<PAGE>
Prospectus dated September 26,
1996
FLAGSHIP TAX EXEMPT FUNDSSM
LOGO
INVESTING IN MUTUAL FUNDS
Flagship and your financial consultant want you to understand both the bene-
fits and risks of mutual fund investing.
Mutual funds sell their shares to investors and invest the proceeds in a port-
folio of securities. A mutual fund allows you to pool your money with that of
other investors in order to obtain professional investment management which
generally enables you to obtain greater diversification of your investments
and to simplify your recordkeeping.
While mutual funds offer significant opportunities, they also carry risk, in-
cluding possible loss of principal due to interest rate risk and credit risk.
Unlike savings accounts and certificates of deposit, mutual funds are not in-
sured or guaranteed by any financial institution or government agency.
Your financial consultant can help you determine how investing in one of these
mutual funds may suit your unique needs, time horizon and risk tolerance.
TABLE OF CONTENTS PAGE
ABOUT THE FUNDS
<TABLE>
<S> <C>
Fees and Expenses........................ 2
Financial Highlights..................... 4
The Funds and Their Objectives........... 9
What the Funds Own and Their Strategies.. 10
Flagship State Tax Exempt Funds.......... 11
Flagship National Tax Exempt Funds....... 14
How the Funds are Managed................ 14
ABOUT YOUR INVESTMENT
How to Buy Shares........................ 16
How to Sell Shares....................... 19
How to Exchange Shares................... 19
Shareholder Services..................... 20
How Fund Shares are Priced............... 20
Taxes.................................... 20
Distributions and Yield.................. 21
About the Distributor.................... 22
About the Trust.......................... 23
Additional Information................... 23
Flagship Application..................... 25
</TABLE>
ABOUT FLAGSHIP TAX EXEMPT FUNDS
Flagship Tax Exempt Funds Trustsm (the "Funds") is an open-end management in-
vestment company composed of separate series. As described in this Prospectus,
the Funds include State, National and Insured Fund portfolios. Each is de-
signed for individual and corporate investors with different income needs and
tax considerations. The investment adviser ("Manager") for the Funds is Flag-
ship Financial Inc., a registered investment adviser since 1978.
On July 16, 1996, Flagship Resources Inc. ("Flagship"), parent of the Manager
for the Funds, signed an Agreement and Plan of Merger with The John Nuveen
Company, pursuant to which Flagship shall be merged with and into The John
Nuveen Company. The transaction is expected to close on or about November 30,
1996. The Funds' board of trustees has approved the transaction, which is con-
tingent upon shareholder approval of new advisory agreements. It is antici-
pated that after the transaction the same management team will continue to
manage the Funds' portfolios, and there will be no material changes in portfo-
lio investment objectives or policies.
Each Tax Exempt Fund seeks high current after tax income exempt from federal
income taxes and, for those State identified funds, from the personal income
taxes or intangibles tax, if any, of the Fund's particular state, consistent
with liquidity and preservation of capital. The Funds invest primarily in
portfolios of municipal securities.
From time to time new Funds may be added. Only the All-American, Intermediate,
and Limited Term National Funds are registered and available for sale in Illi-
nois, Nebraska, New Hampshire and Washington. Other National Funds will also
be registered and available in the above states when they are offered to the
public.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. Please read and retain it for future reference.
Information concerning the Flagship High Yield Municipal Bond Fund, a nation-
al, diversified series of the Flagship Tax Exempt Funds TrustSM is also avail-
able in a separate Prospectus.
A Statement of Additional Information ("SAI") dated September 26, 1996, con-
taining more detailed information, has been filed with the Securities and Ex-
change Commission and is incorporated herein by reference, making it a part of
this Prospectus. A copy of the SAI or the Flagship High Yield Municipal Bond
Fund Prospectus can be obtained without charge by telephoning the Funds toll-
free at 1-800-414-7447, or for TDD, 1-800-360-4521.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK SELLING THE SHARES, NOR ARE THEY FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. INVESTMENT RISKS INCLUDE POSSIBLE
LOSS OF PRINCIPAL. THE VALUE OF THE INVESTMENT AND ITS RETURN WILL FLUCTUATE
AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF THE INVESTMENT MAY BE HIGHER
OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED.
<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 Flag-
ship utilizes for Class A Shares and a contingent deferred sales charge
("CDSC") for Class B and Class C Shares, and a no-fee, no-load structure for
institutional investors for Class R Shares. Class R Shares are subject to a
minimum purchase requirement
of $1,000,000. If investing for the long term, shareholders of Class B and
Class C Shares could ultimately pay more fees than if they had invested at the
maximum sales charge in Class A Shares. Class C Shares, while authorized, are
not currently offered by all Funds. Class B Shares automatically convert to
Class A Shares after eight years. The Funds' 12b-1 plan and management fee are
more fully described under "How The Funds are Managed" and "About the Distribu-
tor", respectively.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS
TRANSACTION AFTER FEE WAIVERS & REIMBURSEMENT
EXPENSE ARRANGEMENTS
<CAPTION>
EXAMPLE OF EXPENSES AN INVESTOR
IN A FLAGSHIP FUND WOULD PAY
THE FOLLOWING DOLLAR AMOUNT OF
EXPENSES ON A $1,000 INVESTMENT
ASSUMING (1) 5% ANNUAL RETURN
AND (2) REDEMPTION AT THE END
OF EACH PERIOD
--------------------------------- -----------------
TOTAL FUND
MAXIMUM MAXIMUM OPERATING
FRONT END CDSC EXPENSES
SALES IMPOSED WITHOUT
CHARGE ON MANAGE- TOTAL FUND WAIVER OR
IMPOSED ON REDEMP- MENT OTHER OPERATING REIMBURSE-
CLASS PURCHASES TIONS FEE 12B-1 FEE EXPENSES EXPENSES MENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State long-term
Funds
Alabama (a) 4.2% N/A% 0.10% 0.40% 0.10% 0.60% 3.19%
Arizona A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.07
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.63
California (b) 4.2 N/A 0.30 0.40 0.20 0.90
Colorado (a)* 4.2 N/A 0.10 0.40 0.40 0.90 1.27
Connecticut A (a)* 4.2 N/A 0.35 0.40 0.15 0.90 1.03
C (a)* N/A 1.0(c) 0.35 0.95(e) 0.15 1.45 1.58
Florida A (a)* 4.2 N/A 0.35 0.40 0.20 0.95 1.02
C (b)* N/A 1.0(c) 0.35 0.95(e) 0.20 1.50 1.55
Georgia A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.08
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.63
Kansas (a) 4.2 N/A 0.25 0.40 0.25 0.90 1.08
Kentucky A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.02
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.57
Louisiana A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.09
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.64
Michigan A (a)* 4.2 N/A 0.40 0.40 0.15 0.95 1.01
C (a)* N/A 1.0(c) 0.40 0.95(e) 0.15 1.50 1.56
Missouri A (a)* 4.2 N/A 0.35 0.40 0.20 0.95 1.05
C (a)* N/A 1.0(c) 0.35 0.95(e) 0.20 1.50 1.60
New Jersey (a) 4.2 N/A 0.20 0.40 0.10 0.70 1.63
New Mexico (a) 4.2 N/A 0.30 0.40 0.20 0.90 1.09
New York A (a)* 4.2 N/A 0.30 0.40 0.20 0.90 1.20
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.20 1.45 1.77
North Carolina A (a)* 4.2 N/A 0.45 0.40 0.10 0.95 1.03
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50 1.58
Ohio A (a)* 4.2 N/A 0.45 0.40 0.10 0.95 1.02
C (a)* N/A 1.0(c) 0.45 0.95(e) 0.10 1.50 1.56
Pennsylvania A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.13
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.68
South Carolina
(a) 4.2 N/A 0.20 0.40 0.10 0.70 1.53
Tennessee A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.01
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.56
Virginia A (a)* 4.2 N/A 0.30 0.40 0.25 0.95 1.06
C (a)* N/A 1.0(c) 0.30 0.95(e) 0.25 1.50 1.60
Wisconsin (a) 4.2 N/A 0.30 0.40 0.20 0.90 1.51
Class B Shares
(b) N/A 5.0(d) 0.40 0.95(e) 0.15 1.50
Class C Shares
(b) N/A 1.0(c) 0.40 0.95(e) 0.15 1.50
Class R Shares
(b) N/A N/A 0.40 0.00 0.15 0.55
(All state funds not
otherwise noted
above)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State long-term
Funds
Alabama (a) $48 $60 $74 $114
Arizona 51 71 92 154
25(c) 48 82 180
California (b) 51 69 N/A N/A
Colorado (a)* 51 69 90 148
Connecticut 51 69 90 148
25(c) 46 79 174
Florida 51 71 92 154
25(c) 48 82 180
Georgia 51 71 92 154
25(c) 48 82 180
Kansas (a) 51 69 90 148
Kentucky 51 69 90 148
25(c) 46 79 174
Louisiana 51 69 90 148
25(c) 46 79 174
Michigan 51 71 92 154
25(c) 48 82 180
Missouri 51 71 92 154
25(c) 48 82 180
New Jersey (a) 49 63 79 125
New Mexico (a) 51 69 90 148
New York 51 69 90 148
25(c) 46 79 174
North Carolina 51 71 92 154
25(c) 48 82 180
Ohio 51 71 92 154
25(c) 48 82 180
Pennsylvania 51 71 92 154
25(c) 48 82 180
South Carolina
(a) 49 63 79 125
Tennessee 51 71 92 154
25(c) 48 82 180
Virginia 51 71 92 154
25(c) 48 82 180
Wisconsin (a) 51 69 90 148
Class B Shares
(b) 67 92 106(d) 164
Class C Shares
(b) 25(c) 48 82 180
Class R Shares
(b) 6 18 30 68
(All state funds not
otherwise noted
above)
</TABLE>
-- 2 --
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AS A
SHAREHOLDER PERCENTAGE OF AVERAGE NET ASSETS
TRANSACTION AFTER FEE WAIVERS & REIMBURSEMENT
EXPENSE ARRANGEMENTS
<CAPTION>
EXAMPLE OF EXPENSES
AN INVESTOR IN A FLAGSHIP FUND
WOULD PAY THE FOLLOWING DOLLAR
AMOUNT OF EXPENSE ON A $1,000
INVESTMENT ASSUMING
(1) 5% ANNUAL RETURN AND
(2) REDEMPTION AT THE END
OF EACH PERIOD
--------------------------------- -------------------
TOTAL FUND
MAXIMUM MAXIMUM OPERATING
FRONT END CDSC EXPENSES
SALES IMPOSED WITHOUT
CHARGE ON MANAGE- TOTAL FUND WAIVER OR
IMPOSED ON REDEMP- MENT OTHER OPERATING REIMBURSE-
CLASS PURCHASES TIONS FEE 12B-1 FEE EXPENSES EXPENSES MENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other State Funds
California
Intermediate (b) 3.0% N/A% 0.10% 0.40% 0.20% 0.70% %
Florida
Intermediate A (a) 3.0 N/A 0.20 0.40 0.20 0.80 1.67
C (a) N/A 1.0(c) 0.10 0.95(e) 0.20 1.25 2.25
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
Kentucky
Limited Term A (a) 2.5 N/A 0.10 0.40 0.20 0.70 1.67
C (a) N/A 1.0(c) 0.10 0.70 0.20 1.00 1.98
Michigan
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
New Jersey
Intermediate (a) 3.0 N/A 0.10 0.40 0.20 0.70 1.71
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
New York
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
Ohio
Intermediate (b) 3.0 N/A 0.10 0.40 0.20 0.70
Limited Term (b) 2.5 N/A 0.10 0.40 0.20 0.70
National Funds
All-American A (a)* 4.2 N/A 0.25 0.40 0.30 0.95 1.02
C (a)* N/A 1.0(c) 0.25 0.95(e) 0.30 1.50 1.57
Intermediate A (a)* 3.0 N/A 0.20 0.40 0.20 0.80 1.17
C (a)* N/A 1.0(c) 0.20 0.95(e) 0.20 1.35 1.73
Limited Term A (a)* 2.5 N/A 0.35 0.40 0.10 0.85 .84
C (a)* N/A 1.0(c) 0.35 0.70(f) 0.10 1.15 1.43
Short Term (b)* 2.5 N/A 0.10 0.40 0.20 0.70
U.S. Territories
(b) 4.2 N/A 0.10 0.40 0.10 0.60
Insured Funds
Insured (b)* 4.2 N/A 0.30 0.40 0.20 0.90
Insured Intermediate (b)* 3.0 N/A 0.10 0.40 0.20 0.70
Insured Limited Term (b)* 2.5 N/A 0.10 0.40 0.20 0.70
Class B Shares
(b)
Intermediate N/A 3.0(d) 0.20 0.75(e) 0.10 1.05
Limited Term N/A 3.0(d) 0.20 0.75(e) 0.10 1.05
Class C Shares
(b)
Intermediate N/A 1.0(c) 0.20 0.95(e) 0.10 1.25
Limited Term N/A 1.0(c) 0.20 0.70(e) 0.10 1.00
Class R Shares
(b)
Intermediate N/A N/A 0.40 0.00 0.15 0.55
Limited Term N/A N/A 0.30 0.00 0.15 0.55
(All
intermediate
and limited
term funds not
otherwise noted above)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other State Funds
California
Intermediate (b) $37 $52 $N/A $N/A
Florida
Intermediate 38 55 73 126
23(c) 40 69 134
Limited Term (b) 32 47 N/A N/A
Kentucky
Limited Term 32 47 63 110
20(c) 32 55 122
Michigan
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
New Jersey
Intermediate (a) 37 52 68 114
Limited Term (b) 32 47 N/A N/A
New York
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
Ohio
Intermediate (b) 37 52 N/A N/A
Limited Term (b) 32 47 N/A N/A
National Funds
All-American 51 71 92 154
25(c) 48 82 180
Intermediate 38 55 73 126
24(c) 43 74 162
Limited Term 33 51 71 127
22(c) 37 63 140
Short Term (b)* 32 47 N/A N/A
U.S. Territories
(b) 48 60 N/A N/A
Insured Funds
Insured (b)* 51 69 N/A N/A
Insured Intermediate (b)* 37 52 N/A N/A
Insured Limited Term (b)* 32 47 N/A N/A
Class B Shares
(b)
Intermediate 42 56 58(d) 105
Limited Term 42 56 58(d) 105
Class C Shares
(b)
Intermediate 23(c) 40 69 151
Limited Term 20(c) 32 55 122
Class R Shares
(b)
Intermediate 6 18 30 68
Limited Term 5 15 25 54
(All
intermediate
and limited
term funds not
otherwise noted above)
</TABLE>
*Diversified Funds. All other Funds are non-diversified.
(a) Percentage based on actual fees incurred from the previous fiscal year
restated to reflect current fees and operating expenses.
(b) Funds are scheduled to commence operations in 1996 through 1997. These
amounts are based on estimates and assume management fee waiver. In
addition, the Manager has agreed to reimburse the funds for any initial
period's total fund operating expenses in excess of the above. No
reimbursement is currently indicated.
(c) No initial sales load; 1% contingent deferred sales charge if redeemed
within 1 year of purchase. Example of expenses would be $10 less in year 1
if no redemption occurs.
(d) No initial sales load; contingent deferred sales charge of 5% declining to
1% in the 6th year if redeemed. Class B expenses in years 9 through 10 are
based on Class A expenses, because the shares automatically convert to
Class A after 8 years. If you did not redeem, the example of expenses
would be $52, $44, and $24 less in years 1, 3 and 5 respectively. For
Intermediate and Limited Term Funds, the contingent deferred sales charge
is 3% declining to 1% in the 4th year. Expenses in years 6 through 10 are
based on Class A expenses because of automatic conversion after 5 years.
If you did not redeem, the example of expenses would be $31 and $22 less
in years 1 and 3 respectively.
(e) Of this amount, 0.75% is an asset based sales charge and 0.20% is a
service fee.
(f) Of this amount, 0.50% is an asset based sales charge and 0.20% is a
service fee.
The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses that an investor will bear directly or indirectly.
These expenses should not be considered a representation of actual future
expenses as future actual expenses may be greater or less than those shown.
-- 3 --
<PAGE>
FINANCIAL HIGHLIGHTS
This table provides per share income and capital changesfor a share of benefi-
cial interest in all Class A Shares of the Funds from the date of commencement
of operations toMay 31, 1996, and for a share of beneficial interest in all
Class C Shares of each of the Funds with Class C Shares outstanding from the
date of commencement of operations
to May 31, 1996. Class B and Class R Shares were not offered to the public dur-
ing the fiscal year. The information was derived from audited financial state-
ments and financial highlights audited by Deloitte & Touche LLP, independent
auditors, whose reports and related notes appear in the SAI.
