<PAGE>
As filed with the Securities and Exchange Commission on
June 24, 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 [X]
and/or
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
One South Main Street
Dayton, Ohio 45402
(Address of Principal (Zip Code)
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 Meagher & Flom
Funds Trust 919 Third Avenue
One Dayton Centre New York, New York
One South Main Street 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)
[_] on (date) pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[X] 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.
<PAGE>
CROSS REFERENCE SHEET
(as required by Item 501(b) of Regulation S-K)
N-1A Item No. Location
- ------------ --------
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 Investing in Mutual Funds; About
of Registrant Flagship 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 How the Funds are Managed
the Fund
Item 5A. Management's Not Applicable
Discussion of
Fund Performance
Item 6. Capital Stock and How to Buy Shares; How to Sell
Other Securities Shares; Fees and Expenses; Taxes;
Distributions and Yield; About
the Trust
Item 7. Purchase of How to Buy Shares; How Fund Shares
Securities are Priced; Distributions
Being Offered and Yield
Item 8. Redemption or How to Sell Shares; How to Exchange
Repurchase Shares; Shareholder Services; About the
Distributor; Additional Information
Item 9. Legal Proceedings Not Applicable
<PAGE>
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
<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 Investing in Mutual Funds; About Flagship
of 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 How the Fund is Managed
the Fund
Item 5A. Management's Not Applicable
Discussion of
Fund Performance
Item 6. Capital Stock and How to Buy Shares; How to Sell Shares;
Other Securities Fees and Expenses; Taxes; Distributions and
Yield; About the Trust
Item 7. Purchase of How to Buy Shares; How Fund Shares are
Securities Priced; Distributions and Yield
Being Offered
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 Not Applicable
and History
Item 13. Investment Objectives Investment Objectives
and Policies and Policies
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
<S> <C>
Item 14. Management of Officers and Trustees
the Registrant
Item 15. Control Persons and Officers and Trustees
Principal Holders
of Securities
Item 16. Investment Advisory Investment Advisory Services; Distributor;
and Other Services Officers and Trustees; Custodian and
Transfer Agent
Item 17. Brokerage Allocation Portfolio Transactions
and Other Practices
Item 18. Capital Stock and Shares of the Fund
Other Securities
Item 19. Purchase, Redemption Purchase, Redemption and Pricing of Shares;
and Pricing of Exchange and Reinvestment Privileges;
Securities Systematic Withdrawal Plan; Shares
Being Offered of the Fund; Dividend Payment Options
Item 20. Tax Status Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Yield and Total Return
Performance Data Calculation
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.................................................. 15
ABOUT YOUR INVESTMENT
How to Buy Shares.......................................................... 16
How to Sell Shares......................................................... 18
How to Exchange Shares..................................................... 19
Shareholder Services....................................................... 19
How Fund Shares are Priced................................................. 20
Taxes...................................................................... 20
Distributions and Yield.................................................... 21
About the Distributor...................................................... 22
About the Trust............................................................ 22
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.
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 Y Shares. Class Y 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 "About the Distributor" and "How The Funds are Man-
aged", 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% %
Arizona A (a)* 4.2 N/A 0.30 0.40 0.25 0.95
N/A 1.0(c) 0.30 0.95(e) 0.25 1.50
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
Connecticut A (a)* 4.2 N/A 0.35 0.40 0.15 0.90
C (a)* N/A 1.0(c) 0.35 0.95(e) 0.15 1.45
Florida A (a)* 4.2 N/A 0.35 0.40 0.20 0.95
C (b)* N/A 1.0(c) 0.35 0.95(e) 0.20 1.50
Georgia A (a)* 4.2 N/A 0.25 0.40 0.30 0.95
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50
Kansas (a) 4.2 N/A 0.25 0.40 0.25 0.90
Kentucky A (a)* 4.2 N/A 0.30 0.40 0.20 0.90
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45
Louisiana A (a)* 4.2 N/A 0.30 0.40 0.20 0.90
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45
Michigan A (a)* 4.2 N/A 0.40 0.40 0.15 0.95
C (a)* N/A 1.0(c) 0.40 0.95(e) 0.15 1.50
Missouri A (a)* 4.2 N/A 0.30 0.40 0.20 0.90
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45
New Jersey (a) 4.2 N/A 0.20 0.40 0.10 0.70
New Mexico (a) 4.2 N/A 0.30 0.40 0.20 0.90
New York A (a)* 4.2 N/A 0.20 0.40 0.10 0.70
C (a)*
North Carolina A (a)* 4.2 N/A 0.45 0.40 0.10 0.95
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50
North Dakota (b)
Ohio A (a)* 4.2 N/A 0.45 0.40 0.10 0.95
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50
Oklahoma (b)
Pennsylvania A (a)* 4.2 N/A 0.25 0.40 0.30 0.95
C (a)8 N/A 1.0(c) 0.25 0.95(e) 0.30 1.50
Rhode Island (b)
South Carolina
(a) 4.2 N/A 0.20 0.40 0.10 0.70
Tennessee A (a)* 4.2 N/A 0.30 0.40 0.25 0.95
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50
Texas (b)
Virginia A (a)* 4.2 N/A 0.30 0.40 0.25 0.95
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50
Wisconsin 4.2 N/A 0.15 0.40 0.15 0.70
Class B Shares
(b) N/A 5.0(d) 0.40 1.00(e) 0.15 1.55
Class C Shares
(b) N/A 1.0(c) 0.40 0.95(e) 0.15 1.50
Class Y 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 69 90 148
25 46 79 174
New Jersey (a) 49 63 79 125
New Mexico (a) 51 69 90 148
New York 49 63 79 125
North Carolina 51 71 92 154
25(c) 48 82 180
North Dakota (b)
Ohio 51 71 92 154
25(c) 48 82 180
Oklahoma (b)
Pennsylvania 51 71 92 154
25(c) 48 82 180
Rhode Island (b)
South Carolina
(a) 49 63 79 125
Tennessee 51 71 92 154
25(c) 48 82 180
Texas (b)
Virginia 51 71 92 154
25(c) 48 82 180
Wisconsin 49 63 79 125
Class B Shares
(b) 67 93 108 168
Class C Shares
(b) 25(c) 48 82 180
Class Y 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 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>
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 0.10 0.40 0.20 0.70
C (a) N/A 1.0(c) 0.10 0.95(e) 0.20 1.25
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
Kentucky
Limited Term A (b) 2.5 N/A 0.10 0.40 0.20 0.70
C (b) N/A 1.0(c) 0.10 0.70 0.20 1.00
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
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
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50
Intermediate A (a)* 3.0 N/A 0.20 0.40 0.20 0.80
C (b)* N/A 1.0(c) 0.20 0.95(e) 0.20 1.35
Limited Term A (a)* 2.5 N/A 0.30 0.40 0.05 0.75
C (b)* N/A 1.0(c) 0.30 0.70(f) 0.05 1.05
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 Y 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 37 52 68 114
23(c) 40 69 151
Limited Term (b) 32 47 N/A N/A
Kentucky
Limited Term 32 47 N/A N/A
20(c) 32 N/A N/A
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 32 48 66 116
21(c) 33 58 128
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 58 105
Limited Term 42 56 58 105
Class C Shares
(b)
Intermediate 23(c) 40 69 150
Limited Term 20(c) 32 55 122
Class Y 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; 5% declining to 1% in the 6th year contingent
deferred sales charge 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 Y 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)
Class A
-------
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
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
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
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
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
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
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)
Class A
-------
1994(a) 357 0.00% 2.42% 0.00%
1995 1,880 0.16% 5.47% 120.19%
1996
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
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
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
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
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
</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
Class C
-------
(9/14/95)
1996
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
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
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
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
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
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
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
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
Class C
-------
(9/14/95)
1996
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
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
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
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
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
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
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
</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
Class C
-------
(9/14/95)
1996 $ 9.75
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
