel in conjunction with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access Services, designated by
the Customer, to receive the training offered by State Street pursuant to this
Agreement.
b. Installation and Conversion. State Street shall be responsible for
the technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. The Customer shall have the following responsibilities
in connection with Installation and Conversion of the System.
(i) The Customer shall be solely responsible for the timely acquisition
and maintenance of the hardware and software that attach to the
Designated Configuration in order to use the Data Access Services at
the Designated Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the Installation
and Conversion phase of the System implementation to enable both
parties to perform their respective obligations under this Agreement.
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
6
<PAGE>
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on the date
of its execution by State Street and shall remain in full force and effect
until terminated as herein provided.
b. Termination of Agreement. Either party may terminate this Agreement
(i) for any reason by giving the other party at least one-hundred and eighty
days' prior written notice in the case of notice of termination by State Street
to the Customer or thirty days' notice in the case of notice from the Customer
to State Street of termination, or (ii) immediately for failure of the other
party to comply with any material term and condition of the Agreement by giving
the other party written notice of termination. In the event the Customer shall
cease doing business, shall become subject to proceedings under the bankruptcy
laws (other than a petition for reorganization or similar proceeding) or shall
be adjusted bankrupt, this Agreement and the rights granted hereunder shall, at
the option of State Street, immediately terminate with notice to the Customer.
This Agreement shall in any event terminate as to any Customer within 90 days
after the termination of the Custodian Agreement applicable to such Customer.
c. Termination of Right to Use. Upon termination of this Agreement for
any reason, any right to use the System and access to the Data Access Services
shall terminate and the Customer shall immediately cease use of the System and
the Data Access Services. Immediately upon termination of this Agreement for any
reason, the Customer shall return to State Street all copies of documentation
and other Proprietary Information in its possession; provided however, that in
the event that either party terminates this Agreement or the Custodian Agreement
for any reason other than the Customer's breach, State Street shall provide the
Data Access Services for a period of time and at a price to be agreed upon by
the parties.
11. MISCELLANEOUS
a. Assignment Successors. This Agreement and the rights and obligations
of the Customer and State Street hereunder shall not be assigned by either party
without the prior written consent of the party, except that State Street may
assign this Agreement to a successor of all or a substantial portion of its
business, or a party controlling, controlled by, or under common control with
State Street.
b. Survival. All provisions regarding indemnification, warranty,
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
c. Entire Agreement. This Agreement and the attachments hereto
constitute the entire understanding of the parties hereto with respect to the
Data Access Services and the use of the System and supersedes any and all prior
or contemporaneous representations
7
<PAGE>
or agreements, whether oral or written, between the parties as such may relate
to the Data Access Services or the System, and cannot be modified or altered
except in a writing duly executed by the parties. This Agreement is not intended
to supersede or modify the duties and liabilities of the parties hereto under
the Custodian Agreement or any other agreement between the parties hereto except
to the extent that any such agreement specifically refers to the Data Access
Services or the System. No single waiver or any right hereunder shall be deemed
to be a continuing waiver.
d. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
e. Governing Law. This Agreement shall be interpreted and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of the date hereof.
STATE STREET BANK AND TRUST COMPANY
By: /s/ M.L. Summers
------------------------------------
Title: Vice President
---------------------------------
Date: 3/26/96
----------------------------------
FLAGSHIP FINANCIAL
By: /s/ Michael D. Kalbfleisch
------------------------------------
Title: Chief Financial Officer
---------------------------------
Date: 4/4/96
-----------------------------------
8
<PAGE>
ATTACHMENT A
Multicurrency HORIZON/R/
System Product Description
--------------------------
I. The Multicurrency HORIZON/R/ Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance; 4) appropriate auotmated feeding mechanisms to
(i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytical
services, (iv) customer's internal computing systems and (v) various State
Street provided information services products.
II. SaFiRe\SM\. SaFiRe\SM\ is designed to provide the customer with the ability
to prepare its own financial reports by permitting the customer to access
customer information maintained on the Multicurrency HORIZON/R/ Accounting
System, to organize such information in a flexible reporting format and to have
such reports printed on the customer's desktop or by its printing provider.
9
<PAGE>
ATTACHMENT B
Designated Configuration
10
<PAGE>
ATTACHMENT C
UNDERTAKING
The undersigned understands that in the course of its employment as
Investment Advisor to the Flagship Funds (the "Customer") it will have access to
State Street Bank and Trust Company's ("State Street") Multicurrency HORIZON
Accounting System and other information systems (collectively, the "System").
The undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation, and other information made available to the Undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The Undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The Undersigned will not attempt to intercept data, gain access to data
in transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System
and access to the Data Access Services shall terminate and the Undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the Undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
FLAGSHIP FINANCIAL
By: /s/ Michael D. Kalbfleisch
------------------------------
Title: Chief Financial Officer
---------------------------
Date: 4/4/96
----------------------------
11
<PAGE>
ATTACHMENT D
SUPPORT
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Customer Designated Persons may contact
State Street's HORIZON/R/ Help Desk and Customer Assistance Center between the
hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for the purpose
of obtaining answers to questions about the use of the System, or to report
apparent problems with the System. From time to time, the Customer shall
provide to State Street a list of persons, not to exceed five in number, who
shall be permitted to contact State Street for assistance (such persons being
referred to as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical support to
assist the Customer in using the System and the Data Access Services. The total
amount of technical support provided by State Street shall not exceed 10
resource days per year. State Street shall provide such additional technical
support as is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical support, including
during installation and testing, is subject to the fees and other terms set
forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially reasonable
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as its practicable.
d. System Enhancements. State Street will provide the Customer any
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Customer and shall offer the Customer reasonable
training on the enhancement. Charges for system enhancements shall be as
provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. Custom Modifications. In the event the Customer desires custom
modifications in connection with its use of the System, the Customer shall make
a written request to State Street providing specifications for the desired
modifications. Any custom modifications may be undertaken by State Street in
its sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation to
support the Customer's use of the System: (1) for use on any computer equipment
or telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Customer has modified the System in
breach of this Agreement.
12
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 23 to Registration
Statement under the Securities Act of 1933 and Amendment No. 24 to Registration
Statement under the Investment Company Act of 1940, both filed under
Registration Statement No. 2-96544, of our reports dated July 3, 1996 relating
to the Flagship Alabama Double Tax Exempt Fund, Flagship Arizona Double Tax
Exempt Fund, Flagship Colorado Double Tax Exempt Fund, Flagship Connecticut
Double Tax Exempt fund, Flagship Florida Double Tax Exempt Fund, Flagship
Florida Intermediate Tax Exempt Fund, Flagship Georgia Double Tax Exempt Fund,
Flagship Kansas Triple Tax Exempt Fund, Flagship Kentucky Triple Tax Exempt
Fund, Flagship Kentucky Limited Term Municipal Bond Fund, Flagship Louisiana
Double Tax Exempt Fund, Flagship Michigan Triple Tax Exempt Fund, Flagship
Missouri Double Tax Exempt Fund, Flagship New Jersey Double Tax Exempt Fund,
Flagship New Jersey Intermediate Tax Exempt Fund, Flagship New Mexico Double Tax
Exempt Fund, Flagship New York Tax Exempt Fund, Flagship North Carolina Double
Tax Exempt Fund, Flagship Ohio Double Tax Exempt Fund, Flagship Pennsylvania
Triple Tax Exempt Fund, Flagship South Carolina Double Tax Exempt Fund, Flagship
Tennessee Double Tax Exempt Fund, Flagship Virginia Double Tax Exempt Fund,
Flagship Wisconsin Double Tax Exempt Fund, Flagship Limited Term Tax Exempt
Fund, Flagship Intermediate Tax Exempt Fund and Flagship All-American Tax Exempt
Fund Appearing in the Statement of Additional Information, which is part of such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus which is also part of such Registration
Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dayton, Ohio
September 3, 1996
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</TABLE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
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<PERIOD-END> MAY-31-1996
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<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (554,941)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 961,767
<NET-ASSETS> 33,636,501
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> (182,536)
<NET-INVESTMENT-INCOME> 1,875,792
<REALIZED-GAINS-CURRENT> 86,320
<APPREC-INCREASE-CURRENT> (554,501)
<NET-CHANGE-FROM-OPS> 1,407,611
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,893,445)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 416,678
<NUMBER-OF-SHARES-REDEEMED> (586,370)
<SHARES-REINVESTED> 90,419
<NET-CHANGE-IN-ASSETS> (1,255,470)
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<NAME> FLAGSHIP NEW MEXICO DOUBLE TAX EXEMPT FUND
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<NAME> FLAGSHIP PENNSYLVANIA DOUBLE TAX EXEMPT FUND
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DOUBLE TAX EXEMPT FUND
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<NAME> FLAGSHIP TENNESSEE DOUBLE TAX EXEMPT FUND
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<NAME> FLAGSHIP TENNESSEE
DOUBLE TAX EXEMPT FUND
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CIK> 0000764860
<NAME> FLAGSHIP WISCONSIN DOUBLE TAX EXEMPT FUND
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<NAME> CLASS A
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