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE FUNDS
Alabama
(4/11/94)
1994(a) $ 9.58 $.03 $.09 $ .12 $.04 $.04 $ 9.66 9.34%
1995 $ 9.66 $.52 $.28 $ .80 $.52 $.52 $ 9.94 8.77%
1996 $ 9.94 $.53 ($.17) $ .36 $.53 $.53 $ 9.77 3.72%
Arizona
Class A
-------
(10/29/86)
1987(a) $ 9.58 $.35 ($.47) ($ .12) $.34 $.34 $ 9.12 (2.67%)
1988 $ 9.12 $.64 $ .64 $.64 $.64 $ 9.12 7.45%
1989 $ 9.12 $.64 ($.60) $1.24 $.64 $.64 $ 9.72 14.04%
1990 $ 9.72 $.64 ($.12) $ .52 $.64 $.64 $ 9.60 5.53%
1991 $ 9.60 $.64 $.21 $ .85 $.64 $.64 $ 9.81 9.19%
1992 $ 9.81 $.65 $.32 $ .97 $.65 $.65 $10.13 10.25%
1993 $10.13 $.63 $.69 $1.32 $.64 $.64 $10.81 13.37%
1994 $10.81 $.60 ($.38) $ .22 $.60 $.60 $10.43 1.92%
1995 $10.43 $.58 $.42 $1.00 $.58 $.58 $10.85 10.03%
1996 $10.85 $.57 ($.12) $ .45 $.57 $.57 $10.73 4.21%
Class C
-------
(2/7/94)
1994(a) $11.22 $.14 ($.79) ($ .65) $.14 $.14 $10.43 (16.61%)
1995 $10.43 $.52 $.41 $ .93 $.52 $.52 $10.84 9.32%
1996 $10.84 $.51 ($.11) $ .40 $.51 $.51 $10.73 3.75%
Colorado
(5/4/87)
1987(a) $ 9.58 $.10 ($.41) ($ .31) $ 9.27 (43.74%)
1988 $ 9.27 $.62 ($.46) $ .16 $.65 $.65 $ 8.78 2.13%
1989 $ 8.78 $.63 $.46 $1.09 $.63 $.63 $ 9.24 12.83%
1990 $ 9.24 $.62 ($.12) $ .50 $.61 $.61 $ 9.13 5.59%
1991 $ 9.13 $.60 $.17 $ .77 $.61 $.61 $ 9.29 8.75%
1992 $ 9.29 $.61 $.27 $ .88 $.61 $.61 $ 9.56 9.80%
1993 $ 9.56 $.60 $.55 $1.15 $.60 $.07 $.67 $10.04 12.41%
1994 $10.04 $.58 ($.37) $ .21 $.58 $.05 $.63 $ 9.62 2.03%
1995 $ 9.62 $.57 $.30 $ .87 $.56 $.56 $ 9.93 9.54%
1996 $ 9.93 $.54 ($.13) $ .41 $.55 $.55 $ 9.79 4.14%
Connecticut
Class A
-------
(7/13/87)
1988(a) $ 9.58 $.54 ($.31) $ .23 $.56 $.56 $ 9.25 3.09%
1989 $ 9.25 $.63 $.55 $1.18 $.64 $.01 $.65 $ 9.78 13.36%
1990 $ 9.78 $.63 ($.13) $ .50 $.63 $.01 $.64 $ 9.64 5.34%
1991 $ 9.64 $.63 $.20 $ .83 $.63 $.63 $ 9.84 8.97%
1992 $ 9.84 $.63 $.21 $ .84 $.63 $.63 $10.05 8.81%
1993 $10.05 $.61 $.61 $1.22 $.61 $.61 $10.66 12.48%
1994 $10.66 $.59 ($.39) $ .20 $.60 $.09 $.69 $10.17 1.70%
1995 $10.17 $.58 $.22 $ .80 $.59 $.59 $10.38 8.21%
1996 $10.38 $.57 ($.14) $ .43 $.58 $.58 $10.23 4.18%
Class C
-------
(10/4/93)
1994(a) $11.06 $.33 ($.84) ($ .51) $.33 $.06 $.39 $10.16 (6.48%)
1995 $10.16 $.53 $.20 $ .73 $.53 $.53 $10.36 7.53%
1996 $10.36 $.52 ($.14) $ .38 $.52 $.52 $10.22 3.71%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATE FUNDS
Alabama
(4/11/94)
1994(a) 357 0.00% 2.42% 0.00%
1995 1,880 0.16% 5.47% 120.19%
1996 3,256 0.48% 5.24% 42.03%
Arizona
Class A
-------
(10/29/86)
1987(a) 31,652 0.84% 6.17% 40.13%
1988 33,696 0.86% 6.96% 68.47%
1989 29,433 0.92% 6.85% 37.28%
1990 32,066 0.85% 6.63% 37.13%
1991 38,933 0.78% 6.62% 18.23%
1992 51,123 0.44% 6.55% 33.75%
1993 72,778 0.44% 6.03% 20.04%
1994 82,676 0.64% 5.48% 21.08%
1995 80,406 0.82% 5.59% 26.79%
1996 80,094 0.69% 5.20% 38.15%
Class C
-------
(2/7/94)
1994(a) 1,122 1.20% 4.36% 21.08%
1995 1,621 1.36% 5.01% 26.79%
1996 1,970 1.23% 4.64% 38.15%
Colorado
(5/4/87)
1987(a) 1,583 0.03% 13.96% 113.96%
1988 7,561 0.55% 7.03% 138.37%
1989 7,545 0.67% 7.04% 18.94%
1990 7,386 0.87% 6.70% 15.55%
1991 9,108 0.84% 6.62% 29.11%
1992 15,699 0.49% 6.42% 39.07%
1993 26,656 0.41% 6.05% 30.49%
1994 35,796 0.37% 5.71% 41.76%
1995 34,892 0.50% 5.99% 37.84%
1996 33,637 0.55% 5.41% 69.76%
Connecticut
Class A
-------
(7/13/87)
1988(a) 25,609 0.54% 6.54% 70.55%
1989 48,990 0.70% 6.62% 32.57%
1990 73,046 0.60% 6.55% 30.74%
1991 103,552 0.67% 6.49% 18.68%
1992 141,215 0.65% 6.30% 18.16%
1993 184,743 0.66% 5.88% 19.31%
1994 202,607 0.65% 5.52% 30.19%
1995 203,210 0.73% 5.84% 25.01%
1996 202,219 0.74% 5.52% 24.22%
Class C
-------
(10/4/93)
1994(a) 4,360 1.22% 4.77% 30.19%
1995 5,536 1.28% 5.27% 25.01%
1996 7,243 1.29% 4.96% 24.22%
</TABLE>
-- 4 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida
Class A
-------
(6/15/90)
1991(a) $ 9.58 $.64 $.29 $ .93 $.64 $.64 $ 9.87 9.81%
1992 $ 9.87 $.66 $.33 $ .99 $.67 $.01 $.68 $10.18 10.32%
1993 $10.18 $.63 $.61 $1.24 $.64 $.02 $.66 $10.76 12.49%
1994 $10.76 $.60 ($.38) $ .22 $.60 $.60 $10.38 2.00%
1995 $10.38 $.58 $.26 $ .84 $.59 $.59 $10.63 8.43%
1996 $10.63 $.57 ($.24) $ .33 $.57 $.57 $10.39 3.14%
Class C
-------
(9/14/95)
1996 $10.65 $.35 ($.26) $ .09 $.35 $.35 $10.39 1.30%
Florida
Intermediate
Class A
-------
(2/1/94)
1994(a) $ 9.70 $.12 ($.04) $ .08 $.12 $.12 $ 9.66 1.75%
1995 $ 9.66 $.46 $.33 $ .79 $.40 $.40 $10.05 8.42%
1996 $10.05 $.46 ($.12) $ .34 $.46 $.05 $.51 $ 9.88 3.41%
Class C
-------
(2/2/94)
1994(a) $ 9.70 $.11 ($.06) $ .05 $.09 $.09 $ 9.66 1.33%
1995 $ 9.66 $.40 $.33 $ .73 $.34 $.34 $10.05 7.80%
1996 $10.05 $.40 ($.11) $ .29 $.41 $.05 $.46 $ 9.88 2.88%
Georgia
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.10 ($.13) ($ .03) $.09 $.09 $ 9.46 (1.80%)
1987 $ 9.46 $.62 ($.24) $ .38 $.62 $.01 $.02 $.65 $ 9.19 4.13%
1988 $ 9.19 $.66 $.11 $ .77 $.66 $.66 $ 9.30 8.61%
1989 $ 9.30 $.65 $.59 $1.24 $.66 $.66 $ 9.88 13.77%
1990 $ 9.88 $.65 ($.22) $ .43 $.64 $.64 $ 9.67 4.55%
1991 $ 9.67 $.64 $.28 $ .92 $.64 $.64 $ 9.95 9.90%
1992 $ 9.95 $.63 $.21 $ .84 $.63 $.63 $10.16 8.81%
1993 $10.16 $.62 $.45 $1.07 $.61 $.61 $10.62 10.84%
1994 $10.62 $.59 ($.39) $ .20 $.59 $.59 $10.23 1.83%
1995 $10.23 $.58 $.23 $ .81 $.58 $.58 $10.46 8.31%
1996 $10.46 $.57 ($.25) $ .32 $.58 $.58 $10.20 3.05%
Class C
-------
(1/4/94)
1994(a) $10.91 $.19 ($.69) ($ .50) $.20 $.20 $10.21 (10.96%)
1995 $10.21 $.52 $.23 $ .75 $.52 $.52 $10.44 7.72%
1996 $10.44 $.51 ($.25) $ .26 $.52 $.52 $10.18 2.48%
Kansas
(1/9/92)
1992(a) $ 9.58 $.19 $.07 $ .26 $.19 $.19 $ 9.65 5.95%
1993 $ 9.65 $.58 $.73 $1.31 $.58 $.58 $10.38 14.15%
1994 $10.38 $.56 ($.47) $ .09 $.57 $.07 $.64 $ 9.83 0.62%
1995 $ 9.83 $.55 $.18 $ .73 $.55 $.55 $10.01 7.80%
1996 $10.01 $.54 ($.18) $ .36 $.54 $.54 $ 9.83 3.63%
Kentucky
Class A
-------
(5/4/87)
1987(a) $ 9.58 $.02 ($.23) ($ .21) $ 9.37 (29.63%)
1988 $ 9.37 $.66 $.02 $ .68 $.67 $.67 $ 9.38 7.79%
1989 $ 9.38 $.67 $.60 $1.27 $.67 $.01 $.68 $ 9.97 14.31%
1990 $ 9.97 $.66 ($.05) $ .61 $.66 $.05 $.71 $ 9.87 6.92%
1991 $ 9.87 $.66 $.32 $ .98 $.66 $.66 $10.19 10.37%
1992 $10.19 $.66 $.27 $ .93 $.66 $.01 $.67 $10.45 9.46%
1993 $10.45 $.64 $.62 $1.26 $.65 $.65 $11.06 12.41%
1994 $11.06 $.62 ($.40) $ .22 $.63 $.63 $10.65 1.90%
1995 $10.65 $.61 $.35 $ .96 $.62 $.62 $10.99 9.42%
1996 $10.99 $.61 ($.17) $ .44 $.61 $.61 $10.82 4.04%
Class C
-------
(10/4/93)
1994(a) $11.46 $.36 ($.81) ($ .45) $.36 $.36 $10.65 (5.88%)
1995 $10.65 $.55 $.35 $ .90 $.56 $.56 $10.99 8.82%
1996 $10.99 $.54 ($.17) $ .37 $.55 $.55 $10.81 3.38%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Florida
Class A
-------
(6/15/90)
1991(a) 136,509 0.19% 6.86% 152.36%
1992 276,811 0.26% 6.59% 49.72%
1993 369,123 0.45% 6.01% 22.60%
1994 372,082 0.58% 5.51% 31.92%
1995 341,374 0.73% 5.71% 52.67%
1996 318,456 0.83% 5.36% 93.93%
Class C
-------
(9/14/95)
1996 1,175 1.38% 4.59% 93.93%
Florida
Intermediate
Class A
-------
(2/1/94)
1994(a) 964 0.29% 3.79% 28.15%
1995 3,898 0.67% 4.74% 105.01%
1996 4,995 0.76% 4.48% 66.18%
Class C
-------
(2/2/94)
1994(a) 1,058 0.68% 3.42% 28.15%
1995 1,765 1.19% 4.19% 105.01%
1996 3,079 1.34% 3.88% 66.18%
Georgia
Class A
-------
(3/27/86)
1986(a) 8,384 0.83% 5.48% 5.98%
1987 33,388 0.71% 6.37% 40.71%
1988 29,701 0.91% 7.14% 46.35%
1989 35,637 0.96% 6.74% 23.08%
1990 36,034 0.84% 6.62% 34.30%
1991 44,829 0.72% 6.60% 24.09%
1992 70,650 0.57% 6.31% 21.19%
1993 101,196 0.62% 5.88% 29.51%
1994 123,068 0.70% 5.47% 39.48%
1995 113,354 0.83% 5.79% 39.94%
1996 107,862 0.80% 5.46% 59.41%
Class C
-------
(1/4/94)
1994(a) 4,348 1.27% 4.55% 39.48%
1995 6,973 1.38% 5.18% 39.94%
1996 9,433 1.34% 4.90% 59.41%
Kansas
(1/9/92)
1992(a) 9,552 0.40% 5.11% 59.26%
1993 62,585 0.11% 5.74% 55.70%
1994 80,060 0.26% 5.37% 93.45%
1995 83,683 0.54% 5.67% 71.50%
1996 96,694 0.57% 5.31% 54.90%
Kentucky
Class A
-------
(5/4/87)
1987(a) 6,063 0.18% 2.66% 45.30%
1988 40,945 0.51% 7.09% 36.42%
1989 72,059 0.67% 6.94% 32.03%
1990 111,234 0.75% 6.63% 56.69%
1991 142,449 0.72% 6.65% 23.35%
1992 207,395 0.62% 6.39% 5.07%
1993 309,223 0.61% 5.96% 14.74%
1994 369,495 0.58% 5.60% 12.26%
1995 394,457 0.68% 5.85% 28.28%
1996 410,808 0.71% 5.50% 16.69%
Class C
-------
(10/4/93)
1994(a) 11,172 1.08% 4.96% 12.26%
1995 15,831 1.23% 5.27% 28.28%
1996 20,647 1.27% 4.93% 16.69%
</TABLE>
-- 5 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kentucky Limited
Term
Class A
-------
(9/14/95)
1996 $ 9.75 $.31 $.04 $ .35 $.31 $.31 $9.79 5.45%
Class C
-------
(9/14/95)
1996 $ 9.75 $.29 $.04 $ .33 $.29 $.29 $9.79 5.12%
Louisiana
Class A
-------
(9/12/89)
1990(a) $ 9.58 $.44 $.04 $ .48 $.43 $.43 $ 9.63 6.52%
1991 $ 9.63 $.66 $.40 $1.06 $.67 $.67 $10.02 11.47%
1992 $10.02 $.65 $.35 $1.00 $.65 $.07 $.72 $10.30 10.35%
1993 $10.30 $.64 $.67 $1.31 $.63 $.05 $.68 $10.93 13.12%
1994 $10.93 $.61 ($.40) $ .21 $.62 $.04 $.66 $10.48 1.77%
1995 $10.48 $.60 $.32 $ .92 $.60 $.60 $10.80 9.20%
1996 $10.80 $.59 ($.08) $ .51 $.60 $.60 $10.71 4.77%
Class C
-------
(2/2/94)
1994(a) $11.29 $.16 ($.81) ($ .65) $.16 $.16 $10.48 (17.21%)
1995 $10.48 $.54 $.32 $ .86 $.54 $.54 $10.80 8.59%
1996 $10.80 $.53 ($.09) $ .44 $.54 $.54 $10.70 4.12%
Michigan
Class A
-------
(6/27/85)
1986(a) $ 9.58 $.65 $.57 $1.22 $.66 $.66 $10.14 14.76%
1987 $10.14 $.71 ($.14) $ .57 $.70 $.06 $.76 $ 9.95 6.60%
1988 $ 9.95 $.72 $.15 $ .87 $.72 $.72 $10.10 8.95%
1989 $10.10 $.71 $.57 $1.28 $.71 $.71 $10.67 13.12%
1990 $10.67 $.70 ($.06) $ .64 $.70 $.70 $10.61 6.21%
1991 $10.61 $.69 $.20 $ .89 $.70 $.70 $10.80 8.73%
1992 $10.80 $.69 $.32 $1.01 $.69 $.69 $11.12 9.74%
1993 $11.12 $.68 $.65 $1.33 $.68 $.68 $11.77 12.27%
1994 $11.77 $.66 ($.43) $ .23 $.66 $.03 $.69 $11.31 1.87%
1995 $11.31 $.65 $.28 $ .93 $.65 $.65 $11.59 8.57%
1996 $11.59 $.63 ($.22) $ .41 $.63 $.63 $11.37 3.61%
Class C
-------
(6/22/93)
1994(a) $11.86 $.54 ($.52) $ .02 $.55 $.03 $.58 $11.30 .19%
1995 $11.30 $.58 $.28 $ .86 $.58 $.58 $11.58 7.98%
1996 $11.58 $.56 ($.22) $ .34 $.57 $.57 $11.35 2.96%
Missouri
Class A
-------
(8/3/87)
1988(a) $ 9.58 $.49 ($.26) $ .23 $.51 $.51 $ 9.30 2.98%
1989 $ 9.30 $.65 $.57 $1.22 $.65 $.01 $.66 $ 9.86 13.70%
1990 $ 9.86 $.65 ($.10) $ .55 $.65 $.65 $ 9.76 5.89%
1991 $ 9.76 $.65 $.28 $ .93 $.65 $.65 $10.04 9.92%
1992 $10.04 $.65 $.29 $ .94 $.65 $.01 $.66 $10.32 9.70%
1993 $10.32 $.64 $.60 $1.24 $.63 $.06 $.69 $10.87 12.54%
1994 $10.87 $.61 ($.34) $ .27 $.61 $.03 $.64 $10.50 2.42%
1995 $10.50 $.60 $.22 $ .82 $.60 $.60 $10.72 8.19%
1996 $10.72 $.58 ($.21) $ .37 $.58 $.58 $10.51 3.51%
Class C
-------
(2/2/94)
1994(a) $11.33 $.02 ($.83) ($ .81) $.02 $.02 $10.50 (17.62%)
1995 $10.50 $.53 $.23 $ .76 $.54 $.54 $10.72 7.60%
1996 $10.72 $.51 ($.21) $ .30 $.52 $.52 $10.50 2.84%
New Jersey
(9/16/92)
1993(a) $ 9.58 $.38 $.54 $ .92 $.38 $.38 $10.12 13.02%
1994 $10.12 $.57 ($.23) $ .34 $.57 $.10 $.67 $ 9.79 3.24%
1995 $ 9.79 $.55 $.30 $ .85 $.55 $.55 $10.09 9.16%
1996 $10.09 $.55 ($.16) $ .39 $.55 $.55 $ 9.93 3.97%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kentucky Limited
Term
Class A
-------
(9/14/95)
1996 8,389 0.37% 4.37% 47.52%
Class C
-------
(9/14/95)
1996 1,767 0.64% 4.12% 47.52%
Louisiana
Class A
-------
(9/12/89)
1990(a) 16,678 0.44% 6.40% 32.42%
1991 27,762 0.38% 6.79% 57.02%
1992 38,873 0.49% 6.43% 42.51%
1993 54,483 0.61% 5.95% 29.25%
1994 66,821 0.66% 5.56% 22.40%
1995 68,145 0.83% 5.80% 43.90%
1996 72,005 0.80% 5.46% 26.24%
Class C
-------
(2/2/94)
1994(a) 1,501 1.23% 4.79% 22.40%
1995 3,220 1.37% 5.21% 43.90%
1996 5,658 1.35% 4.87% 26.24%
Michigan
Class A
-------
(6/27/85)
1986(a) 44,647 0.81% 7.01% 79.15%
1987 82,007 0.78% 6.71% 89.44%
1988 73,481 0.94% 7.11% 78.48%
1989 84,608 0.96% 6.80% 54.03%
1990 102,519 0.95% 6.54% 46.75%
1991 134,243 0.90% 6.56% 23.01%
1992 176,584 0.81% 6.34% 11.48%
1993 227,333 0.81% 5.85% 9.55%
1994 242,993 0.75% 5.56% 27.78%
1995 250,380 0.80% 5.82% 36.57%
1996 248,422 0.82% 5.42% 54.01%
Class C
-------
(6/22/93)
1994(a) 30,042 1.25% 4.89% 27.78%
1995 37,122 1.35% 5.25% 36.57%
1996 41,365 1.37% 4.86% 54.01%
Missouri
Class A
-------
(8/3/87)
1988(a) 7,786 0.50% 6.32% 118.90%
1989 13,028 0.69% 6.80% 68.60%
1990 19,080 0.66% 6.64% 35.84%
1991 43,391 0.58% 6.57% 44.08%
1992 76,069 0.47% 6.39% 31.73%
1993 144,775 0.55% 5.99% 33.26%
1994 187,347 0.62% 5.52% 34.30%
1995 205,089 0.67% 5.78% 40.08%
1996 212,717 0.80% 5.37% 37.66%
Class C
-------
(2/2/94)
1994(a) 1,877 1.15% 4.44% 34.30%
1995 3,989 1.20% 5.19% 40.08%
1996 6,220 1.35% 4.79% 37.66%
New Jersey
(9/16/92)
1993(a) 2,388 0.00% 5.43% 75.40%
1994 4,880 0.01% 5.52% 90.63%
1995 7,723 0.36% 5.75% 33.58%
1996 11,114 0.44% 5.42% 15.61%
</TABLE>
-- 6 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Jersey
Intermediate
(9/16/92)
1993(a) $ 9.70 $.34 $ .45 $ .79 $.34 $.34 $10.15 11.07%
1994 $10.15 $.53 ($ .10) $ .43 $.52 $.02 $.54 $10.04 4.27%
1995 $10.04 $.50 $ .22 $ .72 $.51 $.51 $10.25 7.42%
1996 $10.25 $.51 ($ .11) $ .40 $.51 $.51 $10.14 3.89%
New Mexico
(9/16/92)
1993(a) $ 9.58 $.37 $ .46 $ .83 $.37 $.37 $10.04 11.72%
1994 $10.04 $.53 ($ .33) $ .20 $.53 $.03 $.56 $ 9.68 1.92%
1995 $ 9.68 $.52 $ .33 $ .85 $.52 $.52 $10.01 9.25%
1996 $10.01 $.51 ($ .19) $ .32 $.52 $.52 $ 9.81 3.18%
New York
Class A
-------
(1/16/91)
1991(a) $ 9.58 $.22 $ .11 $ .33 $.22 $.22 $ 9.69 8.14%
1992 $ 9.69 $.68 $0.41 $1.09 $.68 $.68 $10.10 11.71%
1993 $10.10 $.66 $ .88 $1.54 $.66 $.07 $.73 $10.91 15.87%
1994 $10.91 $.64 ($ .37) $ .27 $.64 $.16 $.80 $10.38 2.38%
1995 $10.38 $.62 $ .24 $ .86 $.62 $.62 $10.62 8.74%
1996 $10.62 $.60 ($ .17) $ .43 $.60 $.60 $10.45 4.15%
Class C
-------
(3/4/96)
1996(a) $10.89 $.12 ($ .44) ($ .32) $.12 $.12 $10.45 (11.83%)
North Carolina
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.08 ($ .40) ($ .32) $.09 $.09 $ 9.17 (19.48%)
1987 $ 9.17 $.61 ($ .36) $ .25 $.61 $.01 $.62 $ 8.80 2.54%
1988 $ 8.80 $.62 $ .13 $ .75 $.62 $.62 $ 8.93 8.77%
1989 $ 8.93 $.62 $ .66 $1.28 $.62 $.62 $ 9.59 14.78%
1990 $ 9.59 $.61 ($ .13) $ .48 $.61 $.61 $ 9.46 5.16%
1991 $ 9.46 $.61 $ .24 $ .85 $.61 $.61 $ 9.70 9.28%
1992 $ 9.70 $.60 $ .27 $ .87 $.60 $.60 $ 9.97 9.30%
1993 $ 9.97 $.58 $ .55 $1.13 $.59 $.59 $10.51 11.66%
1994 $10.51 $.57 ($ .42) $ .15 $.58 $.58 $10.08 1.30%
1995 $10.08 $.57 $ .15 $ .72 $.57 $.57 $10.23 7.45%
1996 $10.23 $.55 ($ .18) $ .37 $.55 $.55 $10.05 3.67%
Class C
-------
(10/4/93)
1994(a) $10.84 $.32 ($ .78) ($ .46) $.32 $.32 $10.06 (6.26%)
1995 $10.06 $.51 $ .16 $ .67 $.51 $.51 $10.22 6.97%
1996 $10.22 $.49 ($ .18) $ .31 $.50 $.50 $10.03 3.01%
Ohio
Class A
-------
(6/27/85)
1986(a) $ 9.58 $.66 $ .56 $1.22 $.68 $.68 $10.12 14.71%
1987 $10.12 $.71 ($ .25) $ .46 $.71 $.05 $.76 $ 9.82 5.33%
1988 $ 9.82 $.71 $ .23 $ .94 $.71 $.01 $.72 $10.04 10.12%
1989 $10.04 $.69 $ .51 $1.20 $.70 $.70 $10.54 12.36%
1990 $10.54 $.69 ($ .09) $ .60 $.69 $.69 $10.45 5.86%
1991 $10.45 $.68 $ .28 $ .96 $.69 $.69 $10.72 9.57%
1992 $10.72 $.68 $ .33 $1.01 $.68 $.68 $11.05 9.77%
1993 $11.05 $.66 $ .54 $1.20 $.66 $.66 $11.59 11.20%
1994 $11.59 $.64 ($ .38) $ .26 $.64 $.64 $11.21 2.24%
1995 $11.21 $.64 $ .22 $ .86 $.64 $.64 $11.43 7.99%
1996 $11.43 $.62 ($ .21) $ .41 $.63 $.63 $11.21 3.59%
Class C
-------
(8/3/93)
1994(a) $11.69 $.46 ($ .49) ($ .03) $.46 $.46 $11.20 (0.17%)
1995 $11.20 $.57 $ .23 $ .80 $.57 $.57 $11.43 7.50%
1996 $11.43 $.55 ($ .21) $ .34 $.56 $.56 $11.21 3.03%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey
Intermediate
(9/16/92)
1993(a) 5,649 0.40% 4.84% 28.93%
1994 9,321 0.16% 5.10% 26.50%
1995 9,217 0.69% 5.04% 35.32%
1996 8,318 0.60% 4.90% 17.46%
New Mexico
(9/16/92)
1993(a) 31,499 0.14% 5.28% 36.11%
1994 51,167 0.40% 5.24% 38.88%
1995 52,150 0.67% 5.48% 38.06%
1996 51,173 0.68% 5.10% 57.40%
New York
Class A
-------
(1/16/91)
1991(a) 9,496 0.16% 6.14% 17.41%
1992 20,701 0.18% 6.89% 36.89%
1993 33,996 0.28% 6.28% 45.65%
1994 48,434 0.30% 5.83% 59.70%
1995 49,018 0.43% 6.15% 58.69%
1996 49,643 0.70% 5.58% 53.53%
Class C
-------
(3/4/96)
1996(a) 633 1.35% 4.49% 53.53%
North Carolina
Class A
-------
(3/27/86)
1986(a) 13,960 0.67% 4.75% 17.30%
1987 66,110 0.49% 6.48% 68.72%
1988 68,077 0.83% 6.93% 75.14%
1989 87,539 0.92% 6.66% 21.17%
1990 96,348 0.94% 6.40% 34.37%
1991 108,917 0.99% 6.36% 11.52%
1992 131,488 0.98% 6.10% 16.91%
1993 169,944 0.95% 5.70% 11.52%
1994 196,087 0.89% 5.41% 21.23%
1995 191,850 0.91% 5.73% 34.67%
1996 185,016 0.90% 5.32% 54.16%
Class C
-------
(10/4/93)
1994(a) 4,161 1.49% 4.65% 21.23%
1995 6,049 1.46% 5.13% 34.67%
1996 6,589 1.45% 4.77% 54.16%
Ohio
Class A
-------
(6/27/85)
1986(a) 76,998 0.75% 7.18% 62.12%
1987 153,333 0.76% 6.78% 108.69%
1988 157,511 0.88% 7.16% 84.63%
1989 195,135 0.93% 6.79% 37.45%
1990 231,311 0.96% 6.56% 41.83%
1991 268,213 1.02% 6.53% 13.88%
1992 325,273 0.95% 6.24% 17.50%
1993 410,467 0.96% 5.81% 14.93%
1994 445,272 0.93% 5.48% 9.14%
1995 445,566 0.95% 5.78% 31.25%
1996 443,077 0.92% 5.41% 30.93%
Class C
-------
(8/3/93)
1994(a) 25,674 1.46% 4.79% 9.14%
1995 28,461 1.50% 5.21% 31.25%
1996 34,939 1.47% 4.84% 30.93%
</TABLE>
-- 7 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania(e)
Class A
-------
(10/29/86)
1987(a) $ 9.58 $.35 ($ .75) ($ .40) $.35 $.35 $ 8.83 (7.77%)
1988 $ 8.83 $.65 $ .18 $ .83 $.65 $.65 $ 9.01 9.70%
1989 $ 9.01 $.64 $ .48 $1.12 $.64 $.64 $ 9.49 12.79%
1990 $ 9.49 $.63 ($ .10) $ .53 $.63 $.63 $ 9.39 5.70%
1991 $ 9.39 $.62 $ .22 $ .84 $.63 $.63 $ 9.60 9.26%
1992 $ 9.60 $.63 $ .30 $ .93 $.63 $.63 $ 9.90 9.98%
1993 $ 9.90 $.62 $ .47 $1.09 $.61 $.61 $10.38 11.34%
1994 $10.38 $.61 ($ .32) $ .29 $.61 $.61 $10.06 2.70%
1995 $10.06 $.60 $ .16 $ .76 $.61 $.61 $10.21 7.90%
1996 $10.21 $.59 ($ .20) $ .39 $.60 $.60 $10.00 3.83%
Class C
-------
(2/2/94)
1994(a) $10.71 $.16 ($ .64) ($ .48) $.17 $.17 $10.06 (13.46%)
1995 $10.06 $.54 $ .16 $ .70 $.55 $.55 $10.21 7.31%
1996 $10.21 $.53 ($ 21) $ .32 $.54 $.54 $ 9.99 3.16%
South Carolina
(7/6/93)