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
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
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
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
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
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
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
Class C
-------
(9/14/95)
1996
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
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
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
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
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
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
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
</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
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
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
Class C
-------
(3/4/96)
1996(a)
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
Class C
-------
(10/4/93)
1994(a) $11.69 $.46 ($ .49) ($ .03) $.46 $.46 $11.20 (0.17%)
1995 $10.06 $.51 $ .16 $ .67 $.51 $.51 $10.22 6.97%
1996
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
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
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
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
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
Class C
-------
(3/4/96)
1996(a)
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
Class C
-------
(10/4/93)
1994(a) 25,674 1.46% 4.79% 9.14%
1995 6,049 1.46% 5.13% 34.67%
1996
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
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
</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
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
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
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
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
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
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
Wisconsin
(6/1/94)
1995(a) $ 9.58 $.49 $ .21 $ .70 $.49 $.49 $ 9.79 7.36%
1996
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
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
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
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
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
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
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
Wisconsin
(6/1/94)
1995(a) 8,278 0.39% 5.25% 51.74%
1996
</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
- --------------------------------------------------------------------------------------------------------------------
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
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
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
Class C
-------
(12/1/95)
1996
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
Class C
-------
(12/1/95)
1996
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
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
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
Class C
-------
(12/1/95)
1996
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
Class C
-------
(12/1/95)
1996
</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.
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, includ-
ing the general condition of the financial markets and of the tax-exempt secu-
rities market in particular, the size of a particular offering, the maturity of
the obligation and the creditworthiness of the issue. Generally, tax-exempt se-
curities 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-exempt securi-
ties 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 portfolio of fixed
income securities generally fluctuates inversely with changes in interest
rates. When interest rates increase, the value of fixed income securities gen-
erally 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 securities
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 settled
with the underlying securities.
. Put features let the holder sell back a security to the issuer or a financial
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 obligations
issued or guaranteed by the U.S. Government and its agencies or instrumentali-
ties, including up to 5% in related, adequately collateralized repurchase
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 fluctua-
tion; 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 advantageous.
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 ag-
gregate value equal to the amount of such purchase commitments until 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 consis-
tent with its investment objective and policies, and not for the purpose of in-
vestment leverage.
NONPUBLIC SECURITIES
Each 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
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 par-
ticular 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
(unless otherwise noted), as well as national averages for
comparison 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 $ and the unemployment rate was
% in 1995.
ALABAMA - In 1995, Alabama population was , average personal income
was $ and the unemployment rate was %. Alabama's economy is distrib-
uted relatively evenly between manufacturing, trade, and government. 1995 gen-
eral fund revenues were $ billion against expenditures of $ billion.
General obligation bonds are rated Aa by Moody's, AA by Standard & Poor's and
AA by Fitch.
ARIZONA - In 1995, Arizona population was , average personal income
was $ and the unemployment rate was %. Arizona's economy is based
primarily on employment in the government and service sectors. 1995 general
fund revenues were $ billion against expenditures of $ billion.
There are no general obligation ratings, however, outstanding certificates of
participation are rated A by Moody's.
CALIFORNIA - In 1995, California population was , average personal
income was $ and the unemployment rate was %. California's economy is
based primarily on the service industry. 1995 general fund revenues were
$ billion against expenditures of $ 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 , average personal income
was $ and the unemployment rate was %. Colorado's economy is based
primarily on services. 1995 general fund revenues were $ billion against
expenditures of $ 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 , average personal
income was $ and the unemployment rate was %. Connecticut's economy
is based primarily on the service sector. 1995 general fund revenues were
$ billion against expenditures of $ billion. General obligation rat-
ings 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 , average personal income
was $ and the unemployment rate was %. Florida's economy is based
primarily on the service sector, which includes tourism. 1995 general fund
revenues were $ billion against expenditures of $ 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 , average personal income
was $ and the unemployment rate was %. 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 $ billion against expenditures of
$ billion. General obligation ratings are Aaa by Moody's, AA+ by Standard
& Poor's and AAA by Fitch.
KANSAS - In 1995, Kansas population was , average personal income was
$ and the unemployment rate was %. Kansas' economy is based primarily
on agriculture. 1995 general fund revenues were $ billion against expendi-
tures of $ 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 , average personal income
was $ and the unemployment rate was %. Kentucky's economy is based
primarily on trade. 1995 general fund revenues were $ billion against ex-
penditures of $ billion. General obligation ratings 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 , average personal in-
come was $ and the unemployment rate was %. Louisiana's economy is
based primarily on services. 1995 unaudited general fund revenues were $
billion against expenditures of $ billion. General obligation ratings are
Baa1 by Moody's and A by Standard & Poor's.
MICHIGAN - In 1995, Michigan population was , average personal income
was $ and the unemployment rate was %. Michigan's economy is based
primarily on services. Projected 1995 general fund revenues were $ bil-
lion against expenditures of $ 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 , average personal income
was $ and the unemployment rate was %. Missouri's economy is based
primarily on services. 1995 general fund revenues were $ billion against
expenditures of $ 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 , average personal
income was $ and the unemployment rate was %. New Jersey's economy is
based primarily on services. Projected 1995 general fund revenues were $
billion against expenditures of $ billion. General obligation 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 , average personal
income was $ and the unemployment rate was %. New Mexico's economy is
based primarily on services. 1995 unaudited general fund revenues were $
billion against expenditures of $ billion. General obligation ratings are
Aa by Moody's and AA+ by Standard & Poor's.
NEW YORK - In 1995, New York population was , average personal in-
come was $ and the unemployment rate was %. New York's economy is
based primarily on services. 1995 general fund revenues were $ billion
against expenditures of $ billion. General obligation ratings are A by
Moody's and A- by Standard & Poor's.