1994(a) $ 9.58 $.42 ($ .38) $ .04 $.39 $.03 $.42 $ 9.20 .15%
1995 $ 9.20 $.50 $ .25 $ .75 $.50 $.50 $ 9.45 8.54%
1996 $ 9.45 $.48 ($ .15) $ .33 $.50 $.50 $ 9.28 3.53%
Tennessee
Class A
-------
(11/2/87)
1988(a) $ 9.58 $.35 $ .09 $ .44 $.37 $.37 $ 9.65 7.50%
1989 $ 9.65 $.68 $ .60 $1.28 $.67 $.67 $10.26 13.89%
1990 $10.26 $.67 ($ .15) $ .52 $.67 $.02 $.69 $10.09 5.53%
1991 $10.09 $.67 $ .26 $ .93 $.67 $.01 $.68 $10.34 9.73%
1992 $10.34 $.65 $ .22 $ .87 $.65 $.65 $10.56 8.66%
1993 $10.56 $.62 $ .68 $1.30 $.63 $.63 $11.23 12.60%
1994 $11.23 $.61 ($ .43) $ .18 $.61 $.02 $.63 $10.78 1.55%
1995 $10.78 $.60 $ .23 $ .83 $.60 $.60 $11.01 8.04%
1996 $11.01 $.59 ($ .18) $ .41 $.59 $.59 $10.83 3.78%
Class C
-------
(10/4/93)
1994(a) $11.61 $.35 ($ .83) ($ .48) $.34 $.01 $.35 $10.78 (5.92%)
1995 $10.78 $.54 $ .22 $ .76 $.54 $.54 $11.00 7.35%
1996 $11.00 $.53 ($ .18) $ .35 $.53 $.53 $10.82 3.22%
Virginia
Class A
-------
(3/27/86)
1986(a) $ 9.58 $.09 ($ .33) ($ .24) $.09 $.09 $ 9.25 (33.49%)
1987 $ 9.25 $.63 ($ .16) $ .47 $.63 $.63 $ 9.09 5.03%
1988 $ 9.09 $.64 $ .19 $ .83 $.63 $.63 $ 9.29 9.73%
1989 $ 9.29 $.64 $ .46 $1.10 $.63 $.63 $ 9.76 12.25%
1990 $ 9.76 $.64 ($ .06) $ .58 $.64 $.64 $ 9.70 6.14%
1991 $ 9.70 $.63 $ .28 $ .91 $.64 $.64 $ 9.97 9.72%
1992 $ 9.97 $.63 $ .27 $ .90 $.63 $.63 $10.24 9.37%
1993 $10.24 $.62 $ .62 $1.24 $.62 $.04 $.66 $10.82 12.41%
1994 $10.82 $.60 ($ .31) $ .29 $.60 $.15 $.75 $10.36 2.62%
1995 $10.36 $.59 $ .20 $ .79 $.59 $.59 $10.56 7.99%
1996 $10.56 $.57 ($ .15) $ .42 $.58 $.58 $10.40 4.03%
Class C
-------
(10/4/93)
1994(a) $11.24 $.34 ($ .78) ($ .44) $.34 $.10 $.44 $10.36 (7.13%)
1995 $10.36 $.53 $ .20 $ .73 $.53 $.53 $10.56 7.40%
1996 $10.56 $.51 ($ .16) $ .35 $.52 $.52 $10.39 3.37%
Wisconsin
(6/1/94)
1995(a) $ 9.58 $.49 $ .21 $ .70 $.49 $.49 $ 9.79 7.36%
1996 $ 9.79 $.50 ($ .18) $ .32 $.50 $.50 $ 9.61 3.35%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania(e)
Class A
-------
(10/29/86)
1987(a) 29,019 0.69% 6.29% 62.75%
1988 33,838 0.72% 7.28% 51.81%
1989 33,476 0.98% 6.84% 22.84%
1990 35,632 0.92% 6.65% 30.42%
1991 35,408 0.91% 6.63% 23.01%
1992 36,917 0.83% 6.47% 41.33%
1993 40,705 0.92% 6.07% 22.69%
1994 42,226 0.91% 5.80% 20.70%
1995 42,600 0.89% 6.08% 49.86%
1996 44,392 .79% 5.76% 64.54%
Class C
-------
(2/2/94)
1994(a) 1,697 1.41% 4.91% 20.70%
1995 3,118 1.39% 5.50% 49.86%
1996 4,442 1.34% 5.19% 64.54%
South Carolina
(7/6/93)
1994(a) 6,284 0.40% 4.82% 87.96%
1995 9,013 0.40% 5.54% 86.81%
1996 10,534 0.71% 4.98% 75.76%
Tennessee
Class A
-------
(11/2/87)
1988(a) 23,725 0.47% 6.35% 22.65%
1989 62,048 0.62% 6.80% 50.44%
1990 73,752 0.78% 6.57% 55.79%
1991 92,431 0.76% 6.60% 29.63%
1992 126,833 0.84% 6.18% 34.57%
1993 191,811 0.88% 5.66% 15.07%
1994 236,230 0.76% 5.42% 16.93%
1995 241,778 0.89% 5.64% 23.38%
1996 250,886 0.88% 5.30% 37.57%
Class C
-------
(10/4/93)
1994(a) 10,652 1.23% 4.80% 16.93%
1995 12,494 1.44% 5.08% 23.38%
1996 15,483 1.43% 4.75% 37.57%
Virginia
Class A
-------
(3/27/86)
1986(a) 12,568 0.70% 5.25% 8.61%
1987 32,698 0.68% 6.54% 74.56%
1988 31,748 0.88% 6.95% 75.07%
1989 37,151 0.97% 6.69% 17.88%
1990 41,596 0.91% 6.54% 35.22%
1991 48,062 0.91% 6.48% 22.02%
1992 64,628 0.75% 6.28% 26.59%
1993 96,105 0.68% 5.82% 30.33%
1994 107,502 0.64% 5.53% 17.37%
1995 112,643 0.79% 5.81% 50.17%
1996 117,677 0.83% 5.41% 17.47%
Class C
-------
(10/4/93)
1994(a) 4,759 1.14% 4.85% 17.37%
1995 6,537 1.34% 5.24% 50.17%
1996 10,978 1.38% 4.84% 17.47%
Wisconsin
(6/1/94)
1995(a) 8,278 0.39% 5.25% 51.74%
1996 12,370 0.64% 5.02% 46.99%
</TABLE>
-- 8 --
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION INCOME FROM
DATE) INVESTMENT OPERATIONS LESS DISTRIBUTIONS PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND NAME
SHARE CLASS
(INCEPTION
DATE) RATIOS/SUPPLEMENTAL DATA(F)
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
MAY 31, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NATIONAL FUNDS
All-American
Class A
-------
(10/3/88)
1989(a) $ 9.58 $.46 $.23 $ .69 $.46 $.46 $ 9.81 10.66%
1990 $ 9.81 $.71 ($.06) $ .65 $.72 $.01 $.73 $ 9.73 6.92%
1991 $ 9.73 $.72 $.22 $ .94 $.72 $.72 $ 9.95 10.10%
1992 $ 9.95 $.69 $.45 $1.14 $.69 $.69 $10.40 11.94%
1993 $10.40 $.67 $.76 $1.43 $.67 $.09 $.76 $11.07 14.25%
1994 $11.07 $.65 ($.30) $ .35 $.65 $.16 $.81 $10.61 2.99%
1995 $10.61 $.63 $.18 $ .81 $.63 $.63 $10.79 8.01%
1996 $10.79 $.61 ($.12) $ .49 $.61 $.61 $10.67 4.64%
Class C
-------
(6/2/93)
1994(a) $11.09 $.57 ($.32) $ .25 $.57 $.17 $.74 $10.60 2.16%
1995 $10.60 $.57 $.18 $ .75 $.57 $.57 $10.78 7.42%
1996 $10.78 $.55 ($.12) $ .43 $.55 $.55 $10.66 4.07%
Intermediate
Class A
-------
(9/15/92)
1993(a) $ 9.70 $.36 $.64 $1.00 $.35 $.35 $10.35 14.06%
1994 $10.35 $.52 ($.13) $ .39 $.52 $.06 $.58 $10.16 3.72%
1995 $10.16 $.51 $.13 $ .64 $.51 $.51 $10.29 6.63%
1996 $10.29 $.51 ($.02) $ .49 $.51 $.51 $10.27 4.84%
Class C
-------
(12/1/95)
1996 $10.57 $.23 ($.30) ($.07) $.22 $.22 $10.28 (1.78%)
Limited Term
Class A
-------
(10/19/87)
1988(a) $ 9.75 $.36 $.13 $ .49 $.36 $.36 $ 9.88 7.44%
1989 $ 9.88 $.62 $.02 $ .64 $.61 $.61 $ 9.91 6.81%
1990 $ 9.91 $.64 $.01 $ .65 $.64 $.64 $ 9.92 6.83%
1991 $ 9.92 $.63 $.13 $ .76 $.64 $.64 $10.04 8.08%
1992 $10.04 $.60 $.26 $ .86 $.60 $.01 $.61 $10.29 9.04%
1993 $10.29 $.55 $.45 $1.00 $.55 $.55 $10.74 10.02%
1994 $10.74 $.52 ($.13) $ .39 $.52 $.01 $.53 $10.60 3.58%
1995 $10.60 $.51 $.04 $ .55 $.50 $.50 $10.65 5.41%
1996 $10.65 $.51 ($.09) $ .42 $.50 $.50 $10.57 4.03%
Class C
-------
(12/1/95)
1996 $10.76 $.22 ($.19) $ .03 $.23 $.23 $10.56 .46%
RATIO OF
NET
RATIO OF INVESTMENT
NET ASSETS EXPENSES INCOME TO
END OF TO AVERAGE AVERAGE PORTFOLIO
YEAR ENDED PERIOD NET NET TURNOVER
MAY 31, (000'S) ASSETS(B) ASSETS(B) RATE(C)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NATIONAL FUNDS
All-American
Class A
-------
(10/3/88)
1989(a) 25,644 0.00% 7.27% 56.53%
1990 49,013 0.42% 7.29% 131.58%
1991 79,557 0.42% 7.33% 93.99%
1992 129,525 0.56% 6.81% 85.69%
1993 170,831 0.65% 6.24% 72.49%
1994 159,867 0.62% 5.77% 81.29%
1995 185,495 0.76% 6.02% 70.54%
1996 207,992 0.83% 5.60% 78.75%
Class C
-------
(6/2/93)
1994(a) 39,997 1.09% 5.16% 81.29%
1995 45,242 1.31% 5.47% 70.54%
1996 47,314 1.37% 5.05% 78.75%
Intermediate
Class A
-------
(9/15/92)
1993(a) 18,971 0.39% 4.98% 102.38%
1994 35,891 0.40% 4.93% 69.14%
1995 42,069 0.54% 5.15% 102.06%
1996 46,742 0.62% 4.86% 80.90%
Class C
-------
(12/1/95)
1996 1,187 1.13% 4.28% 80.90%
Limited Term
Class A
-------
(10/19/87)
1988(a) 9,835 0.41% 5.84% 66.91%
1989 13,446 0.56% 6.28% 50.00%
1990 19,018 0.70% 6.48% 38.23%
1991 67,471 0.56% 6.32% 166.77%
1992 284,479 0.47% 5.88% 48.35%
1993 570,518 0.70% 5.10% 19.84%
1994 704,627 0.70% 4.76% 22.16%
1995 569,196 0.74% 4.88% 19.74%
1996 489,157 0.79% 4.77% 38.55%
Class C
-------
(12/1/95)
1996 15,415 1.19% 4.17% 38.55%
</TABLE>
(a) Since commencement of investment operations as stated above.
(b) Annualized.
(c) Annualization is not appropriate.
(d) The total returns shown do not include the effect of front-end or
contingent deferred sales loads and are annualized in first year after
commencement of investment operations.
(e) Financial highlights prior to June 1, 1995 are from Flagship Pennsylvania
Triple Tax Exempt Fund, predecessor to the current Pennsylvania Fund.
(f) During the period ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. The expense ratio has been
grossed up to exclude the effect of these credits. Prior period numbers
have not been restated.
THE FUNDS AND THEIR OBJECTIVES
Each Fund is a series of Flagship Tax Exempt Funds Trust and is actively, pro-
fessionally managed, independent of the others. The diversified Funds are
marked with an asterisk in the "Fees and Expenses" chart above. All other
Funds are non-diversified and may invest, subject to certain federal tax re-
quirements, a relatively high percentage of assets in the securities of a lim-
ited number of issuers. The securities of a non-diversified fund may be more
susceptible to any single economic, political or regulatory occurrence than
the securities of a diversified Fund. In this Prospectus, all references to
the "Funds" refer to the Trust and its Funds unless expressly noted otherwise.
The Funds include State, National and Insured tax exempt portfolios. Each of
the Funds will seek high current after tax income free from federal ordinary
income tax consistent with liquidity and preservation of capital, by investing
primarily in portfolios of investment grade municipal
-- 9 --
<PAGE>
obligations. The foregoing is fundamental to each Fund and cannot be changed
without shareholder approval. There can be no assurance that the objective of
the Funds will be achieved. The State Funds seek to pay income that is also
free of the particular state and, in some cases local, income taxes. For the
National and Insured Funds, a portion of dividend income paid from securities
issued by your state of residence or U.S. Territories may be exempt from state
or local income taxes. The Insured Funds pursue the same objectives as the Na-
tional Funds, but will invest only in insured municipal obligations. On aver-
age, no more than 20% of the Funds' assets will be invested in assets subject
to the alternative minimum tax, except the Kentucky Limited Term Municipal
Bond Fund which may invest more than 20% of its assets in assets subject to
the alternative minimum tax.
WHAT THE FUNDS OWN AND THEIR STRATEGIES
FUND HOLDINGS
Each Fund's investments may be long-term (usually called bonds) or short-term
(usually called notes or tax exempt commercial paper). The two primary types
of tax exempt bonds are "general obligation" and "revenue" or "special obliga-
tion" bonds, which include "industrial revenue bonds." General obligation
bonds are secured by the issuer's full faith, credit and taxing power. Revenue
or special obligation bonds are payable only from the revenues derived from a
particular facility or type of facilities or, in some cases, from the proceeds
of a special tax or other identified revenue source. Obligations of territo-
ries and possessions of the United States (such as Puerto Rico, Guam and the
United States Virgin Islands) also qualify for investment by each Fund. From
time to time, each Fund may also invest up to 10% of its assets in tax exempt
funds, including tax exempt money market funds, subject to the requirements of
applicable law. Such investments will result in shareholders paying duplicate
or multiple fees, as such funds incur expenses similar to those of the Flag-
ship Funds. The Manager will only invest in such funds when it believes their
yields are beneficial, even including multiple fees.
It is possible that a single Fund (or all Funds) from time to time will invest
more than 25% of its assets in a particular segment of the municipal bond mar-
ket, such as Hospital Revenue Bonds, Housing Agency Bonds, Industrial Develop-
ment Bonds, Airport Bonds or U.S. Territorial Bonds. In such circumstances,
economic, business, political or other changes affecting one bond might also
affect other bonds in the same segment, thereby potentially increasing market
or credit risk.
Each Fund may invest in municipal leases, which are leases or installment pur-
chases used by state and local governments as a means to acquire property,
equipment or facilities without involving debt issuance limitations. It is
possible that more than 5% of a Fund's net assets will be invested in munici-
pal leases which, under Securities and Exchange Commission ("SEC") guidelines,
have been determined to be liquid securities by the Board of Trustees or by
the Manager under procedures established by the Trustees. See the SAI for more
details and a discussion of the special risks of investing in these securi-
ties.
QUALITY
Each State and National Fund will invest all of its assets in investment-grade
obligations that are rated at the date of purchase:
(1) in the case of long-term obligations, in the four highest ratings of Stan-
dard & Poor's Ratings Group(R) ("S&P") (AAA, AA, A and BBB) or Moody's In-
vestor Service, Inc. ("Moody's") (Aaa, Aa, A and Baa) or Fitch Investors Serv-
ice, Inc. ("Fitch") (AAA, AA, A, and BBB);
(2) in the case of bonds not rated by an agency, each Fund may also invest in
unrated obligations that the Manager believes to be equivalent to at least a
BBB rating;
(3) in the case of short-term notes, SP-1 through SP-2 by S&P or MIG 1 through
MIG 4 by Moody's;
(4) in the case of tax-exempt commercial paper, A-1+ through A-2 by S&P or
Prime-1 through Prime-2 by Moody's; or
(5) in the case of tax-exempt funds, those funds that invest only in compara-
ble quality securities.
For a description of such ratings, see Appendix I to the SAI. According to
these descriptions, securities rated in these categories are regarded as hav-
ing capacity to pay interest and repay principal that varies from "extremely
strong" to "adequate." For example, according to S&P, AAA bonds exhibit ex-
tremely strong capacity, while BBB bonds normally exhibit adequate protection
parameters, although adverse economic conditions or other changes are more
likely to lead to a weakened capacity. Securities rated Baa are regarded by
Moody's as having some speculative characteristics. Securities rated BBB by
Fitch are considered to have adequate capacity, although adverse changes in
economic conditions and circumstances are more likely to have an adverse im-
pact than for higher-rated categories. For a discussion of the quality of the
Insured Funds' holdings, please see "Flagship National Tax Exempt Funds."
MATURITY
Any Flagship Fund with "short term" in its name indicates a dollar-weighted
average maturity of 1 to 3 years; "limited term" as 1 to 7 years; and "inter-
mediate term" as 5 to 10 years. Unless so named, the Fund is a long-term port-
folio whose dollar-weighted average maturity is 15 to 25 years. No Fund has
any restrictions on the maturity of the obligations in its portfolio and may
lengthen or shorten the average dollar weighted maturity in light of market
conditions and the Manager's expectations. Under certain circumstances a Fund
may invest in nominally long-term securities that have many of the features of
shorter-term securities, and the maturities of these securities would be
deemed to be earlier than their ultimate maturity dates by virtue of an exist-
ing demand feature.
-- 10 --
<PAGE>
NAV AND YIELD VARIATIONS
Yields on tax-exempt securities vary depending on a variety of factors, 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
July 1, 1995 (unless otherwise noted), as well as national averages for com-
parison purposes. Unless otherwise indicated, shares are exempt from state
property taxes, and there are no other material tax considerations for state
residents except as discussed under "Taxes." See the SAI for further informa-
tion.
NATIONAL AVERAGES
The national average personal income was $22,788 and the unemployment rate was
5.6% in 1995.
ALABAMA - In 1995, Alabama population was 4,253,000, average personal income
was $18,781 and the unemployment rate was 6.3%. Alabama's economy is distrib-
uted relatively evenly between manufacturing, trade, and government. 1995 gen-
eral fund revenues were $756 million against expenditures of $712 million.
General obligation bonds are rated Aa by Moody's, AA by Standard & Poor's and
AA by Fitch.
ARIZONA - In 1995, Arizona population was 4,218,000, average personal income
was $20,421 and the unemployment rate was 5.1%. Arizona's economy is based
primarily on employment in the trade and service sectors. 1995 general fund
revenues were $4.23 billion against expenditures of $4.43 billion. There are
no general obligation ratings, however, outstanding certificates of participa-
tion are rated A by Moody's, and A by Standard & Poor's.
CALIFORNIA - In 1995, California population was 31,589,000, average personal
income was $23,699 and the unemployment rate was 7.8%. California's economy is
based primarily on the service industry. 1995 budgeted general fund revenues
were $42.5 billion against expenditures of $41.7 billion. General obligation
ratings are A1 by Moody's, A by Standard & Poor's and A by Fitch.
Tax Considerations: Distributions attributable to interest on obligations of
California or its political subdivisions, the United States, Puerto Rico, the
U.S. Virgin Islands or Guam are exempt from California income tax, provided
that, at the close of each quarter, at least 50% of Fund assets consist of
such obligations.
COLORADO - In 1995, Colorado population was 3,747,000, average personal income
was $23,499 and the unemployment rate was 4.2%. Colorado's economy is based
primarily on services, trade, and government. 1995 general fund revenues were
$5.96 billion against expenditures of $5.17 billion. There is no outstanding
general obligation debt, but outstanding lease obligations are rated A by
Moody's and AAA by Standard & Poor's.
CONNECTICUT - In 1995, Connecticut population was 3,275,000, average personal
income was $30,303 and the unemployment rate was 5.5%. Connecticut's economy
is based primarily on the service sector. 1995 general fund revenues were
$8.480 billion against expenditures of $8.399 billion. General obligation
ratings are Aa by Moody's, AA- by Standard & Poor's and AA by Fitch.
Tax Considerations: Distributions attributable to interest on obligations with
respect to which taxation is prohibited by federal law are exempt from Con-
necticut income tax, provided that, at the close of each quarter, at least 50%
of Fund assets consist of such obligations. Interest attributable to obliga-
tions of Connecticut or its political subdivisions are not subject to Connect-
icut tax.
FLORIDA - In 1995, Florida population was 14,166,000 average personal income
was $22,916 and the unemployment rate was 5.5%. Florida's economy is based
primarily on the service sector, which includes tourism. 1995 general fund
revenues were $13.892 billion against expenditures of $11.865 billion. General
obligation ratings are Aa by Moody's, AA by Standard & Poor's and AA by Fitch.
Tax Considerations: There is no Florida individual income tax. Shares are ex-
empt from the Florida intangibles tax with respect to any calendar year, pro-
vided that, at the close of the preceding calendar year, all Fund assets con-
sist of obligations of Florida or its political subdivisions, the United
States, Puerto Rico, the U.S. Virgin Islands or Guam.
GEORGIA - In 1995, Georgia population was 7,201,000, average personal income
was $21,278 and the unemployment rate was 4.9%. Georgia's economy is based
heavily on trade, which is due primarily to its central location in the South-
east. 1995 general fund revenues were $11.324 billion against expenditures of
$11.324 billion. General obligation ratings are Aaa by Moody's, AA+ by Stan-
dard & Poor's and AAA by Fitch.
KANSAS - In 1995, Kansas population was 2,565,000, average personal income was
$21,012 and the unemployment rate was 4.4%. Kansas' economy is based primarily
on agriculture. 1995 budgeted general fund revenues were $3.247 billion
against expenditures of $3.342 billion. There is no long-term debt and thus
are no ratings to report.
Tax Considerations: Distributions attributable to interest on (1) obligations
of Kansas or its political subdivisions issued prior to January 1, 1988 and
specifically exempt under the Kansas tax code, (2) any obligations of Kansas
or its political subdivisions issued after December 31, 1987, and (3) any ob-
ligations of the United States, Puerto Rico, the U.S. Virgin Islands or Guam
are exempt from Kansas income tax. Shares are subject to the Kansas property
tax but are exempt from the local intangibles taxes levied by counties, cities
and townships.
-- 12 --
<PAGE>
KENTUCKY - In 1995, Kentucky population was 3,860,000, average personal income
was $18,612 and the unemployment rate was 5.4%. Kentucky's economy is based
primarily on manufacturing and services. 1995 general fund revenues were $5.023
billion against expenditures of $3.997 billion. General obligation 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 4,342,000, average personal in-
come was $18,827 and the unemployment rate was 6.9%. Louisiana's economy is
based primarily on services. 1995 unaudited general fund revenues were $10.6
billion against expenditures of $9.9 billion. General obligation ratings are
Baa1 by Moody's and A by Standard & Poor's.
MICHIGAN - In 1995, Michigan population was 9,549,000, average personal income
was $23,551 and the unemployment rate was 5.3%. Michigan's economy is based
primarily on manufacturing and services. Projected 1995 general fund revenues
were $16.93 billion against expenditures of $16.1 billion. General obligation
ratings are A1 by Moody's, AA by Standard & Poor's and AA by Fitch.
Tax Considerations: Shares acquired through purchases or reinvestment of divi-
dends are not subject to Michigan intangible personal property tax to the ex-
tent that the Fund invests in obligations of Michigan or its political subdivi-
sions, the United States, Puerto Rico, the U.S. Virgin Islands or Guam.
MISSOURI - In 1995, Missouri population was 5,324,000, average personal income
was $21,627 and the unemployment rate was 4.8%. Missouri's economy is based
primarily on services. 1995 general fund revenues were $8.5 billion against ex-
penditures of $6.1 billion. General obligation ratings are Aaa by Moody's, AAA
by Standard & Poor's and AAA by Fitch.
NEW JERSEY - In 1995, New Jersey population was 7,945,000, average personal in-
come was $28,858 and the unemployment rate was 6.4%. New Jersey's economy is
based primarily on retail trade and services. Projected 1995 general fund reve-
nues were $16.60 billion against expenditures of $15.47 billion. General obli-
gation ratings are Aa1 by Moody's, AA+ by Standard & Poor's and AA+ by Fitch.
Tax Considerations: Distributions attributable to interest or gain from obliga-
tions of New Jersey or its political subdivisions, the United States, Puerto
Rico, the U.S. Virgin Islands, or Guam are exempt from New Jersey income tax if
at least 80 percent of the aggregate principal amount of obligations held by
the New Jersey Fund consists of such obligations.
NEW MEXICO - In 1995, New Mexico population was 1,685,000, average personal in-
come was $18,055 and the unemployment rate was 6.3%. New Mexico's economy is
based primarily on services. 1995 unaudited general fund revenues were $2.745
billion against expenditures of $2.781 billion. General obligation ratings are
Aa by Moody's and AA+ by Standard & Poor's.
NEW YORK - In 1995, New York population was 18,136,000, average personal income
was $26,782 and the unemployment rate was 6.3%. New York's economy is based
primarily on services. 1995 general fund revenues were $31.5 billion against
expenditures of $33.1 billion. General obligation ratings are A by Moody's and
A- by Standard & Poor's.
NORTH CAROLINA - In 1995, North Carolina population was 7,195,000, average per-
sonal income was $20,624 and the unemployment rate was 4.3%. North Carolina's
economy is based primarily on manufacturing and service. 1995 general fund rev-
enues were $14.18 billion against expenditures of $11.98 billion General obli-
gation ratings are Aaa by Moody's, AAA by Standard & Poor's and AAA by Fitch.
Tax Considerations: Capital gains distributions exempt from North Carolina in-
come tax to the extent that they are attributable to gain from the sale or ex-
change of certain obligations of North Carolina or its political subdivisions,
agencies or instrumentalities.
OHIO - In 1995, Ohio population was 11,151,000, average personal income was
$22,021 and the unemployment rate was 4.8%. Ohio's non-farming economy is based
primarily on services. 1995 general fund revenues were $15.78 billion against
total expenditures of $13.2 billion. General obligation ratings are Aa by
Moody's and AA by Standard & Poor's.
Tax Considerations: Distributions attributable to gains on the disposition of
obligations of Ohio or its political subdivisions, Puerto Rico, the Virgin Is-
lands and Guam exempt from Ohio personal income tax.
PENNSYLVANIA - In 1995, Pennsylvania population was 12,072,000, average per-
sonal income was $23,279 and the unemployment rate was 5.9%. Pennsylvania's
economy is based primarily on services. Projected 1995 general fund revenues
were $15.8 billion against total expenditures of $15.6 billion. General obliga-
tion ratings are A1 by Moody's, AA- by Standard & Poor's and AA- by Fitch.
Tax Considerations: Individual shareholders not subject to (i) the Pennsylvania
personal income tax on distributions to the extent that such distributions are
attributable to gains on the disposition of obligations of Pennsylvania and its
political subdivisions, the United States, Puerto Rico, the U.S. Virgin Islands
or Guam; and (ii) the Pennsylvania personal property tax on shares to the ex-
tent that the Fund's portfolio consists of such obligations.
SOUTH CAROLINA - In 1995, South Carolina population was 3,673,000, average per-
sonal income was $18,788 and the unemployment rate was 5.1%. South Carolina's
economy includes a very diversified economic base of services and trade. Con-
tinued growth is expected in the service industries, particularly tourism and
manufacturing. 1995
-- 13 --
<PAGE>
general fund revenues were $4.45 billion against expenditures of $3.61 billion.
General obligation ratings are Aaa by Moody's, AAA by Standard & Poor's and AAA
by Fitch.
TENNESSEE - In 1995, Tennessee population was 5,256,000, average personal in-
come was $20,376 and the unemployment rate was 5.2%. Tennessee's economic base
is reasonably well diversified, with services the largest employment sector.
1995 general fund revenues were $6.60 billion against expenditures of $6.30
billion. General obligation ratings are Aaa by Moody's, AA+ by Standard &
Poor's and AAA by Fitch.
Tax Considerations: No state personal income tax. Qualified exempt-interest
dividends exempt from the Hall Tax on interest and dividends.
VIRGINIA - In 1995, Virginia population was 6,618,000, average personal income
was $17,915 and the unemployment rate was 4.5%. Virginia's economy remains
strong and diversified. Budgeted 1995 general fund revenues were $6.831 billion
against expenditures of $6.319 billion. General obligation ratings are Aaa by
Moody's, AAA by Standard & Poor's and AAA by Fitch.
WISCONSIN - In 1995, Wisconsin population was 5,123,000, average personal in-
come was $21,839 and the unemployment rate was 3.7%. Wisconsin's economy is
based largely on services. 1995 general fund revenues were $13.3 billion
against expenditures of $13.1 billion. General obligation ratings are Aa by
Moody's, AA by Standard & Poor's and AA+ by Fitch.
Tax Considerations: Distributions attributable to certain obligations of Wis-
consin or its political subdivisions, and certain obligations of the United
States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands or Guam
are exempt from the Wisconsin income tax. The Wisconsin Fund intends to invest
in obligations that will permit interest to be free from Wisconsin income tax.
FLAGSHIP NATIONAL TAX EXEMPT FUNDS
NATIONAL FUNDS
Flagship Short Term Tax Exempt Fund
Flagship Limited Term Tax Exempt Fund
Flagship Intermediate Tax Exempt Fund
Flagship All-American Tax Exempt Fund
Flagship U.S. Territories Tax Exempt Fund
Flagship High Yield Municipal Bond Fund
Flagship's National Tax Exempt Funds are designed for investors who want income
free of federal income tax. A portion of dividend income paid from securities
issued by your state of residence or U.S. Territories may be exempt from state
income, personal property or intangibles tax. Please consult your tax adviser
about the specific tax laws in your state.
These Funds are investment quality or better (except for the High Yield Fund),
nationally diversified portfolios of municipal securities, listed in order of
increasing dollar weighted average maturity and increasing potential for price
fluctuations.
Flagship U.S. Territories Tax Exempt Fund is a non-diversified portfolio in-
vesting in the long-term securities of Puerto Rico, Guam and the U. S. Virgin
Islands.
Each National Fund pays income dividends that will vary with market conditions.
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. Territo-
ries and High Yield Funds, all of which seek high current income. The All-Amer-
ican Fund may be more actively managed among moderate-quality, value-added se-
curities. The High Yield Fund is actively monitored investing in riskier medium
and lower grade municipal securities. Additional information concerning 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 munici-
pal securities that are insured as to the payment of principal and interest by
either a mutual fund portfolio insurance policy or an insurance policy applica-
ble to a specific security. Neither a Fund's value nor any of its securities is
insured by the Federal Deposit Insurance Corporation. A Fund may also own mu-
nicipal securities where such payments are guaranteed by an agency or instru-
mentality of the U.S. Government; or where such payments are secured by an es-
crow 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 in-
vest in short-term securities 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 corre-
sponding 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 Man-
ager to each Fund is Flagship Financial Inc., whose principal business address
is One Dayton Centre, One South Main Street, Dayton, Ohio 45402-2030. The Man-
ager is a wholly-owned subsidiary of Flagship Resources Inc., which is owned
and/or controlled by Bruce P. Bedford
-- 14 --
<PAGE>
and Richard P. Davis and members of their immediate families. Messrs. Bedford
and Davis are each a Trustee and officer of the Funds and an officer and Di-
rector of the Manager and the Distributor. In accordance with the terms of
separate Investment Advisory Agreements with each Fund (the "Advisory Agree-
ments"), the Manager renders investment supervisory and corporate administra-
tive services to the Funds, subject to the general supervision of the Trustees
and in conformity with the stated policies of the Funds. It is the responsi-
bility of the Manager to make investment decisions and to place the purchase
and sale orders for the portfolio transactions for each Fund.
The Funds have adopted a Code of Ethics regarding restrictions on the invest-
ment activity of specified "Investment Personnel." These include restrictions
on personal investing, pre-clearance of trades, sanctions and disgorgement of
certain profits, as well as prohibitions on short swing profits, investments
in initial public offerings and holding public directorships.
The Manager's Investment Policy Committee, composed of all of the portfolio
managers and principal executive officers, meets monthly to review the domes-
tic economic outlook and the status of financial markets and to set the policy
guidelines for the management of each Fund. All securities purchased must pass
certain screening criteria by the portfolio managers and are continuously
monitored to various degrees by Credit Research Department analysts. Implemen-
tation, trading, and temporary modification of a Fund's strategy is the func-
tion of a small team of portfolio managers who support each other. Each team
is led by a designated portfolio manager primarily responsible for the day-to-
day operations and performance of the Funds. The designated team leaders and
their Funds are listed below. Richard Huber has been employed by the Manager
since 1987. Prior to September, 1991, Michael Davern was Assistant Vice Presi-
dent, Van Kampen Merritt Inc. (Chicago, IL). Prior to January, 1991, Jan
Terbreuggen was Vice President, Todd Investment Advisers (Louisville, KY).
Walter Parker has been employed by the Manager since July, 1994. Prior to Oc-
tober, 1993, he was Senior Vice President, PNC Bank (Cincinnati, OH). Paul
Brennan has been employed by the Manager since July, 1991. Prior to April,
1991, he was Audit Assistant at Deloitte & Touche LLP (Dayton, OH). At any
time during which a portfolio manager is on vacation or is otherwise unavaila-
ble for day-to-day management, the responsibility for the management of his
designated funds will shift to one or more of the other named portfolio manag-
ers.
<TABLE>
<CAPTION>
Jan Terbrueggen, CFA Michael Davern, CFA Richard Huber Walter Parker, CFA Paul Brennan, CFA
Vice President Vice President Vice President Vice President Portfolio Manager
- -------------------- ---------------------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Arizona Alabama Insured Limited* All-American North Carolina Florida
California* California Kansas Connecticut Ohio Intermediate
Colorado Intermediate* Michigan Kentucky Ohio Intermediate
Louisiana Florida Michigan Kentucky Limited Intermediate*
New Mexico Florida Limited* Intermediate* Limited Term Ohio Limited*
Georgia Michigan Limited* New Jersey South Carolina
Insured* Missouri New Jersey Tennessee
Insured U.S. Territories* Intermediate
Intermediate* Wisconsin New Jersey Limited*
New York
New York
Intermediate*
New York Limited*
Pennsylvania
Short Term*
Virginia
</TABLE>
*Funds are scheduled to commence operations 1996 to 1997.
In addition, the Manager performs or supervises the administrative services
for the Funds, including: (i) assisting in supervising all aspects of their
operations; (ii) providing the Funds, at the Manager's expense, with persons
competent to perform necessary, effective corporate administrative and cleri-
cal functions; and (iii) providing the Funds, at the Manager's expense, with
adequate office space and related services. Accounting records are maintained,
at the Funds' expense, by its Custodian, State Street Bank and Trust Company.
-- 15 --
<PAGE>
As compensation for the services rendered by the Manager under the Advisory
Agreements, the Manager is paid a fee, computed daily and payable monthly with
respect to each Fund on a separate basis, at an annual rate of 0.50% of the
average daily net assets of such Funds, except for any Limited Term Fund,
which pays a fee, computed daily and payable monthly with respect to each Fund
on a separate basis, at an annual rate of 0.30% of the average daily net as-
sets of $500 million or less, plus 0.25% of the average daily net assets in
excess of $500 million. For the fiscal year ended May 31, 1996, the fee paid
to the Manager by each Fund is shown below. Please see "Fees and Expenses" for
the total expenses for each Fund (or class of shares if applicable), expressed
as a percentage of average net assets.
<TABLE>
<CAPTION>
Fund Fee Paid to Manager Fund Fee Paid to Manager Fund Fee Paid to Manager
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama .00% Kentucky Ltd. .06% Ohio .39%
Arizona .17% Louisiana .20% Pennsylvania .17%
Colorado .00% Michigan .30% South Carolina .00%
Connecticut .20% Missouri .23% Tennessee .35%
Florida .30% New Jersey .00% Virginia .25%
Florida Int. .00% New Jersey Int. .00% Wisconsin .00%
Georgia .20% New Mexico .06% All-American .26%
Kansas .04% New York .01% Intermediate .00%
Kentucky .19% North Carolina .34% Limited Term .24%
</TABLE>
The Manager, which has been a registered investment adviser since 1978, also
renders investment advisory and management services to others. The Manager
manages approximately $4.6 billion in assets, primarily of mutual funds, cor-
porations, insurance companies, employee benefit plans and individuals. The
Manager is investment adviser to the Trust, with assets of approximately $4.0
billion and to Flagship Admiral Funds Inc., an investment company with assets
of approximately $225 million. All assets are as of June 30, 1996.
HOW TO CONTACT FLAGSHIP
----------------------------------
FOR GENERAL INFORMATION:
Call toll free from anywhere in
the U.S.
8:00 a.m. to 6:00 p.m. Eastern
time
1-800-414-7447
FOR REDEMPTIONS AND OTHER
TRANSACTIONS:
Call toll free from anywhere in
the U.S.
9:00 a.m. to 5:00 p.m. Eastern
time
1-800-225-8530
(TDD) 1-800-360-4521
SEND YOUR INVESTMENTS AND ALL
REQUESTS TO:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
HOW TO BUY SHARES
PURCHASE PRICE
Shares of each Fund are offered continuously at a public offering price that
is equal to the net asset value per share plus any applicable sales charge.
You pay the sales charge (1) at the time of purchase (Class A Shares) or (2)
on a contingent deferred basis (Class B and Class C Shares). The Class R
Shares are designed for institutional investors, with a minimum initial in-
vestment of $1,000,000. The R Shares are sold at net asset value with no
front-end sales load, no contingent deferred sales charge and no Rule 12(b)-1
charge. When placing purchase orders, you must specify whether the order is
for Class A, Class B, Class C or Class R Shares. All unspecified purchase or-
ders will automatically be invested in Class A shares. Any order in an amount
of $1,000,000 or more must be for Class A or Class R Shares.
The minimum purchase required to open an account in any Fund is $3,000. Addi-
tional purchases of $50 or more may be made through your financial consultant
or by mail at any time.
CLASSES OF SHARES
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares, are authorized for all Funds. They are described fully in the
SAI. The following table shows the total sales charges or underwriting dis-
counts and dealer concessions for each breakpoint in sales.
-- 16 --
<PAGE>
CLASS A SHARES--OFFERED BY ALL FUNDS
<TABLE>
<CAPTION>
TOTAL SALES
CHARGE
------------------------------ DEALER CONCESSION OR AGENCY
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF COMMISSION AS PERCENTAGE
AT PUBLIC OFFERING PRICE OFFERING PRICE NET ASSET VALUE OF OFFERING PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Series Except Those Listed Below
Less than $50,000 4.20% 4.38% 3.70%
$50,000 to $100,000 4.00 4.18 3.50
$100,000 to $250,000 3.50 3.65 3.00
$250,000 to $500,000 2.50 2.61 2.00
$500,000 to $1,000,000 2.00 2.09 1.50
$1,000,000 and over -- -- --*
Intermediate Series
Less than $50,000 3.00% 3.09% 2.50%
$50,000 to $100,000 2.50 2.58 2.00
$100,000 to $250,000 2.00 2.06 1.50
$250,000 to $500,000 1.50 1.55 1.25
$500,000 to $1,000,000 1.25 1.29 1.00
$1,000,000 and over -- -- --*
Limited and Short Term Series
Less than $50,000 2.50% 2.56% 2.00%
$50,000 to $100,000 2.00 2.05 1.60
$100,000 to $250,000 1.50 1.54 1.20
$250,000 to $500,000 1.25 1.28 1.00
$500,000 to $1,000,000 .75 .77 .60
$1,000,000 and over -- -- --*
</TABLE>
*A CDSC may be imposed as described below.
CLASS A CONTINGENT DEFERRED SALES CHARGE. There is no initial sales charge on
purchases of Class A Shares of any one or more of the Tax Exempt Funds for
purchases aggregating $1 million or more. Shares of any of the Funds that of-
fer only one class of shares that have no designation are considered "Class A"
shares for this purpose. The Distributor pays dealers of record commissions on
those purchases in an amount equal to the sum of 1.0% of the first $2.5 mil-
lion, plus 0.50% of the next $2.5 million, plus 0.25% of purchases over $5
million. If you redeem any of those shares within 18 months of the end of the
calendar month of their purchase, a Class A contingent deferred sales charge
("CDSC") may be deducted from the redemption proceeds. That sales charge will
be equal to 1.0% of either (1) the aggregate net asset value of the redeemed
shares (not including shares purchased by reinvestment of dividends or capital
gain distributions) or (2) the original cost of the shares, whichever is less.
CLASS B SHARES
CLASS B SHARES are offered at net asset value, without an initial sales
charge, subject to a continuing 0.95% annual distribution fee (0.70% for short
term or limited term maturity funds). Class B Shares are subject to a declin-
ing contingent deferred sales charge ("CDSC") if you redeem your shares within
six years from the purchase date. This CDSC charge for long maturity funds is
5%, 4%, 4%, 3%, 2% and 1% for years one through six. For intermediate and
short term maturity funds, the declining CDSC is 3%, 3%, 2% and 1% for years
one through four. Class B Shares automatically convert to Class A Shares at
the end of eight years for long maturity funds and at the end of five years
for intermediate and short term maturity funds. The conversion is based on the
relative net asset value of the two classes, and no sales load or other charge
is imposed.
The Distributor pays a 0.20% service fee to dealers in advance for the first
year upon the sale of Class B Shares. After the shares have been held for a
year, the Distributor pays the fee monthly. In addition, the Distributor pays
sales commission of 3.80% (2.30%-intermediate; 1.80%-limited term) of the pur-
chase price to dealers from its own resources at the time of sale.
CLASS C SHARES
Class C Shares are offered at net asset value, without an initial sales
charge, subject to a continuing 0.95% annual distribution fee for any fund
with other than a short term or limited term maturity (of which 0.75% is an
asset based sales charge and 0.20% is a service fee) or a continuing 0.70% an-
nual distribution fee for any fund with a short term or limited term maturity
(of which 0.50% is an asset based sales charge and 0.20% is a service fee).
Class C Shares are subject to a contingent deferred sales charge ("CDSC") of
1% if redeemed within one year of the purchase date. The first year, the an-
nual distribution fee is paid to the Distributor. In subsequent years, the
service fee is paid to the Distributor and the remainder is paid to the Deal-
er. Class C Shares are authorized for all Funds, but are not currently offered
by all Funds.