NORTH CAROLINA - In 1995, North Carolina population was , average
personal income was $ and the unemployment rate was %. North Caroli-
na's economy is based primarily on . 1995 general fund revenues were
$ billion against expenditures of $ billion General obligation rat-
ings 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.
NORTH DAKOTA - In 1995, North Dakota population was , average per-
sonal income was $ and the unemployment rate was %. North Dakota's
economy is based primarily on . 1995 general fund revenues were
$ billion against expenditures of $ billion
OHIO - In 1995, Ohio population was , average personal income was
$ and the unemployment rate was %. Ohio's non-farming economy is
based primarily on services. 1995 general fund revenues were $ billion
against total expenditures of $ 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.
OKLAHOMA - In 1995, Oklahoma population was , average personal in-
come was $ and the unemployment rate was %. Oklahoma's economy is
based primarily on . 1995 general fund revenues were $ billion
against total expenditures of $ billion.
PENNSYLVANIA - In 1995, Pennsylvania population was , average per-
sonal income was $ and the unemployment rate was %. Pennsylvania's
economy is based primarily on services. Projected 1995 general fund revenues
were $ billion against total expenditures of $ 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
-- 13 --
<PAGE>
political subdivisions, the United States, Puerto Rico, the U.S. Virgin Is-
lands or Guam; and (ii) the Pennsylvania personal property tax on shares to
the extent that the Fund's portfolio consists of such obligations.
RHODE ISLAND - In 1995, Rhode Island population was , average per-
sonal income was $ and the unemployment rate was %. Rhode Island's
economy is based primarily on . 1995 general fund revenues were $
billion against expenditures of $ billion.
SOUTH CAROLINA - In 1995, South Carolina population was , average
personal income was $ and the unemployment rate was %. South Caroli-
na's economy includes a very diversified economic base. Continued growth is
expected in the service industries, particularly tourism and manufacturing.
1995 general fund revenues were $ billion against expenditures of $
billion. General obligation ratings are Aaa by Moody's, AA+ by Standard &
Poor's and AAA by Fitch.
TENNESSEE - In 1995, Tennessee population was , average personal income
was $ and the unemployment rate was %. Tennessee's economic base is
reasonably well diversified, with services the largest employment sector. 1995
general fund revenues were $ billion against expenditures of $ bil-
lion. 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.
TEXAS - In 1995, Texas population was , average personal income was
$ and the unemployment rate was %. Texas' economy is based primarily
on . 1995 general fund revenues were $ billion against expendi-
tures of $ billion.
VIRGINIA - In 1995, Virginia population was , average personal income
was $ and the unemployment rate was %. Virginia's economy remains
strong and diversified. Budgeted 1995 general fund revenues were $ bil-
lion against expenditures of $ billion. General obligation ratings are
Aaa by Moody's, AAA by Standard & Poor's and AAA by Fitch.
WISCONSIN - In 1995, Wisconsin population was , average personal in-
come was $ and the unemployment rate was %. Wisconsin's economy is
based largely on services. 1995 general fund revenues were $ billion
against expenditures of $ 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. It seeks the highest current income of all the National Tax Exempt
Funds.
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
policy applicable to a specific security. Neither a Fund's value nor any of
its securities is insured by the Federal De-
-- 14 --
<PAGE>
posit Insurance Corporation. A Fund may also own municipal securities where
such payments are guaranteed by an agency or instrumentality of the U.S. Gov-
ernment; 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 secu-
rities that are rated within the highest 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 securities 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 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 Director of the Manager and the Dis-
tributor. In accordance with the terms of separate Investment Advisory Agree-
ments with each Fund (the "Advisory Agreements"), the Manager renders invest-
ment supervisory and corporate administrative 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 responsibility of the Manager to make invest-
ment 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
Vice President Vice President Vice President Vice President
- -------------------- ------------------------------------------ ----------------------- ------------------
<S> <C> <C> <C> <C>
Arizona Alabama Insured Limited* All-American North Carolina
California* California Intermediate* Kansas Connecticut Ohio
Colorado Florida Michigan Kentucky South Carolina
Intermediate (a) Florida Intermediate (a) Missouri Kentucky Limited Tennessee
Louisiana Georgia U.S. Territories* Limited Term
New Mexico Insured* Wisconsin New Jersey
North Dakota* Insured Intermediate* New Jersey Intermediate
Oklahoma* New York
Texas* Pennsylvania
Rhode Island*
Short Term*
Virginia
</TABLE>
(a) Fund is managed jointly with Paul Brennan.
*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 Kentucky Ltd. Ohio
Arizona Louisiana Pennsylvania
Colorado Michigan South Carolina
Connecticut Missouri Tennessee
Florida New Jersey Virginia
Florida Int. New Jersey Int. Wisconsin
Georgia New Mexico All-American
Kansas New York Intermediate
Kentucky North Carolina Limited Term
</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 $ 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 $
billion and to Flagship Admiral Funds Inc., an investment company with assets
of approximately $ 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 Y
Shares are designed for institutional investors, with a minimum initial in-
vestment of $1,000,000. The Y 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 Y 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 Y 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 Y 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 1.00% annual distribution fee (0.75% 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 0.25% 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 3.75% (2.25%-intermediate; 1.75%-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 Y SHARES
Class Y Shares are for institutional investors only and are sold at net asset
value with no sales charge or distribution fee. The Class Y Shares have no
conversion feature.
-- 17 --
<PAGE>
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 such further quantity
discount). The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase of the dollar amount of the total 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 differ-
ence 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 difference in sales charge is not paid, Flagship is hereby au-
thorized to redeem an appropriate number of shares to realize such difference.
Flagship Funds Inc. is hereby irrevocably constituted under this Letter of In-
tent 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.
-- 18 --
<PAGE>
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 .
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 exchange plan. Please refer to the account application to es-
tablish 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.
-- 19 --
<PAGE>
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 tax, such Funds will be able to designate and
pay "exempt-interest dividends" to the extent of its tax-exempt interest in-
come (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, in-
cluded in determining what portion, if any, of a person's social security ben-
efits will be includable in gross income subject to federal income tax. Inter-
est with respect to indebtedness incurred 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-interest dividends of the Fund. Similarly,
investment and other shareholder expenses allocable to such exempt-interest
dividends generally are not deductible. Any dividends paid by a 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 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 regardless of the length of time you have owned shares.
-- 20 --
<PAGE>
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 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,
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.
-- 21 --
<PAGE>
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 1.00% (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
0.25% 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 % per day (1.00% 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 Y 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.