CLASS R SHARES
You may purchase Class R Shares with monies representing dividends and capital
gain distributions on Class R Shares of the Fund. Also, you may purchase Class
R Shares if you are within the following specified categories of investors who
are
-- 17 --
<PAGE>
also eligible to purchase Class A Shares at net asset value without an up-
front sales charge: officers, current and former trustees of the Fund, bona
fide, full-time and retired employees of Flagship, and subsidiaries thereof,
or their immediate family members; any person who, for at least 90 days, has
been an officer, director or bona fide employee of any Authorized Dealer, or
their immediate family members; officers and directors of bank holding compa-
nies that make Fund shares available directly or through subsidiaries or bank
affiliates; and bank or broker-affiliated trust departments; persons investing
$1 million or more in Class R Shares; and clients of investment advisers, fi-
nancial planners or other financial intermediaries that charge periodic or as-
set-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares with-
out a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Flagship Funds Inc. (the "Distributor") for
distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and, conse-
quently, holders of Class R Shares may not receive the same types or levels of
services from Authorized Dealers. In choosing between Class A Shares and Class
R Shares, you should weigh the benefits of the services to be provided by Au-
thorized Dealers against the annual service fee imposed upon the Class A
Shares.
BUYING THROUGH YOUR FINANCIAL CONSULTANT
To purchase shares through your financial consultant, you should request that
the firm transmit your order for the appropriate dollar amount or number of
shares with your check or wire.
BUYING BY MAIL
To open a new account, please complete the enclosed Flagship Application and
mail it with your check to the address shown.
Make your check payable to (Name of Fund). Your order will be executed on the
day your check is received, processed at the public offering price based on
the net asset value per share plus the applicable sales charge next deter-
mined.
All purchases made by check should be in US dollars. Third-Party checks will
not be accepted.
The Fund executes purchase orders received in good order immediately prior to
declaration of the daily dividend as of the close of business on the day the
order is received. Payments by wire will begin to earn dividends on the busi-
ness day that the Fund's custodian bank receives payment for your shares. All
other forms of payment will begin to earn dividends on the subsequent business
day. When you redeem shares, you will continue to receive dividends up to, but
not including, payment date. See "How to Sell Shares" and "Distributions and
Yield." Because dividends do not begin until payment is received, you should
request your financial consultant to forward payment promptly. To the extent
your securities account or bank account is charged for your purchase before
the Fund receives funds, your financial consultant or bank may be earning in-
terest on your funds. The Fund reserves the right to reject any order for
shares. The Fund may, in its sole discretion, accept in-kind payments.
AUTOMATIC INVESTMENT PLAN
The Fund offers shareholders who receive a quarterly statement from Flagship
the convenience of automatic monthly investing. On any regular business day
between the fifth and twenty-eighth of each month, the amount you specify ($50
minimum) will be transferred from your bank account to the Fund. To initiate
your automatic investment plan, complete the Flagship Application and attach a
voided check. The Fund pays the cost associated with these transfers, but re-
serves the right, upon 90 days written notice, to make reasonable charges for
this service. Your bank may charge for debiting your account. Shareholders may
change the amount or discontinue their participation in the plan by written
notice to Boston Financial 30 days prior to fund transfer date. Because a
sales charge is applied on new Class A Shares purchased, it would be disadvan-
tageous to purchase Class A Shares while also making systematic withdrawals.
REDUCED SALES CHARGES
The Funds' Distributor offers several reduced sales charge programs through:
. rights of accumulation and combinations
. letter of intent
. group purchases
. redemptions from unrelated funds
Letter of intent is explained below. Please see the SAI for additional infor-
mation.
LETTER OF INTENT (CLASS A SHARES ONLY)
A shareholder may qualify for reduced sales charges on Class A shares by com-
pleting the Letter of Intent section on the application form. All investments
in Class A shares of any Flagship fund count toward the indicated goal. It is
understood that 5% of the dollar amount checked on this application will be
held in a special escrow account. These shares will be held by the escrow
agent subject to the terms of the escrow. All dividends and capital gains dis-
tributions on the escrowed shares will be credited to the shareholder's ac-
count in shares. If the total purchases, less redemptions by the shareholder,
his or her spouse, children and parents, equal the amount specified under this
Letter, the shares held in escrow will be deposited to the shareholder's open
account or delivered to the shareholder or to his order. If the total pur-
chases, less redemptions, exceed the amount specified under this Letter and an
amount which would qualify for a further discount, a retroactive price adjust-
ment will be made by Flagship Funds Inc. and the dealer through whom purchases
were made pursuant to this Letter of Intent (to reflect
-- 18 --
<PAGE>
such further quantity discount). The resulting difference in offering price
will be applied to the purchase of additional shares at the offering price ap-
plicable to a single purchase of the dollar amount of the total purchase. If
the total purchases less redemptions are less than the amount specified under
this Letter, the shareholder will remit to Flagship Funds Inc. an amount equal
to the difference in the dollar amount of sales charge actually paid and the
amount of sales charge which would have applied to the aggregate purchases if
the total of such purchases had been made at a single time. Upon such remit-
tance, the shares held for the shareholder's account will be deposited to his
account or delivered to him or to his order. If within 20 days after written
request by Flagship such difference in sales charge is not paid, Flagship is
hereby authorized to redeem an appropriate number of shares to realize such
difference. Flagship Funds Inc. is hereby irrevocably constituted under this
Letter of Intent to effect such redemption as agent of the shareholder. The
shareholder or the shareholder's dealer will inform Boston Financial that this
Letter is in effect each time a purchase is made.
HOW TO SELL SHARES
You can arrange to take money out of your Flagship account by redeeming (sell-
ing) some or all of your shares on any day the New York Stock Exchange is open,
either through your financial consultant or directly.
Upon receipt of your request in good order by Boston Financial through one of
the methods discussed below, the Fund will redeem shares at their next deter-
mined net asset value. See "How Fund Shares are Priced". Proceeds of redemp-
tions of recently purchased shares may be delayed for 15 days or more, pending
collection of funds for the initial purchase. If you sell all shares owned, the
dividends declared during the month through the time of redemption will be in-
cluded 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 Appli-
cation, 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 Flagship.
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 tel-
ephone redemptions that are believed to be valid. The shareholder will unilat-
erally bear the risk of such transactions. The Fund will employ reasonable pro-
cedures 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 unautho-
rized instructions. The procedures include requiring a form of personal identi-
fication prior to acting on telephone instructions, recording such instructions
and providing written confirmation of such transactions.
BY MAIL. Write a letter of instruction with the following information: your
name, account number, dollar or share amount to be sold and Fund name. Send it,
along with any certificates for shares to be sold, to the address shown on page
16.
Payment will be made by check to you at the address on your most recent Appli-
cation. Checks will normally be sent out within one business day, but in no
event more than seven days after the receipt of your redemption request in good
order. For requests over $50,000, or if the registration on your account has
been changed within the past 60 days, or if the redemption proceeds are to go
to an address other than the address of record, the Fund must receive a letter
of instruction signed by all persons authorized to sign for the account exactly
as it is registered. All signatures must be guaranteed.
SIGNATURE GUARANTEE
Boston Financial may require a signature guarantee on certain written transac-
tion requests. A signature guarantee may be executed by any eligible guarantor.
Eligible guarantors include member firms of a domestic stock exchange, commer-
cial banks, trust companies, savings associations and credit unions as defined
by the Federal Deposit Insurance Act. You should verify with the institution
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 accounts ex-
changed must be registered exactly the same, and you must have owned the Fund
shares you are exchanging from for at least 15 calendar days. Class A Shares
are sold and simultaneously purchased at net asset value ("NAV"). No contingent
deferred sales charge ("CDSC") is assessed on Class B or Class C shares at the
time of the exchange. The period of time you held Class B or Class C Shares of
the Fund exchanged from will be counted toward any future CDSC when shares are
redeemed.
Shareholders with the desire to automatically exchange shares of a predeter-
mined amount on a monthly, quarterly, or annual basis, may take advantage of
the systematic ex-
-- 19 --
<PAGE>
change plan. Please refer to the account application to establish this plan.
This is a free service, although the Fund may at any time impose a fee, change
or terminate the exchange privilege or limit the number of exchanges you may
make.
An exchange is a sale and subsequent purchase for tax purposes. See the SAI
for more information about federal tax treatment of capital losses. Be sure to
read the Prospectus for the Fund you are exchanging into before you invest.
SHAREHOLDER SERVICES
FREE RE-ENTRY
If you have sold Class A shares of any Fund within one year and wish to rein-
vest your proceeds without incurring another initial sales charge, send a
written request to Flagship at the address shown in "How to Buy Shares." If
reopening an account by this re-entry privilege, be sure to meet the Fund's
investment minimums. There is no charge by the Fund for this service, although
your financial consultant may apply a fee.
Be sure to observe the "wash sale" rules for redemptions and exchanges from
Funds within 30 days of purchase. Consult your tax adviser.
SYSTEMATIC WITHDRAWAL PLAN
If your Fund account is valued at $10,000 or more, you may have $50 or more
sent to you, or anyone you designate, every month or calendar quarter. These
"SWP" payments are drawn from redemption proceeds from your account and may
include shares added to your account through dividend reinvestments or from
the principal value. To the extent that redemptions for such periodic with-
drawals exceed dividend income reinvested in the account, such redemptions
will reduce and may ultimately exhaust the number of shares in the account.
You should not consider a SWP if you intend to add to your SWP account concur-
rently because new purchases of Class A shares will incur a sales charge and
new Class B or Class C Shares, other than through reinvestment, will be sub-
ject to the contingent deferred sales load schedule. (Boston Financial redeems
first the principal shares purchased earliest). Similarly, use of the SWP for
Class B and Class C Shares and held for less than the contingent deferred
sales load period will result in imposition of the CDSC. To terminate your
SWP, to change the amount or frequency or to designate a new payee of your
payments, contact Flagship in writing. Boston Financial may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. Boston Financial does not
currently charge a fee against your account for this service, but could do so
upon 60 days written notice to shareholders.
DIRECT DEPOSITS
You may have dividend distributions or proceeds from your Systematic With-
drawal Plan deposited electronically into your bank account. Under normal cir-
cumstances direct deposits are credited to your account on the second business
day of the month following normal payment. In order to utilize this option,
your bank must be a member of Automated Clearing House ("ACH"). To elect di-
rect deposit, just fill out the appropriate section of the Flagship Applica-
tion inserted in this Prospectus and include a voided check from the bank ac-
count into which redemptions are to be deposited. You may terminate direct de-
posits at any time by writing to Flagship at the address shown in "How to Buy
Shares."
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value ("NAV")
of each Fund and of each class of shares of the Fund is determined as of the
close of the regular trading session on each day that the New York Stock Ex-
change is open. NAV also will be computed as of 4:00 p.m., Eastern time, on
any other day in which purchase or redemption orders are received and there is
sufficient trading in the portfolio securities of the Fund such that a Fund's
NAV might be affected. NAV per share of each Fund is calculated to the nearest
cent by adding the value of all securities and other assets of such Funds,
subtracting all of the liabilities and dividing the remainder by the number of
shares outstanding at the time of determination.
Assets of each Fund for which market quotations are readily available are val-
ued at market price. Securities with remaining maturities of 60 days or less
are valued at their amortized cost under rules adopted by the SEC. Other as-
sets and securities are valued at their fair value as determined in good faith
under procedures established by the Trustees.
TAXES
The Funds intend that each qualify for taxation as a separate "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and satisfy certain other requirements, so that each Fund will not be
subject to federal income tax to the extent that it distributes its income to
its shareholders. The following discussion is for general information only.
Prospective investors should consult their own tax advisers regarding tax con-
sequences of any Fund investment.
From time to time proposals have been discussed or introduced before Congress
that could, if enacted, limit the types of securities eligible to pay tax-ex-
empt interest. If the tax-exempt status of municipal obligations changes at
some future date, the Trustees may recommend changes in the fundamental objec-
tives, which would have to be approved by shareholder vote.
FEDERAL TAXATION OF DISTRIBUTIONS
If, at the close of each quarter of the taxable year of a Fund, 50% or more of
the total value of its assets consists of obligations, the interest on which
is exempt from federal income
-- 20 --
<PAGE>
tax, such Funds will be able to designate and pay "exempt-interest dividends"
to the extent of its tax-exempt interest income (less any allocable expenses).
Such dividends will be treated as interest excludable from gross income for
federal income tax purposes in the hands of the shareholders of such Funds.
Exempt-interest dividends are, however, included in determining what portion,
if any, of a person's social security benefits will be includable in gross in-
come subject to federal income tax. Interest with respect to indebtedness in-
curred or continued by a shareholder to purchase or carry shares of a Fund is
not deductible to the extent that, under regulations, it relates to exempt-in-
terest dividends of the Fund. Similarly, investment and other shareholder ex-
penses allocable to such exempt-interest dividends generally are not deduct-
ible. Any dividends paid by a Fund that are attributable to its taxable ordi-
nary income (e.g., interest on U.S. Treasury securities and net short-term
capital gain) will be taxable to the shareholders of such Funds as ordinary
income. Capital gain distributions, which are designated as distributions of a
Fund's net capital gain (i.e., the excess of net long-term capital gain over
net short-term capital loss), are treated as a long-term capital gain regard-
less of the length of time you have owned shares.
To the extent that a Fund invests in certain tax exempt "private activity" ob-
ligations issued after August 7, 1986, shareholders may be subject to the fed-
eral alternative minimum tax on the portion of exempt-interest dividends de-
rived from such obligations. Each Fund will provide information concerning the
tax status of its distributions, including the amount of its dividends desig-
nated as exempt-interest dividends and as capital gain dividends, and any ap-
plicable state tax information.
STATE TAXATION OF DISTRIBUTIONS
Except as otherwise stated earlier, shareholders in each Fund who otherwise
are subject to individual income taxes of the state named in a Fund will not
be subject to such taxes on distributions with respect to their shares to the
extent that such distributions are attributable to interest on obligations of
the state and, generally, its political subdivisions or on obligations of the
United States, Puerto Rico, the U.S. Virgin Islands or Guam. Except as other-
wise indicated, shareholders will be required to include the entire amount of
capital gain distributions in income to the same extent for state income tax
purposes as for federal income tax purposes. Shareholders are urged to consult
their own tax advisers with respect to the alternative minimum tax imposed by
certain states.
Corporations should note that ownership of shares of certain Funds may have
tax consequences not discussed herein. Accordingly, corporate shareholders are
particularly urged to consult their own tax advisers with respect to the state
and local tax consequences of investment in the shares of any Fund.
REDEMPTIONS
Redemptions of shares of each Fund will be taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between the shareholder's basis in his/her shares and
the amount received. Assuming that such shares are held as a capital asset,
such gain or loss will be a capital gain or loss and will be a long-term capi-
tal gain or loss if the shareholder has held his/her shares for a period of
more than one year. If a shareholder redeems shares of any Fund at a loss and
makes an additional investment in the same series 30 days before or after such
redemption, the loss may be disallowed under the wash sale rules.
DISTRIBUTIONS AND YIELD
DISTRIBUTIONS
Each Fund will seek to distribute all of its income each year. Each Fund de-
clares dividends daily, immediately prior to the close of business, from its
net investment income. Each such dividend will be payable with respect to
fully paid shares to shareholders of record at the time of declaration. All
daily dividends declared during a given month will be paid as of the last cal-
endar day of the month. Distributions of realized net capital gains, if any,
will generally be declared and paid at the end of the year in which they have
been earned. To have your dividend payments deposited electronically into your
bank account, see "Shareholder Services--Direct Deposits."
YIELD AND TOTAL RETURN CALCULATION
Flagship uses standardized SEC formulas to calculate the current yield and to-
tal returns of each Fund. These calculations help investors compare past per-
formance of funds they are considering for investment, while giving them con-
fidence that any particular fund's performance results are based on the same
type of data as those of another fund.
At any given time, the yields and total returns of each Flagship Fund will
vary, depending on operating expenses, the underlying securities in a Fund's
portfolio and general market conditions during the time period calculated.
Yields and total returns are always based on historic performance and do not
indicate future results. Your actual performance will vary, and your shares
may be worth less than their original cost when redeemed.
CURRENT YIELD refers to the income from an investment in a Fund over a stated
time period. It is expressed as an annual percentage rate, based on the actual
dividends paid to a shareholder as a percentage of the maximum offering price
of a share on the day that ends the performance period. The SEC yield is al-
ways a 30-day yield, net of fund expenses and adjustments (such as accretion
of original issue discounts and amortization of market premiums). When
annualized, it assumes semi-annual compounding of interest at an average daily
dividend rate over the period.
The current yields of tax-exempt income funds are often expressed in terms of
the yield an investor would have to earn in a taxable income fund to equal the
same after-tax yield once federal income taxes, and in some cases state
-- 21 --
<PAGE>
and/or local taxes, have been paid. This TAX-EQUIVALENT YIELD is calculated
within SEC guidelines and may be used in advertisements or information fur-
nished to shareholders or prospective investors, which will disclose the 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 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 be-
ginning to the end of the period is expressed as an average annual rate of re-
turn. Return is always less when calculating the effects of sales charges.
The CUMULATIVE TOTAL RETURN is the actual change in the value of an account
from the beginning to the end of an investment period, less expenses. This per-
formance 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 conforms to
the requirements of the rules of the National Association of Securities Deal-
ers, 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 activities
shall be interpreted by the Trustees, whose decision shall be conclusive except
to the extent it contravenes established legal authority.
The maximum amount payable annually by any Fund under the Plan and related
agreements is 0.95% (Class A 0.40%) of such series' average daily net assets
for the year. Of this amount, 0.75% is an asset based sales charge and up to
0.20% is a service fee. In the case of broker-dealers who have selling agree-
ments with the Distributor and others, such as banks, who have service agree-
ments or bank clearing agreements with any Fund, the maximum amount payable to
any recipient is 0.00260% per day (0.95% on an annualized basis) of the propor-
tion of average daily net assets of such Fund represented by such person's cus-
tomers. A salesperson and any other person entitled to receive compensation for
selling Fund shares may receive different compensation for selling one particu-
lar 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 maxi-
mum 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 par-
tial or full reallowance of its retained underwriting commission for fund sales
as permitted by applicable rules. In addition, it will support those firms' ef-
forts in sales training seminars, management meetings, and broker roundtables
where it has the opportunity to present Flagship's products and services. Flag-
ship 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 addition, the distributor
provides recognition through the awarding of imprinted nominal promotional
items; client leads; as well as "thank you" dinners and entertainment. Its
agents also typically provide food for office meetings. Under appropriate terms
it will share with broker-dealers a portion of the cost of prospecting seminars
and shareholder gatherings. In those situations where there is no retained un-
derwriting commission, i.e., on the sale of Class B, Class C or Class R Shares,
Flagship Funds will periodically pay for similar activities at its own expense.
Various federal and state laws prohibit national banks and some state-chartered
commercial banks from underwriting or dealing in the Funds' shares. In the un-
likely 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 disadvantage. In addi-
tion, under the securities laws in some states, banks and financial institu-
tions may be required to register as dealers following state law. The Fund does
not offer its securities in conjunction with any qualified retirement plan.
Please see the SAI for more details about the distribution payment and dealer
reallowances.
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<PAGE>
ABOUT THE TRUST
The Trust is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated March 8, 1985 and
as amended as of September 3, 1992 and April 21, 1995. The Trust's Declaration
of Trust permits the Trustees to issue an unlimited number of full and frac-
tional shares in separate Funds, each of which is deemed to be a separate 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 Declaration
of Trust provides that shareholders are not liable for any liabilities 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. Al-
though shareholders of an unincorporated business trust established under Mas-
sachusetts law may, under certain limited circumstances, be held personally li-
able 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-
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, preemptive
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 re-
moval 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 present
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 assess-
ment 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 Funds will issue semiannual reports containing unaudited financial state-
ments and annual reports containing audited financial statements approved annu-
ally by the Board of Trustees.
This Prospectus does not contain all the information included in the Registra-
tion Statement filed with the SEC under the Securities Act of 1933 and the 1940
Act with respect to the securities offered hereby, certain portions of which
have been omitted according to the rules and regulations of the SEC. The Regis-
tration Statement including the exhibits filed therewith may be examined at the
office of the SEC in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each 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>
(This Page Intentionally Left Blank)
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<PAGE>
FLAGSHIP TAX EXEMPT FUNDS APPLICATION
PLEASE PRINT OR TYPE ALL INFORMATION PLEASE MAIL THIS APPLICATION AND
YOUR CHECK TO:
NOTE: You must complete Sections 1, Flagship Funds
2, 3, 4, 5 and sign the signature c/o Boston Financial
line. Your signature is required P.O. Box 8509
for processing. Complete sections Boston, MA 02266-8509
7, 8, 9, 10, 11, 12 and 13 for op-
tional services.
1. YOUR ACCOUNT REGISTRATION
Please check only ONE registration type:
Owner Name(s) (First, Middle Initial (if used), Last)
[_] Individual or Joint Account*
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*Joint tenants with rights of survivorship unless tenancy in common is
indicated
[_] Corporation, Partnership, Trust or other entity
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[_] Uniform Gift to Minors
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Custodian Name (One name only)
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Minor's Name (One name only)
Minor's state of residence
---
2. YOUR MAILING ADDRESS
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Street or P.O. Box Suite or Apt. Number
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City
--- -------- -------
StateZip Code
()- ()-
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Daytime Phone Evening Phone
[_] U.S. Citizen or
[_] Other (specify)
3. YOUR SOCIAL SECURITY/TAX ID NUMBER
For individual or joint accounts use Social Security number of owner. For
custodial accounts use minor's Social Security number.
-------- -------
Social Security Number
--- ---------------
Tax ID Number
4. YOUR INITIAL INVESTMENT
I want to invest in this Flagship Tax Exempt Fund.
Please indicate class of shares.
<TABLE>
<CAPTION>
Class of Shares
Name of Fund Amount* A** C***
<S> <C> <C> <C>
$ [_] [_]
--------------- ------------
$ [_] [_]
--------------- ------------
$ [_] [_]
--------------- ------------
</TABLE>
*Minimum of $3,000. **Front end sales charge. ***Level load. Class C Shares
are not available for all Funds. Check prospectus for availability. If no
share class is marked, investment will automatically be made in A Shares.
Attach check payable to NAME OF FUND
[_] Purchase or check through Dealer Account
[_] Exchange of bonds (Contact your Dealer or Flagship Funds)
5. DIVIDEND/DISTRIBUTION OPTIONS
If no option is selected, all distributions will be reinvested.
[_] Reinvest dividends and capital gains.
[_] Pay dividends in cash, reinvest capital gains.
[_] Pay dividends and capital gains in cash.
[_] Direct dividends to an existing account with identical registration.
Designate the Fund name and account number below.
------------------------------------------------------------------------------
Name of the Fund
------------------------------------------------------------------------------
Existing Fund Account Number
[_] Deposit dividends directly into the bank account indicated on the
attached VOIDED check (subject to terms and conditions in the prospectus).
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
------------------------------------------------------------------------------
Investment Firm
------------------------------------------------------------------------------
Financial Consultant's Name
Rep Number
------------------------------------------------------------------------------
Branch Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
()-
------------------------------------------------------------------------------
Financial Consultant's Phone Number
X
------------------------------------------------------------------------------
Signature of Financial Consultant
7. LETTER OF INTENT (Class A Shares only)
Please see information on back page.