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 fore-
-- 22 --
<PAGE>
going sentence make the likelihood of such personal liability 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 Securities and Exchange Commission ("SEC") under
the Securities Act of 1933 and the 1940 Act with respect to the securities of-
fered hereby, certain portions of which have been omitted according to the
rules and regulations of the SEC. The Registration Statement including the ex-
hibits 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
NOTE: You must complete Sections 1, CHECK TO:
2, 3, 4, 5 and sign the signature Flagship Funds
line. Your signature is required c/o Boston Financial
for processing. Complete sections P.O. Box 8509
7, 8, 9, 10, 11 and 12 for optional Boston, MA 02266-8509
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** B C*** Y
<S> <C> <C> <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)
---
$
-----------------
Amount ($50 Minimum)Month to Begin Plan__________________________________
------------------------------------------------------------------------------
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
--- -------- -------
State
Zip 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 __________________________________________________________
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
--- -------- -------
State
Zip 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
--- -------- -------
State
Zip Code
SIGNATURE(S)
Under the penalties of perjury, I/we certify that the information provided on
this form is true, correct, and complete. The undersigned certify that I/we
have full authority and legal capacity to purchase, exchange or redeem shares
of the above named Fund(s) and affirm that I/we have received and read a 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
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 Objectives............................................... 2
What the Fund Owns and Its Strategies..................................... 2
Special Considerations and Risk Factors Regarding Medium and Lower Grade
Municipal Securities..................................................... 5
How the Fund is Managed................................................... 6
ABOUT YOUR INVESTMENT
How to Buy Shares......................................................... 7
How to Sell Shares........................................................ 8
How to Exchange Shares.................................................... 9
Shareholder Services...................................................... 9
How Fund Shares are Priced................................................ 10
Taxes..................................................................... 10
Distributions and Yield................................................... 11
About the Distributor..................................................... 12
About the Trust........................................................... 12
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.
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.
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
-- 1 --
<PAGE>
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 PRIN-
CIPAL. 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.
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 Y 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 Y 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
"About the Distributor" and "How The Fund is Managed", respectively.
<TABLE>
<CAPTION>
EXAMPLE OF EXPENSES
AN INVESTOR IN THE FUND WOULD
PAY THE FOLLOWING DOLLAR AMOUNT
OF EXPENSES ON A $1,000
ANNUAL FUND OPERATING EXPENSES AS A INVESTMENT ASSUMING
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS (1) 5% ANNUAL RETURN AND
TRANSACTION AFTER FEE WAIVERS & REIMBURSEMENT (2) REDEMPTION AT THE END
EXPENSE ARRANGEMENTS 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 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A 4.2% N/A% 0.25% 0.40% 0.30% 0.95% % $51 $71 $92 $154
B
C
Y
</TABLE>
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 OBJECTIVES
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 STRATEGIES
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 iden-
-- 2 --
<PAGE>
tified revenue source. Obligations of territories and possessions of the
United States (such as Puerto Rico, 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 invest in
such funds when it believes their yields are beneficial, even including multi-
ple 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, comparably rated short-term municipal obligations and municipal secu-
rities determined by the Manager to be of comparable quality. Municipal secu-
rities rated BBB by S&P generally are regarded by S&P as having an adequate
capacity to pay interest and repay principal; adverse economic conditions 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 gener-
ally are considered by Moody's as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. In Moody's view, interest pay-
ments and principal security appear adequate for the present but certain pro-
tective elements may be lacking or may be characteristically unreliable over
any great length of time. In Moody's view, such securities lack outstanding
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
-- 3 --
<PAGE>
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-exempt 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 ob-
ligations. The value of a portfolio of fixed income securities generally fluc-
tuates inversely with changes in interest rates. When interest rates increase,
the value of fixed income securities 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 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.
-- 4 --
<PAGE>
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 grade munici-
pal securities and adversely affect the market value of such securities. Such
events also could lead to a higher incidence of defaults by issuers of medium
and lower grade municipal securities as compared with historical default
rates. In addition, changes in interest rates and periods of economic uncer-
tainty 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 perceptions,
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 inter-
est 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.
-- 5 --
<PAGE>
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, 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 the Flagship Funds (which includes the Fund).
Before any security may be considered for purchase, it must pass the scrutiny
and receive the approval of Credit Research Department analysts. Implementa-
tion, trading, and temporary modification of each Fund's strategy is the func-
tion of a small team of portfolio managers who support each other. Because of
the special risk considerations of the Fund, it will be managed by a team com-
posed of two senior Credit Research Department employees and two senior port-
folio managers. The team will be led by Terry Trim, Vice President and Direc-
tor of Credit Research, Brian Ehlers, Vice President Credit Analysis, and
portfolio managers Michael Davern and Richard Huber.
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 $ 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 $
billion and to Flagship Admiral Funds Inc., an investment company with assets
of approximately $ 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 Y Shares are
designed for institutional investors, with a minimum initial investment of
$1,000,000. The Y 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 Y 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 Y 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 Y 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 1.00% 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 0.25% 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 3.75% 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 Y SHARES
Class Y Shares are for institutional investors only and are sold at net asset
value with no sales charge or distribution fee. The Class Y Shares have no
conversion features.
-- 7 --
<PAGE>
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 dollar amount of the total purchase. If the total purchases less
redemptions are less than the amount specified under this Letter, the share-
holder 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 pur-
chases 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
difference in sales charge is not paid, Flagship is hereby authorized to re-
deem 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 ef-
fect 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.
-- 8 --
<PAGE>
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 under "Additional
Information".
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. Any Class Y Shares which have been registered for at
least 15 calendar days may be exchanged for Class Y Shares of any other Fund
(or series thereof) distributed by the Distributor which are offered to insti-
tutional investors on a similar no-fee, no-load basis.
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.
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.
-- 9 --
<PAGE>
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 "exempt-interest dividends" to the extent of its tax-exempt interest
income (less any allocable expenses). Such dividends will be treated as inter-
est excludable from gross income for federal income tax purposes in the hands
of the shareholders of the Fund. Exempt-interest dividends are, however, in-
cluded in determining what portion, if any, of a person's social security ben-
efits will be includable in gross income subject to federal income tax. Inter-
est with respect to indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible to the extent that, un-
der regulations, it relates to exempt-interest dividends of the Fund. Similar-
ly, investment and other shareholder expenses allocable to such exempt-inter-
est dividends 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
shareholders of the Fund as ordinary income. Capital gain distributions, which
are designated as distributions of the Fund's net capital gain (i.e., the ex-
cess 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 mini-
-- 10 --
<PAGE>
mum tax on the portion of exempt-interest dividends derived from such obliga-
tions. The Fund will provide information concerning the tax status of its dis-
tributions, including the amount of its dividends designated as exempt-inter-
est dividends and as capital gain dividends, and any applicable state tax in-
formation.
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.
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.