I/we agree to the escrow provision described in the prospectus and intend to
purchase, although I'm not obligated to do so, shares of the Fund designated
on this application within a 13-month period which, together with the total
asset value of shares owned, will aggregate at least:
[_] $50,000
[_] $100,000
[_] $250,000
[_] $500,000
[_] $1,000,000
8. CUMULATIVE PURCHASE DISCOUNT
I/we qualify for cumulative discount with the accounts listed below.
------------------------------------------------------------------------------
Fund Name
------------------------------------------------------------------------------
Account Number
------------------------------------------------------------------------------
Fund Name
------------------------------------------------------------------------------
Account Number
------------------------------------------------------------------------------
Fund Name
-- 25 --
<PAGE>
9. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we authorize
the automatic monthly transfer of funds from my/our bank account for
investment in the above Flagship Fund. Attached is a VOIDED check from that
account.
Date for Investment (Between 5th and 28th Only)
---
$
----------------- Month to Begin Plan_______________________________________
Amount ($50 Minimum)
------------------------------------------------------------------------------
Name of Bank
------------------------------------------------------------------------------
Bank Account Number
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
X
------------------------------------------------------------------------------
Signature of Depositor Date
X
------------------------------------------------------------------------------
Signature of Joint Depositor Date
10. SYSTEMATIC WITHDRAWAL PLAN
A minimum $10,000 balance is required.
BANK ACCOUNT CREDIT
Please redeem $ from my account and credit my bank account as indi-
cated in the banking information section below.
Month first credit is to be made: ____________________________________________
Day of the month that I wish the credit to be made:
---
(Between the 5th and 28th only.)
Please credit my account for each month I have selected.
<TABLE>
<CAPTION>
JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
<CAPTION>
JUL AUG SEP OCT NOV DEC
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
</TABLE>
CHECK
Please redeem $ from my account on or about the 31st of each month
as selected above.
Month first credit is to be sent: ____________________________________________
Send checks to: [_] Address on account
[_] Special address (complete below)
------------------------------------------------------------------------------
Payee
------------------------------------------------------------------------------
Street
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
11. SYSTEMATIC EXCHANGES
IMPORTANT: The account registrations for the originating and receiving funds
must be identical. I hereby authorize automatic exchanges of;
Amount $ ($50 minimum)
From fund name _______________________________________________________________
Account no. (if known) _______________________________________________________
Into fund name _______________________________________________________________
Account no. (if known) _______________________________________________________
Exchanges will be made on or about the 16th of these months:
<TABLE>
<CAPTION>
JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
<CAPTION>
JUL AUG SEP OCT NOV DEC
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
</TABLE>
12. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone redemp-
tion requests (under $50,000 only) without signature verification to the reg-
istered fund account name and address. Redemption proceeds may be wired to
the U.S. commercial bank designated, provided you complete the information
below and enclose a VOIDED check for that account.
------------------------------------------------------------------------------
Name of Bank
------------------------------------------------------------------------------
Bank Account Number
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
13. INTERESTED PARTY MAIL/DIVIDEND MAIL
[_] Send my distributions to the address listed below.
[_] Send duplicate confirmation statements to the interested party listed be-
low.
------------------------------------------------------------------------------
Name of Individual
------------------------------------------------------------------------------
Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
SIGNATURE(S)
Under the penalties of perjury, I/we certify that the information provided on
this form is true, correct, and complete. The undersigned certify that I/we
have full authority and legal capacity to purchase, exchange or redeem shares
of the above named Fund(s) and affirm that I/we have received and read a cur-
rent Prospectus of the named Fund(s) and agree to be bound by its terms.
I/we agree to indemnify and hold harmless State Street Bank and Trust Company,
Boston Financial, and any Flagship fund(s) which may be involved in transac-
tions authorized by telephone against any claim, loss, expense or damage, in-
cluding reasonable fees of investigation and counsel, in connection with any
telephone withdrawal effected on my account pursuant to procedures described
in the Prospectus.
X X
- -------------------------------------- --------------------------------------
Signature Date Signature (Joint Tenant) Date
1. As required by the IRS I/we certify (a) that the number shown on this form
is my correct Taxpayer Identification number. I/we understand that if I/we do
not provide a Taxpayer Identification Number to the Fund within 60 days, the
Fund is required to withhold 31 percent of all reportable payments thereafter
made to me until I/we provide a number certified under penalties of perjury,
and that I/we may be subject to a $50 penalty by the IRS.
2. As required by the IRS I/we certify under penalties of perjury that I/we
are not subject to backup withholding by the IRS.
NOTE: Strike out Item (2) if you have been notified that you are subject to
backup withholding by the IRS and you have not received a notice from the IRS
advising you that backup withholding has been terminated.
X X
- -------------------------------------- --------------------------------------
Signature Date Signature (Joint Tenant) Date
Thank you for your investment in the Flagship Fund(s). You will receive a con-
firmation statement shortly.
-- 26 --
<PAGE>
FLAGSHIP TAX EXEMPT FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 26, 1996
ONE DAYTON CENTRE, ONE SOUTH MAIN STREET; DAYTON, OHIO 45402-2030
Flagship Tax Exempt Funds Trust (the "Fund") is a registered open-end, man-
agement investment company organized in series. The Fund is divided into sepa-
rate series each of which is designed for individuals and taxable entities
that desire to invest in an actively managed portfolio of securities the in-
terest on which is exempt from Federal income taxes as well as income taxes of
the particular state indicated by the name of such series. There are two clas-
ses of shares authorized for each series (Class A Shares and Class C Shares),
although they may not be available for all series. The current state series
are:
Flagship Alabama Double Tax Exempt Fund
Flagship Arizona Double Tax Exempt Fund--Class A Shares
Flagship Arizona Double Tax Exempt Fund--Class C Shares
Flagship California Double Tax Exempt Fund
Flagship California Intermediate Tax Exempt Fund
Flagship Colorado Double Tax Exempt Fund
Flagship Connecticut Double Tax Exempt Fund--Class A Shares
Flagship Connecticut Double Tax Exempt Fund--Class C Shares
Flagship Florida Double Tax Exempt Fund--Class A Shares
Flagship Florida Double Tax Exempt Fund--Class C Shares
Flagship Florida Intermediate Tax Exempt Fund--Class A Shares
Flagship Florida Intermediate Tax Exempt Fund--Class C Shares
Flagship Florida Limited Term Tax Exempt Fund
Flagship Georgia Double Tax Exempt Fund--Class A Shares
Flagship Georgia Double Tax Exempt Fund--Class C Shares
Flagship Kansas Triple Tax Exempt Fund
Flagship Kentucky Limited Term Municipal Bond Fund--Class A Shares
Flagship Kentucky Limited Term Municipal Bond Fund--Class C Shares
Flagship Kentucky Triple Tax Exempt Fund--Class A Shares
Flagship Kentucky Triple Tax Exempt Fund--Class C Shares
Flagship Louisiana Double Tax Exempt Fund--Class A Shares
Flagship Louisiana Double Tax Exempt Fund--Class C Shares
Flagship Michigan Triple Tax Exempt Fund--Class A Shares
Flagship Michigan Triple Tax Exempt Fund--Class C Shares
Flagship Michigan Intermediate Tax Exempt Fund
Flagship Michigan Limited Term Tax Exempt Fund
Flagship Missouri Double Tax Exempt Fund--Class A Shares
Flagship Missouri Double Tax Exempt Fund--Class C Shares
Flagship New Jersey Double Tax Exempt Fund
Flagship New Jersey Intermediate Tax Exempt Fund
Flagship New Jersey Limited Term Tax Exempt Fund
Flagship New Mexico Double Tax Exempt Fund
Flagship New York Tax Exempt Fund--Class A Shares
Flagship New York Tax Exempt Fund--Class C Shares
Flagship New York Intermediate Tax Exempt Fund
Flagship New York Limited Term Tax Exempt Fund
Flagship North Carolina Double Tax Exempt Fund--Class A Shares
Flagship North Carolina Double Tax Exempt Fund--Class C Shares
Flagship Ohio Double Tax Exempt Fund--Class A Shares
Flagship Ohio Double Tax Exempt Fund--Class C Shares
Flagship Ohio Intermediate Tax Exempt Fund
Flagship Ohio Limited Term Tax Exempt Fund
Flagship Pennsylvania Triple Tax Exempt Fund--Class A Shares
Flagship Pennsylvania Triple Tax Exempt Fund--Class C Shares
<PAGE>
Flagship South Carolina Double Tax Exempt Fund
Flagship Tennessee Double Tax Exempt Fund--Class A Shares
Flagship Tennessee Double Tax Exempt Fund--Class C Shares
Flagship Virginia Double Tax Exempt Fund--Class A Shares
Flagship Virginia Double Tax Exempt Fund--Class C Shares
Flagship Wisconsin Double Tax Exempt Fund
National series:
Flagship All-American Tax Exempt Fund--Class A Shares
Flagship All-American Tax Exempt Fund--Class C Shares
Flagship High Yield Municipal Bond Fund
Flagship Intermediate Tax Exempt Fund--Class A Shares
Flagship Intermediate Tax Exempt Fund--Class C Shares
Flagship Limited Term Tax Exempt Fund--Class A Shares
Flagship Limited Term Tax Exempt Fund--Class C Shares
Flagship Short Term Tax Exempt Fund
Flagship U.S. Territories Tax Exempt Fund
Insured series:
Flagship Insured Limited Term Tax Exempt Fund
Flagship Insured Intermediate Tax Exempt Fund
Flagship Insured Tax Exempt Fund
The diversified series of the Fund are All-American, Arizona, Colorado, Con-
necticut, Florida, Georgia, High Yield, Insured, Insured Intermediate, Insured
Limited Term, Intermediate, Kentucky, Limited Term, Louisiana, Michigan, Mis-
souri, New York, North Carolina, Ohio, Pennsylvania, Short Term, Tennessee and
Virginia. All other series are non-diversified. The initial offering to the
public of any series is determined at the discretion of the Board of Trustees.
Each series seeks high current after tax income consistent with liquidity and
preservation of capital primarily through investment in investment grade tax
exempt obligations.
This Statement of Additional Information provides certain detailed informa-
tion concerning the Fund. It is not a Prospectus and should be read in con-
junction with the current Prospectus (the "Prospectus") relating to the Fund.
A copy of the Prospectus may be obtained without charge by telephone or writ-
ten 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...................................................... 8
Investment Advisory Services............................................... 9
Distributor................................................................ 12
Custodian and Transfer Agent............................................... 16
Auditors................................................................... 16
Portfolio Transactions..................................................... 16
Yield and Total Return Calculation......................................... 17
Dividend Payment Options................................................... 19
Purchase, Redemption and Pricing of Shares................................. 19
Taxes...................................................................... 22
Exchange and Reinvestment Privilege........................................ 23
Systematic Withdrawal Plan................................................. 24
Servicemarks............................................................... 24
Other Information.......................................................... 24
Index to Financial Statements.............................................. F-1
Appendix I--Description of Municipal Securities Ratings.................... I-1
Appendix II--Description of Hedging Techniques............................. II-1
</TABLE>
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 Prospec-
tus), none of which may be changed with respect to any series of the Fund des-
ignated on the date hereof without the approval of the holders of a majority
of such series' outstanding shares. No existing series of the Fund may:
(1) Purchase the securities of any one issuer, other than the U.S. Govern-
ment or any of its instrumentalities, if immediately after such purchase more
than 5% of the value of its total assets would be invested in such issuer, or
if all series of the Fund would own in the aggregate more than 10% of the out-
standing voting securities of such issuer, except that up to 25% of the value
of the Fund's total assets may be invested without regard to such 5% and 10%
limitations.
(2) Make loans, except to the extent the purchase of the debt obligations
(including repurchase agreements) in accordance with the series' investment
objectives and policies are considered loans.
(3) Issue securities senior to the shares or borrow money, except from banks
for extraordinary or emergency purposes (and not for leveraging) or in order
to meet unexpectedly heavy redemption requests in an amount not exceeding 10%
of the value of the series' assets, or purchase any securities at any time
when the total outstanding borrowings from banks attributable to such series
exceeds 5% of the series' net assets.
(4) Mortgage, pledge or hypothecate any assets except as required by law or
agreement to secure borrowings permitted by clause (3) above.
(5) Purchase or sell real estate, real estate mortgage loans, real estate
investment trust securities, commodities, commodity contracts or oil and gas
interests, except to the extent that the tax-exempt and U.S. government secu-
rities the series may invest in would be considered to be such loans, securi-
ties, contracts or interests and except to the extent the various hedging in-
struments the series may invest in would be considered to be commodities or
commodities contracts.
(6) Acquire securities of other investment companies (other than in connec-
tion with the acquisition of such companies), except that a series may from
time to time invest up to 10% of its assets in tax-exempt funds, including
money market funds.
(7) Act as an underwriter of securities except to the extent that in connec-
tion with disposition of portfolio securities it may be deemed to be an under-
writer.
(8) Purchase securities on margin, make short sales of securities or main-
tain a net short position except to the extent the various hedging instruments
the series may invest in or the options the series may write would be consid-
ered to involve short sales or a net short position.
(9) Invest more than 25% of its assets in a single industry. However, as de-
scribed in the Prospectus, particular series may from time to time invest more
than 25% of their assets in one or more particular segments of the tax exempt
obligations market.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of the Fund and its stockholders, it will revoke the commitment by
terminating sales of its shares in the state involved. Specifically, in addi-
tion, each series has made a commitment, although not a fundamental policy, to
not purchase warrants.
Portfolio Turnover. Although the Fund anticipates that the portfolio turn-
over of each series will be less than 100% in any fiscal year, each series
will adjust its turnover as necessary or appropriate to seek to attain its in-
vestment objective.
By purchasing obligations in larger denominations and with greater variation
in maturity and interest payment dates than investors may be able to achieve
on their own, the Fund, through each of its series, offers investors economies
of scale and greater diversification. In addition, an investment in any series
of the Fund gives investors a convenient and affordable method of avoiding ad-
ministrative burdens and transaction costs normally involved in direct pur-
chases of tax exempt obligations. For instance, investors do not have to keep
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 R Shares, are authorized for all series with Class A Shares currently
offered by all series and Class C Shares currently offered by some series.
Other classes of shares in other series may be offered in the future. Each se-
ries of the Fund is authorized to offer up to four classes of shares which may
be purchased at a price equal to their net asset value per share, plus (for
certain classes) a sales charge (discussed below) which, at the election of
the purchaser, may be imposed either (i) at the time of purchase (the "Class A
Shares") or (ii) on a contingent deferred basis (the "Class B Shares" or the
"Class C Shares"). See "How to Buy Shares" in the Prospectus. The four classes
of shares each represent an interest in the same portfolio of investments of
the Fund and have the same rights, except (i) Class B and Class C Shares bear
the expenses of the deferred sales arrangement and any expenses (including a
higher distribution services fee) resulting from such sales arrangement, (ii)
each class that is subject to a distribution fee has exclusive voting rights
with respect to those provisions of the Fund's Rule 12b-1 distribution plan
which relate only to such class and (iii) the classes have different exchange
privileges. Additionally, Class B Shares will automatically convert into Class
A Shares after a specified period of years (as discussed below.) The net in-
come attributable to Class B and Class C Shares and the dividends payable on
Class B and Class C Shares will be reduced by the amount of the higher distri-
bution services fee and certain other incremental expenses associated with the
deferred sales charge arrangement. The net asset value per share of Class A
Shares, Class B Shares, Class C Shares and Class R Shares is expected to be
substantially the same, but it may differ from time to time. Class B, Class C
and Class R Shares are authorized for all series, but may not be available for
all series. Prior to implementing the multiple class distribution for any se-
ries, the Trustees will re-denominate all outstanding shares in such series as
Class A Shares.
Class A Shares. The public offering price of Class A Shares is equal to net
asset value plus an initial sales charge that is a variable percentage of the
offering price depending on the amount of the sale. Net asset value will be
determined as described in the Prospectus under "How Fund Shares are Priced".
The net assets attributable to Class A Shares are subject to an ongoing dis-
tribution services fee (see "Distributor" below). Purchasers of Class A Shares
may be entitled to reduced sales charges through a combination of investments,
rights of accumulation or a Letter of Intent even if their current investment
would not normally qualify for a quantity discount (see "Purchase, Redemption
and Pricing of Shares" below). Class A Shares also qualify for certain ex-
change and reinvestment privileges as described in "Exchange And Reinvestment
Privilege" below. The investor or the investor's broker or dealer is responsi-
ble for promptly forwarding payment to the Fund for shares purchased. Class A
Shares may be subject to a CDSC as explained in the Prospectus.
Class B Shares. Class B Shares are sold at net asset value without a sales
charge at the time of purchase. Instead, the sales charge is imposed on a con-
tingent deferred basis. The net assets attributable to Class B Shares are sub-
ject to an ongoing distribution fee (see "Distributor" below). The amount of
the contingent deferred sales charge, if any, will vary depending on the num-
ber of years from the time of payment of the purchase of Class B Shares until
the time such shares are redeemed. Solely for purposes of determining the num-
ber of years from the time of any payment of the purchase of Class B Shares,
all payments during any month will be aggregated and deemed to have been made
on the last day of the month.
Class B Shares automatically convert into Class A Shares after 8 years (5
years intermediate and limited term) after the end of the month in which a
shareholder's order to purchase Class B Shares was accepted. As a
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)
0.95% for any fund with other than a short term or limited term maturity, of
which 0.75% is an asset based sales charge and 0.20% is a service fee or (b)
for any fund with a short term or limited term maturity, an ongoing distribu-
tion services fee of 0.70%, of which 0.50% is an asset based sales charge and
0.20%, is a service fee (see "Distributor" below). The Class C Shares have no
conversion rights.
The CDSC will not be imposed on amounts representing increases in net asset
value above the initial purchase price. Additionally, no charge will be as-
sessed on Class B or Class C Shares derived from reinvestment of dividends or
capital gains distributions. The CDSC will be waived (i) on redemption of
shares following the death of a shareholder, (ii) for redemptions following
the disability (as determined in writing by the Social Security Administra-
tion) or death of the shareholder, and (iii) when Class B or Class C Shares
are exchanged for Class B or Class C Shares of other Flagship Funds distrib-
uted by the Distributor (see "Exchange And Reinvestment Privilege" below). In
the case of an exchange, the length of time that the investor held the origi-
nal Class B or Class C Shares is counted towards satisfaction of the period
during which a deferred sales charge is imposed on the Class B or Class C
Shares for which the exchange was made.
Class R Shares. You may purchase Class R Shares with monies representing
dividends and capital gain distributions on Class R Shares of the Fund. Also,
you may purchase Class R Shares if you are within the following specified cat-
egories of investors who are also eligible to purchase Class A Shares at net
asset value without an up-front sales charge: officers, current and former
trustees of the Fund, bona fide, full-time and retired employees of Flagship,
and subsidiaries thereof, or their immediate family members; any person who,
for at least 90 days, has been an officer, director or bona fide employee of
any Authorized Dealer, or their immediate family members; officers and direc-
tors of bank holding companies that make Fund shares available directly or
through subsidiaries or bank affiliates; and bank or broker-affiliated trust
departments; persons investing $1 million or more in Class R Shares; and cli-
ents of investment advisers, financial planners or other financial intermedi-
aries that charge periodic or asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the differ-
ences between these two classes of shares. Class A Shares are subject to an
annual distribution fee to compensate Flagship Funds Inc. (the "Distributor")
for distribution costs associated with the Fund and to an annual service fee
to compensate Authorized Dealers for providing you with ongoing account serv-
ices. Class R Shares are not subject to a distribution or service fee and,
consequently, holders of Class R Shares may not receive the same types or lev-
els of services from Authorized Dealers. In choosing between Class A Shares
and Class R Shares, you should weigh the benefits of the services to be pro-
vided by Authorized Dealers against the annual service fee imposed upon the
Class A Shares.
7
<PAGE>
OFFICERS AND TRUSTEES
The Trustees and executive officers of the Fund are listed below. Each of
them holds the same positions with each series of the Fund and with Flagship
Admiral Funds Inc. Except as indicated, each individual has held the office
shown or other offices in the same company for the last five years and has a
business address at One Dayton Centre, One South Main Street, Dayton, Ohio
45402-2030, which is also the address of the Fund.
The "interested" trustees of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act") are indicated by an asterisk (*).
<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 and Chief Marketing Officer,
227 E. Dixon Avenue ChoiceCare; prior to March 1993, Vice
Dayton, Ohio 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March 1991, Partner, Hooper & Nezi, a marketing
and communications firm.
William J. Schneider Trustee Senior Partner, Miller-Valentine Partners; Vice
4000 Miller-Valentine Ct. President, Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations of the Distributor
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer of Flagship,
the Manager and the Distributor
LeeAnne G. Sparling Controller Director of Portfolio Operations of the Manager
</TABLE>
COMPENSATION: TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM REGISTRANT AND
AGGREGATE FUND COMPLEX
NAME OF PERSON COMPENSATION PAID TO TRUSTEES
POSITION FROM REGISTRANT (NUMBER OF OTHER FUNDS)
-------------- --------------- ----------------------
<S> <C> <C>
Robert P. Bremner $20,500 $25,500 (4)
Trustee
Joseph F. Castellano $21,500 $26,500 (4)
Trustee
William J. Schneider $21,500 $26,500 (4)
Trustee
Paul F. Nezi $21,500 $26,500 (4)
Trustee
</TABLE>
8
<PAGE>
As of August 8, 1996, to the knowledge of management, each of the following
persons beneficially owned the percentage noted of the fund listed beside
their name:
<TABLE>
<C> <S> <C>
Alabama Fund Farley L. Berman 10.39%
1234 Champaign Ave.
Anniston, AL 36207
Prudential Securities Inc. 7.32%
FBO Jerry F. Wilson
P.O. Box 300
Addison, AL 35540
Kansas Fund PaineWebber 8.62%
FBO Sonya & Leonard Ropfogel, Trustees
155 N. Market, Suite 1000
Wichita, KS 67202
South Carolina Fund Janece Marsha Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
J.C. Bradford & Co. Cust. FBO 6.38%
Ruth K. Keever
330 Commerce St.
Nashville, TN 37201
Joseph Christopher Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
James G. McMillan 8.96%
6 Rock Ledge Ct.
Banner Elk, NC 28604
</TABLE>
As of such date, no person beneficially owned 5% or more of the outstanding
shares of the following sub-trusts of the Trust: All-American Fund, Arizona
Fund, Colorado Fund, Connecticut Fund, Florida Fund, Florida Intermediate
Fund, Georgia Fund, Intermediate Fund, Kentucky Fund, Kentucky Limited Term
Fund, Limited Term Fund, Louisiana Fund, Michigan Fund, Missouri Fund, New
Jersey Fund, New Jersey Intermediate Fund, New Mexico Fund, New York Fund,
North Carolina Fund, Ohio Fund, Pennsylvania Fund, Tennessee Fund, Virginia
Fund and Wisconsin Fund.