-- 11 --
<PAGE>
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 Flagship Funds Inc. (the "Distributor"), which has the same ad-
dress as the Manager. Accordingly, the Distributor serves as the exclusive
selling agent and distributor of the Fund's shares, and in that capacity will
make a continuous offering of the shares 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 1.00% (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
0.25% 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 % per day (1.00% 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 or
Class C Shares, the Flagship funds will periodically pay for similar activi-
ties 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.
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 fore-
-- 12 --
<PAGE>
going sentence make the likelihood of such personal liability 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 Securities and Exchange Commission ("SEC") under
the Securities Act of 1933 and the 1940 Act with respect to the securities of-
fered hereby, certain portions of which have been omitted according to the
rules and regulations of the SEC. The Registration Statement including the ex-
hibits 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
NOTE: You must complete Sections 1, CHECK TO:
2, 3, 4, 5 and sign the signature Flagship Funds
line. Your signature is required c/o Boston Financial
for processing. Complete sections P.O. Box 8509
7, 8, 9, 10, 11 and 12 for optional Boston, MA 02266-8509
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
A [_] B [_] C [_] Y [_]
*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 _________________________________
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 North Dakota Tax Exempt Fund
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 Oklahoma Tax Exempt Fund
Flagship Pennsylvania Triple Tax Exempt Fund--Class A Shares
Flagship Pennsylvania Triple Tax Exempt Fund--Class C Shares
<PAGE>
Flagship Rhode Island Double Tax Exempt Fund
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 Texas Tax Exempt Fund
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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 4
Shares of the Fund......................................................... 6
Officers and Trustees...................................................... 7
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>
3
<PAGE>
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
Prospectus), none of which may be changed with respect to any series of the
Fund designated 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. Government
or any of its instrumentalities, if immediately after such purchase more than
5% of the value of its total assets would be invested in such issuer, or if all
series of the Fund would own in the aggregate more than 10% of the outstanding
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
securities the series may invest in would be considered to be such loans,
securities, contracts or interests and except to the extent the various hedging
instruments the series may invest in would be considered to be commodities or
commodities contracts.
(6) Acquire securities of other investment companies (other than in
connection 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
connection with disposition of portfolio securities it may be deemed to be an
underwriter.
(8) Purchase securities on margin, make short sales of securities or maintain
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 considered to
involve short sales or a net short position.
(9) Invest more than 25% of its assets in a single industry. However, as
described 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
addition, each series has made a commitment, although not a fundamental policy,
to not purchase warrants.
Portfolio Turnover. Although the Fund anticipates that the portfolio turnover
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
investment 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
administrative burdens and transaction costs normally involved in direct
purchases of tax exempt obligations. For instance, investors do not have to
keep
4
<PAGE>
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.
5
<PAGE>
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 Y 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 Y Shares is expected to be
substantially the same, but it may differ from time to time. Class B, Class C
and Class Y 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
6
<PAGE>
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)
1.00% for any fund with other than a short term or limited term maturity, of
which 0.75% is an asset based sales charge and 0.25% is a service fee or (b)
for any fund with a short term or limited term maturity, an ongoing distribu-
tion services fee of 0.75%, of which 0.50% is an asset based sales charge and
0.25%, 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 Y Shares. Class Y Shares will be offered only to institutional invest-
ors, at a price equal to net asset value. No front-end or deferred sales
charge is imposed on Class Y Shares. Additionally, Class Y Shares are not sub-
ject to a Rule 12b-1 distribution fee. Net asset value will be determined as
described in the Prospectus under "Net Asset Value." The Class Y Shares have
no conversion feature, and they can only be exchanged for other Class Y
Shares.
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.
7
<PAGE>
The "interested" trustees of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act") are indicated by an asterisk (*).
<TABLE>
<CAPTION>
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, Marketing Sales & Product
227 E. Dixon Avenue Development, ChoiceCare; prior to March 1993, Vice
Dayton, Ohio 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March 1991, Partner, Hooper & Nezi, a marketing
and communications firm.
William J. Schneider 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)
-------------- --------------- ----------------------
<S> <C> <C>
Robert P. Bremner $14,500 $20,500 (4)
Trustee
Joseph F. Castellano $13,500 $19,500 (4)
Trustee
William J. Schneider $14,000 $20,000 (4)
Trustee
Paul F. Nezi $14,000 $20,000 (4)
Trustee
</TABLE>
8
<PAGE>
As of , 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 %
1234 Champaign Ave.
Anniston, AL 36207
J.C. Bradford & Co. Cust. FBO %
Edward L. Turner Jr.
330 Commerce St.
Nashville, TN 37201
PaineWebber %
FBO Jamie B. McGuire
202 Bristol Ct.
Florence, AL 35630
Kansas Fund PaineWebber %
FBO Sonya & Leonard Ropfogel, Trustees
155 N. Market, Suite 1000
Wichita, KS 67202
Kentucky Limited Term Fund Prudential Securities %
FBO Bluegrass Contracting Corp.
c/o Charles R. Denham
P.O. Box 11638
Lexington, KY 40576
Louisiana Fund Edward D. Jones & Co. %
F/A/O Earl K. Rush
P.O. Box 2500
Maryland Heights, MO 63043
Edward D. Jones & Co. %
F/A/O R. Lynn Lanoux
P.O. Box 2500
Maryland Heights, MO 63043
South Carolina Fund Janece Marsha Garrison %
1017 Stevens Creek Road
Augusta, GA 30907
Joseph Christopher Garrison %
1017 Stevens Creek Road
Augusta, GA 30907
James G. McMillan %
16 Spring Hill Ct.
Bluffton, SC 29910
</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, Limited Term 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, Tennes-
see 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 Manager's du-
ties as investment adviser. The Manager's administrative obligations include:
(i) assisting in supervising all aspects of
9
<PAGE>
the Fund's operations; (ii) providing the Fund, at the Manager's expense, with
the services of persons competent to perform such administrative and clerical
functions as are necessary in order to provide effective corporate administra-
tion; and (iii) providing the Fund, at the Manager's expense, with adequate of-
fice 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; February 2,
1987, with respect to the Colorado, Connecticut, Kentucky and Missouri series;
July 20, 1987 with respect to the New York, Florida, Louisiana, New Jersey, and
Tennessee series; June 15, 1990, with respect to the Kansas series; May 15,
1992, with respect to the Intermediate, New Jersey, New Jersey Intermediate,
Pennsylvania and New Mexico series; June 15, 1992, with respect to the Alabama,
Florida Intermediate and South Carolina series; and February 4, 1994 with re-
spect to the Wisconsin series; the Manager is paid a fee, computed daily and
payable monthly with respect to each series on a separate basis, at an annual
rate of .50% of the average daily net assets of such series. As compensation
for the services rendered 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
Colorado -- --
Connecticut 255,441 396,094
Florida 314,749 633,336
Florida Intermediate -- --
Georgia 165,095 287,399
Kansas -- --
Kentucky 294,356 559,150
Kentucky Limited
Louisiana 24,821 96,442
Michigan 645,194 729,008
Missouri 107,595 244,965
New Jersey -- --
New Jersey Intermediate -- --
New Mexico -- 17,972
New York -- --
North Carolina 676,431 675,473
Ohio 1,901,128 1,926,295
Pennsylvania 104,513 58,095
South Carolina -- --
Tennessee 548,942 776,025
Virginia 133,981 211,367
Wisconsin -- --
<CAPTION>
National Series
- ---------------
<S> <C> <C> <C>
All-American 267,846 420,954
Intermediate -- --
Limited Term 1,313,071 1,369,218
---------- ---------- ----------
TOTAL $6,798,798 $8,523,825
========== ========== ==========
</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
Arizona 377,569 277,079
Colorado 162,901 169,048
Connecticut 768,360 615,631
Florida 1,676,047 1,093,473
Florida Int. 2,503 19,498
Georgia 421,674 321,940
Kansas 425,046 404,085
Kentucky 1,521,748 1,357,696
Kentucky Limited
Louisiana 290,721 240,777
Michigan 653,131 626,290
Missouri 779,519 726,130
New Jersey 18,392 31,524
New Jersey Intermediate 40,542 45,333
New Mexico 225,840 226,715
New York 215,688 236,428
North Carolina 290,321 289,460
Ohio 404,687 375,587
Pennsylvania 111,454 164,423
South Carolina 23,928 37,587
Tennessee 597,902 442,963
Virginia 404,880 351,513
Wisconsin -- 22,083
National Series
All-American 753,169 632,023
Intermediate 146,230 187,583
Limited Term 657,881 458,100
----------- ---------- --------
TOTAL $10,970,240 $9,357,823
=========== ========== ========
</TABLE>
Also, under separate agreements with the following Funds, for the period
ended May 31, 1996, Manager agreed to subsidize certain expenses as set forth
below. The Manager is not obligated to subsidize such expenses and may not do
so in the future, although the Manager expects such reimbursement will con-
tinue until these funds reach a sufficient size to maintain a normal expense
ratio to net assets.
<TABLE>
<CAPTION>
AMOUNT
SUBSIDIZED
5/31/96
----------
<S> <C>
State Series
- ------------
Alabama $ 65,116
Colorado 52,140
Florida Intermediate 98,946
Kansas 13,950
New Jersey 73,895
New Jersey Intermediate 56,229
New Mexico 15,300
New York 138,257
South Carolina 72,306
Wisconsin 62,467
National Series
- ---------------
Intermediate 71,839
--------
Total $720,445
========
</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
terminable 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
series, 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, $69,100 for the Limited Term series, $83,600
for the Missouri series, $72,000 for the Louisiana series, $285,000 for the
Florida series, $257,000 for the New York series, $42,800 for the Kansas
series, $58,900 for the New Jersey series, $32,200 for the New Jersey
Intermediate series, $51,700 for the New Mexico series, $30,700 for the
Intermediate series, $35,400 for the South Carolina series, $27,400 for the
Florida Intermediate series, $60,800 for the Alabama series, and $98,100 for
the Wisconsin series.
The expenses are being reimbursed to the Manager by uniform pro rata
deductions 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
respect to the Florida, Louisiana, Limited Term, 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 June 1, 1994, with respect to the
Intermediate Series.
The Manager has agreed that in the event the operating expenses of the series
(including fees paid to the Manager and payments to the Distributor but
excluding taxes, interest, brokerage and extraordinary expenses) for any fiscal
year ending on a date on which the related Advisory Agreement is in effect,
exceed the expense limitations imposed by applicable state securities laws or
any regulations thereunder, it will, up to the amount of its fee, reduce its
fee or reimburse the 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
investments 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
advisory 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
Distributor 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.
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
12
<PAGE>
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 except to the extent it contravenes established legal authority.
Without in any way limiting the discretion of the trustees, the following ac-
tivities are hereby declared to be primarily intended to result in the sale of
shares of the Fund: advertising the Fund or the Fund's investment adviser's
mutual fund activities; compensating underwriters, dealers, brokers, banks and
other selling entities and sales and marketing personnel of any of them for
sales of shares of the Fund, whether in a lump sum or on a continuous, period-
ic, contingent, deferred or other basis; compensating underwriters, dealers,
brokers, banks and other servicing entities and servicing personnel (including
the Fund's investment adviser and its personnel of any of them for providing
services to shareholders of the Fund relating to their investment in the Fund,
including assistance in connection with inquiries relating to shareholder 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 1.00% 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
% per day (1.00% 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>
COMPENSATION UPFRONT ADVERTISING & SALARIES &
CLASS TO BROKERS COMMISSIONS PROMOTIONS BENEFITS OTHER TOTAL
------ ------------ ----------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
State Se-
ries
Alabama
Arizona A
C
Colorado
Connecticut A
C
Florida A
C
Florida
Int. A
C
</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
C
Kansas
Kentucky A
C
Kentucky Lim-
ited A
C
Louisiana A
C
Michigan A
C
Missouri A
C
New Jersey
New Jersey
Intermediate
New Mexico
New York A
C
N. Carolina A
C
Ohio A
C
Pennsylvania A
C
South
Carolina
Tennessee A
C
Virginia A
C
Wisconsin
National
Series
- --------
All-American A
C
Intermediate A
C
Limited Term A
C
</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 Y 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
Arizona 743,600 84,700 226,600 31,400
Colorado 326,900 43,800 95,400 13,300
Connecticut 1,033,000 137,900 446,500 59,500
Florida 2,135,700 296,700 882,000 111,900
Florida In-
termediate 24,400 -- 23,300 3,200
Georgia 945,300 127,200 347,400 46,900
Kansas 1,400,000 185,200 384,000 51,100
Kentucky 3,192,800 423,600 1,304,200 174,100
Kentucky Lim-
ited
Louisiana 575,400 71,400 246,500 31,500
Michigan 1,222,500 139,300 593,700 80,600
Missouri 2,103,300 278,200 892,200 119,700
New Jersey 112,100 10,800 115,700 14,700
New Jersey
Intermediate 117,500 20,400 30,800 5,600
New Mexico 646,900 85,500 191,100 28,400
New York 596,817 69,217 242,700 31,800
N. Carolina 1,076,400 146,300 438,500 46,900
Ohio 2,337,100 274,500 1,065,900 141,100
Pennsylvania 173,900 20,000 118,700 15,300
S. Carolina 111,100 6,100 44,300 5,700