All trustees and officers as a group own less than 1% of the outstanding
shares of the Trust.
Prior to the sale of shares of any series of the Fund to the public, all of
the shares of such series of the Fund will be owned by the Manager.
INVESTMENT ADVISORY SERVICES
As stated in the Prospectus, Flagship Financial Inc. acts as investment ad-
viser (the "Manager") to the Fund and each series pursuant to separate Invest-
ment Advisory Agreements (the "Advisory Agreements") with each series. See
"How the Funds are Managed" in the Prospectus for a description of the Manag-
er's duties as investment adviser. The Manager's administrative obligations
include: (i) assisting in supervising all aspects of the Fund's operations;
(ii) providing the Fund, at the Manager's expense, with the services of per-
sons competent to perform such administrative and clerical functions as are
necessary in order to provide effective corporate administration; and (iii)
providing the Fund, at the Manager's expense, with adequate office space and
related services. The Fund's accounting records are maintained, at the Fund's
expense, by its Custodian, Boston Financial.
As compensation for the services rendered by the Manager under the Advisory
Agreements dated March 8, 1985, with respect to the All American, Michigan and
Ohio series; November 21, 1985, with respect to the Georgia, North Carolina
and Virginia series; July 25, 1986, with respect to the Arizona series; Febru-
ary 2, 1987, with respect to the Colorado, Connecticut, Kentucky and Missouri
series; July 20, 1987 with respect to the New
9
<PAGE>
York, Florida, Louisiana, New Jersey, and Tennessee series; June 15, 1990,
with respect to the Kansas series; May 15, 1992, with respect to the Interme-
diate, New Jersey, New Jersey Intermediate, Pennsylvania and New Mexico se-
ries; June 15, 1992, with respect to the Alabama, Florida Intermediate and
South Carolina series; and February 4, 1994 with respect to the Wisconsin se-
ries; the Manager is paid a fee, computed daily and payable monthly with re-
spect to each series on a separate basis, at an annual rate of .50% of the av-
erage daily net assets of such series. As compensation for the services ren-
dered by the Manager under the Advisory Agreement dated July 20, 1987, with
respect to the Limited Term series, and April 21, 1995, with respect to the
Kentucky Limited Term Municipal Bond Fund, the Manager is paid a fee, computed
daily and payable monthly at an annual rate of .30% of the average daily net
assets up to $500 million plus .25% of the average daily net assets in excess
of $500 million.
For the most recent fiscal periods ended May 31, 1994, 1995, and 1996, with
respect to each series, the amounts paid to the Manager by such series of the
Fund were as follows:
<TABLE>
<CAPTION>
State Series 1994 1995 1996
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Alabama $ -- $ -- $ --
Arizona 43,162 122,032 140,063
Colorado -- -- --
Connecticut 255,441 396,094 421,811
Florida 314,749 633,336 980,751
Florida Intermediate -- -- --
Georgia 165,095 287,399 235,562
Kansas -- -- 38,552
Kentucky 294,356 559,150 799,646
Kentucky Limited 2,496
Louisiana 24,821 96,442 148,090
Michigan 645,194 729,008 873,242
Missouri 107,595 244,965 494,006
New Jersey -- -- --
New Jersey Intermediate -- -- --
New Mexico -- 17,972 32,291
New York -- -- 6,359
North Carolina 676,431 675,473 674,110
Ohio 1,901,128 1,926,295 1,899,111
Pennsylvania 104,513 58,095 76,802
South Carolina -- -- --
Tennessee 548,942 776,025 921,400
Virginia 133,981 211,367 310,198
Wisconsin -- -- --
<CAPTION>
National Series
- ---------------
<S> <C> <C> <C>
All-American 267,846 420,954 644,844
Intermediate -- -- --
Limited Term 1,313,071 1,369,218 1,259,810
---------- ---------- ----------
TOTAL $6,796,325 $8,523,825 $9,959,144
========== ========== ==========
</TABLE>
10
<PAGE>
The tables set forth above do not include portions of the Manager's fee
which were permanently waived by the Manager. The amounts of compensation
waived by the Manager for such period were:
<TABLE>
<CAPTION>
State Series 1994 1995 1996
- ------------ ----------- ---------- ----------
<S> <C> <C> <C>
Alabama $ 107 $ 4,854 $ 12,670
Arizona 377,569 277,079 279,976
Colorado 162,901 169,048 173,105
Connecticut 768,360 615,631 636,447
Florida 1,676,047 1,093,473 685,218
Florida Int. 2,503 19,498 38,041
Georgia 421,674 321,940 366,193
Kansas 425,046 404,085 429,494
Kentucky 1,521,748 1,357,696 1,328,971
Kentucky Limited -- -- 10,100
Louisiana 290,721 240,777 222,310
Michigan 653,131 626,290 586,307
Missouri 779,519 726,130 598,909
New Jersey 18,392 31,524 48,257
New Jersey Intermediate 40,542 45,333 45,699
New Mexico 225,840 226,715 226,537
New York 215,688 236,428 244,412
North Carolina 290,321 289,460 318,954
Ohio 404,687 375,587 522,006
Pennsylvania 111,454 164,423 156,472
South Carolina 23,928 37,587 46,785
Tennessee 597,902 442,963 389,150
Virginia 404,880 351,513 312,111
Wisconsin -- 22,083 55,421
National Series
All-American 753,169 632,023 588,351
Intermediate 146,230 187,583 228,684
Limited Term 657,881 458,100 332,579
----------- ---------- ----------
TOTAL $10,970,240 $9,357,823 $8,883,159
=========== ========== ==========
</TABLE>
Also, under separate agreements with the following Funds, for the period
ended May 31, 1996, Manager agreed to subsidize certain expenses, excluding
advisory and distribution fees, as set forth below. The Manager is not obli-
gated to subsidize such expenses and may not do so in the future.
<TABLE>
<CAPTION>
AMOUNT
SUBSIDIZED
5/31/96
----------
<S> <C>
State Series
- ------------
Alabama $ 57,787
Arizona 57,950
Colorado 84,532
Florida Intermediate 37,757
Kansas 66,694
Kentucky Limited 40,302
New Jersey 67,802
New Jersey Intermediate 56,297
New York 26,209
Pennsylvania 11,285
South Carolina 40,103
Wisconsin 47,172
National Series
- ---------------
Intermediate 41,246
--------
Total $635,136
========
</TABLE>
11
<PAGE>
Each Advisory Agreement will terminate automatically upon its assignment and
its continuance must be approved annually by the Fund's trustees or a majority
of the particular series' outstanding voting shares and in either case, by a
majority of the Fund's disinterested trustees. Each Advisory Agreement is ter-
minable at any time without penalty by the trustees or by a vote of a majority
of the particular series' outstanding voting shares on 60 days' written notice
to the Manager, or by the Manager on 60 days' written notice to the Fund.
The Manager has advanced all organization expenses of the Fund and each se-
ries, which include printing of documents, fees and disbursements of the
Fund's counsel and accountants, registration fees under the Securities Act of
1933, the 1940 Act, and state securities laws, as well as the initial fees of
the Fund's custodian and transfer agent. Such fees aggregated approximately
$83,600 for the Colorado series, $69,000 for the Limited Term series, $83,600
for the Missouri series, $72,000 for the Louisiana series, $284,600 for the
Florida series, $257,000 for the New York series, $42,800 for the Kansas se-
ries, $58,900 for the New Jersey series, $32,200 for the New Jersey Intermedi-
ate series, $51,700 for the New Mexico series, $35,700 for the Intermediate
series, $35,400 for the South Carolina series, $27,400 for the Florida Inter-
mediate series, $60,800 for the Alabama series, $98,000 for the Wisconsin se-
ries and $29,400 for the Kentucky Limited Term series. The Manager advanced
$63,000 for reorganizational expenses for the Pennsylvania Series.
The expenses are being reimbursed to the Manager by uniform pro rata deduc-
tions from the net asset value of each series of the Fund accrued daily and
paid monthly over the five-year period which commenced June 1, 1991, with re-
spect to the Louisiana, and Missouri series; June 1, 1992, with respect to the
New York series; June 1, 1993, with respect to the Colorado, Kansas and New
Mexico series, and January 1, 1996 with respect to the Pennsylvania Series.
For the Alabama, Florida, Intermediate, Kentucky Limited Term, New Jersey In-
termediate, South Carolina and Wisconsin Series, reimbursement commenced on
June 1, 1996 and will be paid pro rata over a three-year period.
The Manager has agreed that in the event the operating expenses of the se-
ries (including fees paid to the Manager and payments to the Distributor but
excluding taxes, interest, brokerage and extraordinary expenses) for any fis-
cal year ending on a date on which the related Advisory Agreement is in ef-
fect, exceed the expense limitations imposed by applicable state securities
laws or any regulations thereunder, it will, up to the amount of its fee, re-
duce its fee or reimburse the Fund in the amount of such excess.
A series may advertise its actual expenses expressed as a percentage of its
net assets and may also quote the average expense percentage of funds of the
same type as calculated by Lipper Analytical Services.
Securities held by any series may also be held by, or be appropriate invest-
ments for, other series or other investment advisory clients of the Manager.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security.
If purchases or sales of securities for any series of the Fund or other ad-
visory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the affected series
and such other clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Manager during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
DISTRIBUTOR
As stated in the Prospectus, Flagship Funds Inc. acts as the Distributor
(the "Distributor") of shares of each series in accordance with the terms of
separate Distribution Agreements with each series. The Distributor may conduct
an initial subscription period offering respecting each series of the Fund and
may thereafter make a continuous offering of such series' shares and will be
responsible for all sales and promotion efforts. The Distribution Agreements
must be approved in the same manner as the Advisory Agreements discussed under
"How the Funds are Managed" in the Prospectus and will terminate automatically
if assigned by either party thereto and are terminable at any time without
penalty by the Board of Trustees of the Fund or by vote of a majority of the
pertinent series' outstanding shares on 60 days' written notice to the Dis-
tributor and by the Distributor on 60 days' written notice to the Fund.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan (the
"Plan") with respect to Class A Shares, Class B Shares and Class C Shares
which permits the Fund to pay for certain distribution and promotion expenses
related to marketing the Fund's shares.
12
<PAGE>
The Plan authorizes each Fund to expend its monies in an amount equal to the
aggregate for all such expenditures to such percentage of each Fund's daily
net asset values attributable to each class of shares as may be determined
from time to time by vote cast in person at a meeting called for such purpose,
by a majority of the Funds' disinterested trustees. The scope of the foregoing
shall be interpreted by the trustees, whose decision shall be conclusive ex-
cept to the extent it contravenes established legal authority. Without in any
way limiting the discretion of the trustees, the following activities are
hereby declared to be primarily intended to result in the sale of shares of
the Fund: advertising the Fund or the Fund's investment adviser's mutual fund
activities; compensating underwriters, dealers, brokers, banks and other sell-
ing entities and sales and marketing personnel of any of them for sales of
shares of the Fund, whether in a lump sum or on a continuous, periodic, con-
tingent, deferred or other basis; compensating underwriters, dealers, brokers,
banks and other servicing entities and servicing personnel (including the
Fund's investment adviser and its personnel of any of them for providing serv-
ices to shareholders of the Fund relating to their investment in the Fund, in-
cluding assistance in connection with inquiries relating to shareholder ac-
counts; the production and dissemination of prospectuses including statements
of additional information) of the Fund and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials; and the
ordinary or capital expenses, such as equipment, rent, fixtures, salaries, bo-
nuses, reporting and record-keeping and third party consultancy or similar ex-
penses relating to any activity for which payment is authorized by the trust-
ees; and the financing of any activity for which payment is authorized by the
trustees. Pursuant to the Plan, each series itself through authorized officers
may make similar payments for marketing services to non-broker-dealers who en-
ter into service agreements with such series. Distribution costs in the early
years of any series of the Fund are likely to be higher than the distribution
fee paid to the Distributor by such series of the Fund. For example, in the
first year of operations distribution expenses might amount to $500,000 and
the fee paid by the Fund might be capped at only $100,000 in view of the
Fund's relatively small size, whereas in later years distribution expenses
might be $1 million but the distribution fee could be even greater than $1
million in view of the growth of the Fund.
The maximum amount payable annually by any series of the Fund under the Plan
and related agreements with respect to the Class A Shares is .40% of such se-
ries' average daily net assets for the year attributable to such Class A
Shares. For Class B Shares, the maximum amount payable annually is .95% of
such series' average daily net assets attributable to such Class B Shares. For
Class C Shares, the maximum amount payable annually is .95% of such series'
average daily net assets attributable to such Class C Shares. In the case of
broker-dealers who have selling agreements with the Distributor and others,
such as banks, who have service agreements with any series of the Fund, the
maximum amount payable to any recipient is .001096% per day (.40% on an
annualized basis) of the proportion of average daily net assets of such series
attributable to Class A Shares represented by such person's customers. The
maximum amount payable to any such recipient with respect to Class B Shares is
.00260% per day (.95% on an annualized basis) of the proportion of average
daily net assets of such series attributable to Class B Shares represented by
such person's customers. The maximum amount payable to any such recipient with
respect to Class C Shares is .00260% per day (.95% on an annualized basis) of
the proportion of average daily net assets of such series attributable to
Class C Shares represented by such person's customers. The Board of Trustees
may reduce these amounts at any time. All distribution expenses incurred by
the Distributor and others, such as broker-dealers, in excess of the amount
paid by the Fund will be borne by such persons without any reimbursement from
the Fund or any series.
During the period ended May 31, 1996, the amounts paid to the Distributor by
each series of the Fund pursuant to the Plan were as follows:
<TABLE>
<CAPTION>
SALARIES MATERIALS
BROKER & INCENTIVE AND SELLING
CLASS PAYMENTS BENEFITS COMPENSATION FULFILMENT ACTIVITIES TOTAL
------ -------- -------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
State Se-
ries
Alabama 5,193 1,278 1,922 846 846 10,085
Arizona A 172,738 40,769 33,210 26,367 55,007 328,091
C 11,759 896 1,396 2,191 465 16,707
Colorado 74,330 17,123 13,096 6,992 26,572 138,113
Connecticut A 413,718 101,546 74,020 31,198 197,518 818,000
C 52,470 3,289 3,976 2,000 407 62,142
Florida A 662,408 164,117 120,873 54,748 325,924 1,328,070
C 2,748 421 -- -- -- 3,169
Florida
Int. A 10,143 2,586 3,116 4,574 -- 20,419
C 19,302 1,157 2,180 836 -- 23,475
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION UPFRONT ADVERTISING & SALARIES &
CLASS TO BROKERS COMMISSIONS PROMOTIONS BENEFITS OTHER TOTAL
------ ------------ ----------- ------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
State Series
Georgia A 221,898 55,538 42,053 20,987 108,015 448,491
C 67,291 3,736 4,019 -- -- 75,046
Kansas 216,586 46,501 53,076 53,704 3,247 373,114
Kentucky A 821,365 201,713 153,206 77,786 367,244 1,621,314
C 158,023 9,602 12,342 1,807 -- 181,774
Kentucky
Limited A 8,450 -- -- -- -- 8,450
C 3,532 -- -- -- -- 3,532
Louisiana A 143,051 34,484 29,834 25,110 44,783 277,262
C 35,638 2,306 3,754 1,381 -- 43,079
Michigan A 506,976 124,353 92,905 48,156 230,567 1,002,957
C 337,687 20,181 19,123 6,253 -- 383,244
Missouri A 465,343 105,958 86,346 55,801 138,003 851,451
C 41,343 2,578 4,381 -- -- 48,302
New Jersey 20,430 4,797 5,920 7,297 -- 38,444
New Jersey
Intermediate 18,192 4,604 3,756 2,523 7,395 36,470
New Mexico 102,945 25,626 19,125 10,090 48,715 206,501
New York A 99,416 24,886 21,298 16,886 37,656 200,142
C 533 -- -- -- -- 533
N. Carolina A 378,621 94,866 67,823 32,435 191,517 765,262
C 55,544 3,402 4,142 1,565 -- 64,653
Ohio A 924,924 223,595 165,812 76,854 411,049 1,802,234
C 270,416 16,259 20,206 441 -- 307,322
Pennsylvania A 101,147 21,299 18,416 15,672 14,438 170,972
C 29,841 1,923 2,397 1,742 -- 35,903
South Caro-
lina 18,382 4,656 4,770 5,467 4,029 37,304
Tennessee A 546,564 123,001 101,192 68,622 149,370 988,749
C 115,085 7,114 9,196 3,055 -- 134,450
Virginia A 227,640 57,827 45,610 28,110 105,191 464,378
C 72,478 3,375 -- -- -- 75,853
Wisconsin 21,996 5,622 8,478 8,068 -- 44,164
National
Series
- --------
All-American A 460,073 99,403 85,217 69,713 86,005 800,411
C 373,587 22,918 24,007 15,918 -- 436,430
Intermediate A 93,973 22,576 24,346 27,048 12,960 180,903
C 3,450 -- -- -- -- 3,450
Limited Term A 1,133,290 259,839 211,727 138,760 365,561 2,109,177
C 28,351 -- -- -- -- 28,351
</TABLE>
14
<PAGE>
The Plan, the Distribution Agreements, the Selling Agreements and the Serv-
ice Agreements have been approved by the Fund's trustees, including a majority
of the trustees who are not "interested persons" of the Fund and who have no
direct or indirect financial interest in the Plan or any related agreement, by
vote cast in person at a meeting called for the purpose of voting on the Plan
and such agreements. Continuation of the Plan and the related agreements must
be approved annually in the same manner, and the Plan or any related agreement
may be terminated at any time without penalty by a majority of such disinter-
ested trustees or by a majority of the Fund's outstanding shares. Any amend-
ment increasing the maximum percentage payable under the Plan for any class of
shares must be approved by a majority of each series' outstanding shares of
such class, and all other material amendments to the Plan or any related
agreement must be approved by a majority of each series' outstanding shares.
Any amendment increasing the maximum must be approved by a majority of such
disinterested trustees.
In order for the Plan to remain effective, the selection and nomination of
trustees who are not "interested persons" of the Fund must be done by the
trustees who are not "interested persons" and the persons authorized to make
payments under the Plan must provide written reports at least quarterly to the
trustees for their review.
Also, in its capacity as national wholesale underwriter for shares of the
Funds, the Distributor received commissions on sales of the Funds' Class A
Shares and, if applicable, contingent deferred sales load on Class C Shares
offered on a continuous basis for the years ended May 31, 1994; 1995; and 1996
as follows (there is no historical data for Class B or R Shares)
CLASS A SHARES
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ---------------------
AGGREGATE RETAINED AGGREGATE RETAINED AGGREGATE RETAINED
AMOUNT BY DIST. AMOUNT BY DIST. AMOUNT BY DIST.
----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
State Series
Alabama $ 14,500 $ -- $ 40,800 $ 5,600 $ 36,800 $ 4,500
Arizona 743,600 84,700 226,600 31,400 193,700 26,200
Colorado 326,900 43,800 95,400 13,300 98,000 12,900
Connecticut 1,033,000 137,900 446,500 59,500 349,000 47,400
Florida 2,135,700 296,700 882,000 111,900 608,800 83,000
Florida In-
termediate 24,400 -- 23,300 3,200 22,700 4,200
Georgia 945,300 127,200 347,400 46,900 292,900 38,600
Kansas 1,400,000 185,200 384,000 51,100 251,000 35,000
Kentucky 3,192,800 423,600 1,304,200 174,100 1,057,100 144,700
Kentucky Lim-
ited 23,400 4,200
Louisiana 575,400 71,400 246,500 31,500 254,300 32,900
Michigan 1,222,500 139,300 593,700 80,600 552,600 75,500
Missouri 2,103,300 278,200 892,200 119,700 631,600 86,900
New Jersey 112,100 10,800 115,700 14,700 105,700 13,400
New Jersey
Intermediate 117,500 20,400 30,800 5,600 19,100 3,600
New Mexico 646,900 85,500 191,100 28,400 131,800 17,500
New York 596,817 69,217 242,700 31,800 202,800 26,900
N. Carolina 1,076,400 146,300 438,500 46,900 358,200 49,300
Ohio 2,337,100 274,500 1,065,900 141,100 931,000 124,400
Pennsylvania 173,900 20,000 118,700 15,300 107,100 14,200
S. Carolina 111,100 6,100 44,300 5,700 47,900 7,800
Tennessee 2,123,600 284,800 845,900 113,400 639,000 88,400
Virginia 677,600 88,700 381,200 49,800 311,100 25,900
Wisconsin 272,200 23,800 169,600 21,300
National Se-
ries
All-American 1,188,000 161,798 763,400 104,100 556,900 73,800
Intermediate 460,600 89,100 171,100 34,400 136,700 27,900
Limited Term 4,055,400 818,100 797,200 160,100 543,300 108,400
----------- ---------- ----------- ---------- ---------- ----------
TOTAL $27,394,417 $3,863,315 $10,961,300 $1,503,900 $8,632,100 $1,198,800
=========== ========== =========== ========== ========== ==========
</TABLE>
15
<PAGE>
CLASS C SHARES
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
CONTINGENT DEFERRED CONTINGENT DEFERRED CONTINGENT DEFERRED
SALES CHARGE SALES CHARGE SALES CHARGE
------------------- ------------------- -------------------
<S> <C> <C> <C>
State Series
Arizona $ -- $ 4,000 $ 1,900
Connecticut 800 5,900 400
Florida 200
Florida Intermedi-
ate 400 1,200 3,600
Georgia 600 7,300 2,000
Kentucky 5,900 6,900 7,300
Kentucky Limited 200
Louisiana 200 1,300 1,000
Michigan 10,500 20,400 7,800
Missouri 100 2,700 1,300
New York --
North Carolina 400 4,500 1,600
Ohio 11,600 7,800 12,300
Pennsylvania 100 800 900
Tennessee 3,900 16,300 18,400
Virginia 1,200 9,600 1,700
National Series
- ---------------
All-American 26,000 31,500 13,400
Intermediate --
Limited Term 1,800
------- -------- -------
TOTAL $61,700 $120,200 $75,800
======= ======== =======
</TABLE>
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin, Boston, MA 02106, is the custodian, transfer
agent and dividend disbursing agent for each series. It also maintains the ac-
counting records, determines the net asset value and performs other share-
holder services for the Fund and each series.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are the
independent auditors for the Fund and each series.
PORTFOLIO TRANSACTIONS
The obligations in which the various series invest are traded primarily in
the over-the-counter market. Portfolio securities normally are purchased di-
rectly from dealers who make a market in the securities involved or directly
from the issuer. Such dealers are usually acting as principals for their own
account. Because such obligations are usually bought and sold on a net basis
without any brokerage commissions, the cost of portfolio transactions to the
Fund will primarily consist of dealer spreads.