Tennessee 2,123,600 284,800 845,900 113,400
Virginia 677,600 88,700 381,200 49,800
Wisconsin 272,200 23,800
National Se-
ries
All-American 1,188,000 161,798 763,400 104,100
Intermediate 460,600 89,100 171,100 34,400
Limited Term 4,055,400 818,100 797,200 160,100
----------- ---------- ----------- ----------
TOTAL $27,394,417 $3,863,315 $10,961,300 $1,503,900
=========== ========== =========== ==========
</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
Connecticut 800 5,900
Florida
Florida Intermedi-
ate 400 1,200
Georgia 600 7,300
Kentucky 5,900 6,900
Kentucky Limited
Louisiana 200 1,300
Michigan 10,500 20,400
Missouri 100 2,700
New York
North Carolina 400 4,500
Ohio 11,600 7,800
Pennsylvania 100 800
Tennessee 3,900 16,300
Virginia 1,200 9,600
National Series
- ---------------
All-American 26,000 31,500
Intermediate
Limited Term
------- -------- -------
TOTAL $61,700 $120,200
======= ======== =======
</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 public accountants 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 ei-
ther 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 of-
fering 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 measure-
ment period (including appropriate adjustments for accretion of original 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 order to equal the
same after-tax return. As appropriate, the tax equivalent yield may reflect ex-
emption from federal and/or state income taxes, as well as property and/or in-
tangible 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 av-
erage 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 ap-
plicable 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 Municipal Bond Funds
under "Short (1-5 Yr.) Municipal Bond Funds," "Intermediate (5-10 Yr.) Munici-
pal 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; Wei-
senberger Investment Companies Service's annual Investment Companies under "Mu-
tual Fund Tax Exempt Bond Funds"; or Morningstar, Inc.'s Mutual Fund Values un-
der "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 Y 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 April 11, 1994
Arizona A October 29, 1986
C February 7, 1994
Colorado May 4, 1987
Connecticut A July 13, 1987
C October 4, 1993
Florida A June 15, 1990
C September 14, 1995
Florida Interme-
diate A February 1, 1994
C February 2, 1994
Georgia A March 27, 1986
C January 4, 1994
Kansas January 9, 1992
Kentucky A May 4, 1987
C October 4, 1993
Kentucky Limited A September 14, 1995
C September 14, 1995
Louisiana A September 12, 1989
C February 2, 1994
Michigan A June 27, 1985
C June 22, 1993
Missouri A August 3, 1987
C February 2, 1994
New Jersey September 16, 1992
New Jersey
Intermediate September 16, 1992
New Mexico September 16, 1992
New York A January 16, 1991
C March 4, 1996
North Carolina A March 27, 1986
C October 4, 1993
Ohio A June 27, 1985
C August 3, 1993
Pennsylvania A October 29, 1986
C February 2, 1994
South Carolina July 6, 1993
Tennessee A November 2, 1987
C October 4, 1993
Virginia A March 27, 1986
C October 4, 1993
Wisconsin June 1, 1994
National Funds
- --------------
All-American A October 3, 1988
C June 2, 1993
Intermediate A September 15, 1992
C December 1, 1995
Limited Term A October 19, 1987
C 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 re-
garding the Fund from their broker/dealer, then all dividends are automatically
paid in cash unless the shareholder instructs their broker/dealer to implement
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, utility, or U.S.
Government fund account which has an identical registration and tax
identification number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via automated clearing house
into a bank account. 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 be-
low.
1. Cumulative Purchase Discount (Class A Shares Only). Whenever an individual
shareholder purchases Class A Shares of any series of the Fund, such individual
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 Distrib-
utor and any current purchases of Class A Shares to determine the applicable
sales charge. A reduced sales charge will be imposed if the aggregate amount
qualifies under the rate schedule. An individual 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 ap-
plicable sales charge, trusts and other fiduciaries may aggregate the holdings
of each trust estate or other fiduciary account in the same fashion even if the
beneficiaries are unrelated. Any 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 Distributor in order to
qualify for a reduced sales charge on any particular purchase.
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 sufficient to
qualify for a reduced sales charge. A single letter may be used for spouses,
their children and parents or any single trust estate or other fiduciary ac-
count. All investments in Class A Shares of the Fund or in Class A Shares of
any other open-end mutual fund subject to a front-end sales charge distributed
by the Distributor count toward the indicated goal. Once the Distributor re-
ceives 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 sin-
gle purchase of the total amount indicated in the letter. During the period
covered by the letter of intent, 5% of the shares purchased will be restricted
until
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 "Y" Share or a share class similar in all material respects to Flag-
ship's Class Y Shares or (iii) a Unit Investment Trust.
6. Wrap Fee Accounts (Class A or Class Y 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, U.S. Government, 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 calcu-
lated after your request and any other materials are received and your entitle-
ment to any prior day's redemption price must be settled between you and your
dealer. Your dealer may charge a service fee for handling your redemption re-
quest.
If you meet the requirements stated below, you may redeem shares by telephone
toll free at 800-225-8530.
If you request payment by wire, proceeds will be sent by wire to a previously
designated bank or trust company account normally on the next business day Bos-
ton 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 re-
quest 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 redemp-
tion proceeds should be sent. Any change in the account designated to receive
the proceeds must be submitted in proper form on a new Application Form with
signature guaranteed (see "Ordinary Redemption" for guaranty requirements).
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 received
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 pe-
riod as set by regulation following receipt of the redemption request in proper
form. Proceeds of redemptions of recently purchased shares may be delayed for
15 days or more, pending collection of funds for the initial purchase. For re-
demption 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 redemption re-
quest must be guaranteed by a commercial bank, trust company, savings 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 certain instances,
Boston Financial may request additional documentation which it believes neces-
sary 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 deter-
mined 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 rea-
sonably practicable, or for such other periods as the Commission by order per-
mits.
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 unwise,
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 redemption
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 account is
less than the minimum amount and will be allowed 30 days to make an additional
investment in an amount which will increase the value of his holdings in such
series to at least $1,000. Accounts with balances of less than $25 will be re-
deemed without written notice. No CDSC will be imposed on involuntary redemp-
tions.
Shares purchased other than by Federal Funds wire or bank wire may not be re-
deemed by telephone until 15 calendar days after the purchase of such shares
but may be redeemed pursuant to the ordinary redemption procedure during such
period.
PRICE
The public offering price is based on net asset value and includes the appli-
cable sales charge. Because the Fund determines net asset value for each 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 be-
tween you and your dealer. Similarly, if your dealer fails to provide timely
payment (normally five business days after the order is received), the Distrib-
utor may sell the shares to other investors at the then current offering price.
If the Distributor does so, the dealer will be responsible to the Distributor
for any loss which the Distributor incurs in connection with the transaction,
and you must settle with your dealer your rights to shares at the price on the
day you ordered them.
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 "reg-
ulated 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 cer-
tain other income (including but not limited to gains from options, futures and
forward contracts) derived with respect to its business of investing 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 following assets held
for less than three months: (a) stock or securities, (b) options, futures or
forward contracts on stock or securities, or (c) foreign currencies (or foreign
currency options, futures or forward contracts) not directly 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 as-
sets is represented by cash, U.S. Government securities, securities of other
regulated investment companies and other securities (for this purpose, such
other securities will qualify only if the Fund's investment is limited, in re-
spect 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 invested in securities of any one is-
suer (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 political subdivisions, it may be more
difficult for a series to comply with the above-mentioned diversification re-
quirements 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, U.S.
Government, 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 exchanged 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 Substitute Fund which are sold pursuant to a deferred sales charge ar-
rangement in any state where such exchange may legally be made. Any Class Y
Shares may be exchanged for any other series of Class Y Shares. Shares must be
on deposit at the transfer agent before the exchange can be made. Before ef-
fecting an exchange, a shareholder should obtain and read a current prospectus
of the Substitute 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-10
Flagship Arizona Double Tax Exempt Fund.................................. F-24
Flagship Colorado Double Tax Exempt Fund................................. F-37
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-78
Flagship Intermediate Tax Exempt Fund.................................... F-91
Flagship Kansas Triple Tax Exempt Fund................................... F-100
Flagship Kentucky Triple Tax Exempt Fund and Flagship Kentucky Limited
Term Municipal Bond Fund................................................ F-109
Flagship Limited Term Tax Exempt Fund.................................... F-125
Flagship Louisiana Double Tax Exempt Fund................................ F-144
Flagship Michigan Triple Tax Exempt Fund................................. F-155
Flagship Missouri Double Tax Exempt Fund................................. F-168
Flagship New Jersey Intermediate Tax Exempt Fund and Flagship New Jersey
Double Tax Exempt Fund.................................................. F-183
Flagship New Mexico Double Tax Exempt Fund............................... F-199
Flagship New York Tax Exempt Fund........................................ F-208
Flagship North Carolina Double Tax Exempt Fund........................... F-217
Flagship Ohio Double Tax Exempt Fund..................................... F-230
Flagship Pennsylvania Triple Tax Exempt Fund............................. F-246
Flagship South Carolina Double Tax Exempt Fund........................... F-257
Flagship Tennessee Double Tax Exempt Fund................................ F-265
Flagship Virginia Double Tax Exempt Fund................................. F-278
Flagship Wisconsin Double Tax Exempt Fund................................ F-291
</TABLE>
F-1
<PAGE>
APPENDIX I
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group rating symbols and their meanings (as
published by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II.Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
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
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
I-1
<PAGE>
2. 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
follows:
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
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such issues. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by
money market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
Securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of
oversupply in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to A-rated bonds may be influenced
to some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
I-2
<PAGE>
Baa--Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments but certain protective elements may be lacking or may be
characteristically unreliable of over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The market value of Baa-rated bonds is more sensitive
to change in economic circumstances, and aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa, and A obligations during periods of economic normalcy,
except in instances of oversupply.
Ba-C--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class. Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. Bonds which are rated C are
the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 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
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit status upon
completion of construction or elimination of basis of condition.
2. 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
protection 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
excess 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
categories.
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>
<S> <C>
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'
defensive hedging techniques and use of repurchase agreements.
FUTURES AND INDEX TRANSACTIONS
Financial Futures. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. They have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a 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
additional 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 position. At closing a final determination of debits and credits is
made, additional 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'
existing 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
correlation between movements in the price of the financial futures and
movements in the price of the debt securities which are the subject of the
hedge.
Thus, if the price of the financial future moves less or more than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective. To compensate for this imperfect correlation, the series may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the
financial futures. Conversely, the series may enter into fewer financial
futures if the historical volatility of the price of the securities being
hedged is less than the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The 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
respect to financial futures on U.S. Treasury Bonds on The Chicago Board of
Trade. The purchase of put options on financial futures is analogous to the
purchase of put options by a 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
effected.
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-
exempt 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
between the index value at the close of the last trading day of the contract
and the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
Index Options. The Fund's series may also purchase put or call options on
U.S. Government or tax-exempt bond index futures and enter into closing
transactions with respect to such options to terminate an existing position.
Options on index futures are similar to options on debt instruments except that
an option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than an
underlying security at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance of the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, is less than the exercise price of the
option on the index future.
Bond index futures and options transactions would be subject to risks similar
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
agreements, 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 authorized 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 excess of $500 million and (ii) securities dealers, provided that
such banks or dealers meet the creditworthiness standards established by the
Fund's board of 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
otherwise, the series will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
series' ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the series may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the series may
suffer a loss to the extent proceeds from the sale of the underlying securities
are less than the repurchase price.
The resale price reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The collateral is marked to market daily. Such agreements
permit the Series to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
II-2
<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
(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*
- --------------------
* Previously filed.
** To be filed.
<PAGE>
(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
matters*
(b) Consent of Deloitte & Touche**
(c) Auditor's Report on Multiple Class Procedures*
(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 Schedule**
(18) Letter of Transmittal for Exchange*
(19) Power of Attorney*
(20) Application Form*
(21) Code of Ethics as amended*
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.
- ------------------
* Previously filed.
** To be filed.
C-2
<PAGE>
Item 26. Number of Holders of Securities.
-------------------------------
As of _______, 1996:
(1) (2)
Number of
Record
Title of Class Holders
-------------- -------
Shares of beneficial
interest, without
par value . . . . . . . _______
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.
C-3
<PAGE>
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.
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.
C-4
<PAGE>
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-5
<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 21st
day of June, 1996.
FLAGSHIP TAX EXEMPT FUNDS TRUST
By /s/ Richard P. Davis
---------------------------
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.
C-6
<PAGE>
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.
Signature Title Date
--------- ----- ----
/s/ Bruce Paul Bedford * Chairman and June 21, 1996
- ---------------------------- Trustee
Bruce Paul Bedford
/s/ Richard P. Davis President June 21, 1996
- ---------------------------- and Trustee
Richard P. Davis
/s/ Michael D. Kalbfleisch * Treasurer June 21, 1996
- ----------------------------
Michael D. Kalbfleisch
/s/ Robert P. Bremner * Trustee June 21, 1996
- ----------------------------
Robert P. Bremner
/s/ Joseph F. Castellano * Trustee June 21, 1996
- ----------------------------
Joseph F. Castellano
/s/ Paul F. Nezi * Trustee June 21, 1996
- ----------------------------
Paul F. Nezi
/s/ William J. Schneider * Trustee June 21, 1996
- ----------------------------
William J. Schneider
- -----------------
* Signed by Richard P. Davis pursuant to a power of
attorney.
C-7
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
---------------------------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- --------- ----------------------------------- ------
<S> <C> <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 Agree- *
ment
(a) Form of Investment Advisory Agree- *
ment for Limited Term Series
(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 **
(c) Auditor's Report on Multiple Class *
Procedures
(13) Letter of understanding relating *
to initial capital
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(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 Schedule **
(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-9