Subject to policy established by the Fund's trustees, the Manager is primar-
ily responsible for each series' portfolio decisions and the placing of port-
folio transactions. In placing orders, it is the policy of the Fund that the
Manager obtain the best net results taking into account such factors as price
(including the dealer spread, where applicable); the size, type and difficulty
of the transaction involved; the firm's general execution and operational fa-
cilities; and the firm's risk in the positioning of the securities involved.
While the Manager seeks reasonably competitive prices or commissions, the Fund
will not necessarily always be paying the lowest price or commission avail-
able. The Manager does not expect to use any one particular dealer, but, sub-
ject to obtaining the best price and execution, dealers who provide supplemen-
tal investment research to the Fund or the Manager may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu
16
<PAGE>
of the services required to be performed by the Manager under the Advisory
Agreements and the expenses of the Manager or any of its affiliates, acting
either as principal or as paid broker. No brokerage commissions were paid by
any series of the Fund from its respective date of commencement through the
period ended May 31, 1996.
YIELD AND TOTAL RETURN CALCULATION
Each series of the Fund may include its current yield or total return in ad-
vertisements of information furnished to stockholders or potential investors.
The yield of each series is calculated in accordance with the Securities and
Exchange Commission's standardized yield formula and, in the case of series
offering both Class A and Class C Shares, is so calculated separately for
Class A and Class C Shares. Under this formula, interest income over a 30-day
measurement period (including appropriate adjustments for accretion of origi-
nal issue discounts and amortization of market premiums) is reduced by period
expenses and divided by the number of days within the measurement period to
arrive at a daily income rate. This daily income rate is then expressed as a
semiannually compounded yield based on the maximum offering price of a share
assuming a standardized 360-day year. The corresponding tax equivalent yield
reflects the rate an investor would have to earn on a taxable security in or-
der to equal the same after-tax return. As appropriate, the tax equivalent
yield may reflect exemption from federal and/or state income taxes, as well as
property and/or intangible taxes.
A series may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a "nonstandardized
quotation"). A nonstandardized quotation of total return measures the percent-
age change in the value of an account between the beginning and end of a peri-
od, assuming no activity in the account other than reinvestment of dividends
and capital gains distributions. This computation does not include the effect
of the applicable sales charges which, if included, would reduce total return.
A nonstandardized quotation of total return will always be accompanied by the
series' or class's "average annual total return." A series' average annual to-
tal return for any time period is calculated (separately for each class of
shares) by assuming an investment at the beginning of the measurement period
at the maximum offering price. Dividends from the net investable amount are
then reinvested in additional shares each month at the net asset value. At the
end of the measurement period, the total number of shares owned are redeemed
at net asset value (less any applicable contingent deferred sales charge). The
change in total value at the end of the investment period is then expressed as
an average annual total rate of return. Each class of each series may also
quote its current yield and total return on a tax equivalent basis assuming
specified applicable Federal, state and local tax rates and may also quote
rankings, yields or returns as published by recognized statistical services or
publishers wherein a series' performance is categorized or compared with other
national or state tax-exempt bond funds with similar investment objectives,
such as Lipper Analytical Service's Fixed Income Performance Analysis for Mu-
nicipal Bond Funds under "Short (1-5 Yr.) Municipal Bond Funds," "Intermediate
(5-10 Yr.) Municipal Bond Funds," or "Single State Municipal Bond Funds," or
this same data as quoted by Barrons, Business Week, Forbes, Fortune, Micropal,
Money, Mutual Fund, Personal Investing, Worth, Value Line Mutual Fund Survey,
or others; Weisenberger Investment Companies Service's annual Investment Com-
panies under "Mutual Fund Tax Exempt Bond Funds"; or Morningstar, Inc.'s Mu-
tual Fund Values under "Municipal Bond General Overview."
A series may also quote from articles or commentary published by these same
statistical services or publishers. In addition, a series may show, in narra-
tive or chart form, such series' credit rating analysis, sector analysis, com-
position, portfolio holdings, coupon range, as well as information contained
in such series' audited financial report.
From time to time the tax equivalent yield and average annual total return
of any national or state tax exempt funds, may be compared to the yield of a
three-month, six-month or five-year Certificate of Deposit (a "CD"). Such com-
parisons will, of course, indicate that while the principal value and yield of
the series may fluctuate, the principal value of a CD is FDIC insured, and
both its principal value and yield are fixed and stable.
Current yield and total return of each class of each series will vary from
time to time depending on market conditions, the composition of the portfolio
of the particular series, operating expenses and other factors. These factors
and possible differences in method of calculating performance figures should
be considered when comparing the performance figures of any series of the Fund
with those of other investment vehicles.
17
<PAGE>
Yield and Total Return Calculation as of May 31, 1996 (there is no historical
data for Class B or R Shares):
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
CURRENT YIELD ------------------------
CLASS PRIOR 30 DAYS 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
----- ------------- ------ ------ ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
State Funds
- -----------
Alabama 5.18% (.64%) 4.33%* April 11, 1994
Arizona A 5.16% (.16%) 6.95% 7.18%* October 29, 1986
C 4.83% 2.75% 3.18%* February 7, 1994
Colorado 5.78% (.24%) 6.59% 6.44%* May 4, 1987
Connecticut A 5.12% (.19%) 6.09% 6.70%* July 13, 1987
C 4.80% 2.72% 2.49%* October 4, 1993
Florida A 4.93% (1.19%) 6.30% 6.86%* June 15, 1990
C 4.58% (.05%)* September 14, 1995
Florida Inter-
mediate A 4.46% .34% 3.92%* February 1, 1994
C 4.05% 1.90% 4.74%* February 2, 1994
Georgia A 5.32% (1.28%) 5.60% 6.92% March 27, 1986
C 5.01% 1.51% 2.24%* January 4, 1994
Kansas 5.82% (.72%) 5.35%* January 9, 1992
Kentucky A 4.94% (.33%) 6.46% 7.53%* May 4, 1987
C 4.60% 2.40% 2.99%* October 4, 1993
Kentucky Lim-
ited A 5.22% 1.29%* September 14, 1995
C 5.05% 2.64%* September 14, 1995
Louisiana A 5.11% .37% 6.84% 7.49%* September 12, 1989
C 4.79% 3.12% 2.83%* February 2, 1994
Michigan A 4.87% (.74%) 6.22% 7.37% June 27, 1985
C 4.55% 1.98% 3.73%* June 22, 1993
Missouri A 4.83% (.84%) 6.28% 7.14%* August 3, 1987
C 4.50% 1.86% 1.82% February 2, 1994
New Jersey 5.35% (.39%) 5.65%* September 16, 1992
New Jersey 4.27% .77% 5.45%*
Intermediate September 16, 1992
New Mexico 4.99% (1.16%) 4.85%* September 16, 1992
New York A 5.11% (.23%) 7.53% 7.58%* January 16, 1991
C 4.77% (3.88%)* March 4, 1996
North Carolina A 4.66% (.69%) 5.70% 6.85% March 27, 1986
C 4.32% 2.02% 2.09%* October 4, 1993
Ohio A 4.48% (.77%) 5.98% 7.20% June 27, 1985
C 4.12% 2.05% 3.62%* August 3, 1993
Pennsylvania A 5.31% (.53%) 6.18% 6.57%* October 29, 1986
C 4.99% 2.19% 2.47%* February 2, 1994
South Carolina 4.93% (.82%) 2.62%* July 6, 1993
Tennessee A 4.69% (.58%) 5.94% 7.31%* November 2, 1987
C 4.35% 2.24% 2.39%* October 4, 1993
Virginia A 5.01% (.34%) 6.31% 7.40% March 27, 1986
C 4.69% 2.38% 2.67%* October 4, 1993
Wisconsin 5.03% (.99%) 3.09%* June 1, 1994
National Funds
- --------------
All-American A 5.33% .25% 7.36% 7.96%* October 3, 1988
C 5.02% 3.08% 4.53%* June 2, 1993
Intermediate A 5.37% 1.70% 5.90%* September 15, 1992
C 4.98% (1.86%)* December 1, 1995
Limited Term A 3.84% 1.43% 5.84% 6.45%* October 19, 1987
C 3.64% (.75%)* December 1, 1995
</TABLE>
- --------
*Inception to date
18
<PAGE>
DIVIDEND PAYMENT OPTIONS
Several dividend payment options are available to shareholders. The activa-
tion of these options varies with the nature of a shareholder's administrative
relationship with the Fund. If the shareholder receives periodic statements
regarding the Fund from their broker/dealer, then all dividends are automati-
cally paid in cash unless the shareholder instructs their broker/dealer to im-
plement a different option. If the shareholder receives a periodic statement
directly from the Fund, then all dividends are automatically reinvested unless
the shareholder instructs the Fund to implement a different option.
The dividend payment options are to:
1. Automatically reinvest all interest and capital gains distributions.
2. Pay interest dividends in cash, and reinvest capital gains
distributions.
3. Pay both interest and capital gains distributions in cash.
4. Direct all dividends to another Flagship tax exempt or utility fund
account which has an identical registration and tax identification
number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via automated clearing house
into a bank account. The Fund's Prospectus contains complete
information.
If a shareholder's dividend or capital gains distribution check is returned
by the postal or other delivery service, such shareholder's check may be rein-
vested in their account. The shareholder's distribution options may also be
converted to having all dividends and other distributions reinvested in addi-
tional shares.
All reinvested or directed dividends will be at net asset value without any
sales charge. Your broker, or Flagship customer service representative can
help you change your option from your initial account opening instructions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The ways in which the shares of the series of the Fund are offered to the
public is described in the Fund's Prospectus.
PURCHASE
The Distributor offers several reduced sales charge programs as described
below.
1. Cumulative Purchase Discount (Class A Shares Only). Whenever an individ-
ual shareholder purchases Class A Shares of any series of the Fund, such indi-
vidual shareholder may aggregate his holdings of all Class A Shares in any
other open-end mutual fund subject to a front-end sales charge distributed by
the Distributor and any current purchases of Class A Shares to determine the
applicable sales charge. A reduced sales charge will be imposed if the aggre-
gate amount qualifies under the rate schedule. An individual shareholder may
also aggregate the holdings of a spouse, any of their children and parents in
the same fashion when making a particular purchase. Finally, for purposes of
determining the applicable sales charge, trusts and other fiduciaries may ag-
gregate the holdings of each trust estate or other fiduciary account in the
same fashion even if the beneficiaries are unrelated. Any shareholder may also
combine his holdings of Class A Shares subject to a front-end sales charge and
current purchases of Class A Shares in all such funds distributed by the Dis-
tributor in order to qualify for a reduced sales charge on any particular pur-
chase.
2. Letter of Intent (Class A Shares Only). A shareholder may also qualify
for reduced sales charges by sending to the Fund (within 90 days after the
first purchase desired to be included in the purchase program) a signed, non-
binding letter of intent to purchase, during a 13-month period, an amount suf-
ficient to qualify for a reduced sales charge. A single letter may be used for
spouses, their children and parents or any single trust estate or other fidu-
ciary account. All investments in Class A Shares of the Fund or in Class A
Shares of any other open-end mutual fund subject to a front-end sales charge
distributed by the Distributor count toward the indicated goal. Once the Dis-
tributor receives the required letter of intent, it will apply to qualifying
purchases within the 13-month period the sales charge that would be applicable
to a single purchase of the total amount indicated in the letter. During the
period covered by the letter of intent, 5% of the shares purchased will be re-
stricted until
19
<PAGE>
the stated goal is reached. If the intended purchase program is not completed
within the 13-month period, the sales charge will be adjusted upward as appro-
priate and a sufficient number of restricted shares will be redeemed by the
Fund if the shareholder does not pay the increased sales charge.
3. Broker-dealer and Flagship Employees. In view of the reduction of distri-
bution expenses associated with sales of the Fund's shares to registered rep-
resentatives and full-time employees of broker/dealers who have signed Selling
agreements with the Distributor, such individuals are permitted to purchase
shares of the Fund at net asset value for their personal accounts. The pur-
chaser must certify to the Fund that certain qualifications have been met and
agree to certain restrictions (such as an investment letter) in order to take
advantage of this program. For similar reasons, shares of the Fund may be pur-
chased at net asset value and in amounts less than the minimum purchase price
by officers, trustees and full-time employees of the Fund, the Distributor and
the Manager. For this purpose, the terms "registered representatives of
broker/dealers who have signed Dealer Agreements with the Distributor," "offi-
cers," "trustees" and "employees" include such persons' spouses, children and
parents, as well as the trustee or custodian of any trust, qualified pension
or profit sharing plan or IRA established by or for the benefit of such offi-
cer, trustee, employee, spouse, child or parent.
4. Group Purchasers (Class A Shares Only). Members of a qualified group may
purchase shares of the Fund at a reduced sales charge applicable to the group
as a whole, if such purchases are made in an amount and manner acceptable to
the Fund. The sales charge, if any, is based on the aggregate dollar value of
shares purchased and still owned by the group, plus the current purchase
amount. Members of a qualified group may purchase shares at net asset value
(without sales charge) where the amount invested is documented to the Fund to
be proceeds from distributions of a unit investment trust. Shares of the Fund
may be purchased at net asset value (without sales charge) by tax-qualified
employee benefit plans and by trust companies and bank trust departments for
funds over which they exercise exclusive discretionary investment authority
for which they charge customary fees and which are held in a fiduciary, agen-
cy, advisory, custodial or similar capacity.
A "qualified group" is one which (i) has previously been in existence, (ii)
has a primary purpose other than acquiring Fund shares at a discount and (iii)
satisfies investment criteria described in the Prospectus which enables the
Distributor to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members and must agree to comply with
certain administrative requirements relating to its group purchases. Under
such purchase plans, subsequent investments will continue until such time as
the investor notifies his group to discontinue further investments. There may
be a delay between the time a member's funds are received by the group and the
time the money reaches the Fund because of a qualified group's remittance pro-
cedures. Unless otherwise noted above, the investment in the Fund will be made
at the public offering price based on net asset value determined on the day
that the funds are received in proper form by the Fund.
5. Redemptions from Unrelated Funds. Shares of the Fund may be purchased at
net asset value where the amount invested is documented to the Fund to be pro-
ceeds from (i) the redemption (within one year of the purchase of Fund shares)
of shares of unrelated investment companies on which the investor has paid
initial or contingent deferred sales charges or is no longer subject to a
CDSC, (ii) the redemption of related or unrelated investment companies with a
Class "R" Share or a share class similar in all material respects to Flag-
ship's Class R Shares or (iii) a Unit Investment Trust.
6. Wrap Fee Accounts (Class A or Class R Shares Only). Shares of the Fund
may be purchased at net asset value by broker/dealers on behalf of wrap fee
client accounts for which the broker/dealer charges a fee and performs adviso-
ry, custodial, record keeping or other services.
7. Waiver of CDSC. For purchases of Class A Shares in amounts over
$1,000,000, the contingent deferred sales charge may be waived for purchases
through a broker-dealer that waives its commission.
EXCHANGES
Any Class A Shares which have been registered in a shareholder's name for at
least 15 calendar days, except shares of money market funds may be exchanged
on the basis of relative net asset value per share without a sales charge for
Class A Shares of any other tax exempt, cash management, utility fund, stock
fund or series thereof distributed by the Distributor in any state where such
exchange may legally be made.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes and, depending upon the circumstances, a
capital gain or loss may be realized. However, shareholders who exchange be-
tween funds within 90 days of the initial purchase date may not take as a loss
the amount of
20
<PAGE>
the sales charge paid, if a sales charge was assessed on the exchanged shares.
Also, if a shareholder receives tax-exempt dividends and shares have not been
held for more than six months, any loss on the sale or exchange of such hold-
ings shall be disallowed to the extent of the tax-exempt dividends.
REDEMPTION
To redeem shares, your dealer is responsible for transmitting the redemption
request to Boston Financial, the Fund's custodian, by the close of trading on
the New York Stock Exchange on a particular day in order for you to receive
the redemption price based upon the net asset value per share determined that
day. If the dealer fails to do so, you will receive the redemption price next
calculated after your request and any other materials are received and your
entitlement to any prior day's redemption price must be settled between you
and your dealer. Your dealer may charge a service fee for handling your re-
demption request.
If you meet the requirements stated below, you may redeem shares by tele-
phone toll free at 800-225-8530.
If you request payment by wire, proceeds will be sent by wire to a previ-
ously designated bank or trust company account normally on the next business
day Boston Financial is open for business. The minimum amount to be wired is
$5,000. Payment by mail may also be requested by telephone, in which case the
Fund will make the redemption as of the close of business on the date on which
such request is received and will normally send a check on the next business
day in the appropriate amount to the shareholder of record at the address
listed in the most recent Application Form received for such shareholder.
In order to use the telephone redemption procedure, an Application Form with
the expedited payment section properly completed must be on file with Boston
Financial before an expedited redemption request is submitted. This form re-
quires you to designate the bank or trust company account to which your re-
demption proceeds should be sent. Any change in the account designated to re-
ceive the proceeds must be submitted in proper form on a new Application Form
with signature guaranteed (see "Ordinary Redemption" for guaranty require-
ments).
Neither the Fund nor Boston Financial will be responsible for the authentic-
ity of any redemption instructions received by telephone or for the accuracy
or authenticity of anything contained in the most recent Application Form re-
ceived from you.
For all redemptions other than through your dealer or by telephone, your re-
demption request must be submitted in writing to:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
Such redemptions will be made immediately after the next determination of
net asset value, and the Fund will make payment by sending a check to you at
the address on your most recent Application Form. Checks will normally be sent
out within one business day, but in no event more than the required settlement
period as set by regulation following receipt of the redemption request in
proper form. Proceeds of redemptions of recently purchased shares may be de-
layed for 15 days or more, pending collection of funds for the initial pur-
chase. For redemption requests over $50,000, or if the address on your account
has been changed within the past 60 days, or if the redemption proceeds are to
go to an address other than the address of record, your signature on the re-
demption request must be guaranteed by a commercial bank, trust company, sav-
ings bank or savings and loan association that is a member of the FDIC or
FSLIC, or by a member firm of a domestic national securities exchange. In cer-
tain instances, Boston Financial may request additional documentation which it
believes necessary to insure proper authorization.
The Fund reserves the right to suspend the right of redemption and to post-
pone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than weekend and holiday closings, or
trading on the New York Stock Exchange is restricted or during which (as de-
termined by the Commission by rule or regulation) and emergency exists as a
result of which disposal or evaluation of a series' portfolio securities is
not reasonably practicable, or for such other periods as the Commission by or-
der permits.
21
<PAGE>
The Fund will use its best efforts to pay in cash for all shares redeemed,
but under abnormal conditions which make payment in cash impractical or un-
wise, the Fund may make payment wholly or partly in portfolio securities at
their then market value equal, when added to any cash payment, to the redemp-
tion price. In such cases an investor may incur brokerage costs in converting
such securities to cash.
Due to the relatively high cost of handling small investments, the Fund re-
serves the right to involuntarily redeem, at net asset value, the shares in a
series of any shareholder whose redemptions cause the value of its holdings in
such series to have a value of less than $1,000. Before the Fund redeems such
shares and sends the proceeds to the shareholder, the shareholder will be
given written notice that the value of the shares of such series in the ac-
count is less than the minimum amount and will be allowed 30 days to make an
additional investment in an amount which will increase the value of his hold-
ings in such series to at least $1,000. Accounts with balances of less than
$25 will be redeemed without written notice. No CDSC will be imposed on invol-
untary redemptions.
Shares purchased other than by Federal Funds wire or bank wire may not be
redeemed by telephone until 15 calendar days after the purchase of such shares
but may be redeemed pursuant to the ordinary redemption procedure during such
period.
PRICE
The public offering price is based on net asset value and includes the ap-
plicable sales charge. Because the Fund determines net asset value for each
series daily as of the close of trading (normally 4:00 p.m. New York time) on
the New York Stock Exchange on each day that the Exchange is open for trading,
your dealer must transmit your order to the Fund prior to such time in order
for your order to be executed at the public offering price based on the net
asset value to be determined that day. Any change in price due to the failure
of the Fund to receive an order prior to the close of the Exchange must be
settled between you and your dealer. Similarly, if your dealer fails to pro-
vide timely payment (normally five business days after the order is received),
the Distributor may sell the shares to other investors at the then current of-
fering price. If the Distributor does so, the dealer will be responsible to
the Distributor for any loss which the Distributor incurs in connection with
the transaction, and you must settle with your dealer your rights to shares at
the price on the day you ordered them.
All funds will be fully invested in full and fractional shares. The issuance
of shares is recorded on the books of the Fund, and, to avoid additional oper-
ating costs and for investor convenience, share certificates will not be is-
sued, except by special arrangement. Boston Financial will send to each share-
holder of record a confirmation of each purchase and redemption transaction
(including the aggregate number of shares owned after such transaction) by
such shareholder and a quarterly statement summarizing purchases, redemptions
and dividend accruals and distributions in the account during the prior month.
TAXES
Each series of the Fund intends to qualify and elect to be treated as a
"regulated investment company" under Sections 851-855 of the Internal Revenue
Code of 1986, as amended (the "Code"). To so qualify, each series must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currency,
or certain other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of invest-
ing in stock, securities or currencies; (ii) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of the follow-
ing assets held for less than three months: (a) stock or securities, (b) op-
tions, futures or forward contracts on stock or securities, or (c) foreign
currencies (or foreign currency options, futures or forward contracts) not di-
rectly related to its principal business of investing in stock or securities;
and (iii) diversify its holdings so that, at the end of each quarter of its
taxable year, the following two conditions are met: (a) at least 50% of the
value of the Fund's total assets is represented by cash, U.S. Government secu-
rities, securities of other regulated investment companies and other securi-
ties (for this purpose, such other securities will qualify only if the Fund's
investment is limited, in respect of any issuer, to an amount not greater than
5% of the Fund's assets and 10% of the outstanding voting securities of such
issuer) and (b) not more than 25% of the value of the Fund's assets is in-
vested in securities of any one issuer (other than U.S. Government securities
or securities of other regulated investment companies). Because each series of
the Fund generally invests in the obligations of a single state and its polit-
ical subdivisions, it may be more difficult for a series to comply with the
above-mentioned diversification requirements than would be the case if such
series invested in a broader category of obligations.
22
<PAGE>
Corporate shareholders may also be taxed on exempt interest dividends not
otherwise considered to be a preference item since the computation of a corpo-
ration's alternative minimum tax liability includes an adjustment generally
based on the difference between adjusted current earnings (an alternative
measure of income that includes interest on tax-exempt obligations) and the
amount otherwise determined to be alternative minimum taxable income.
Each series intends to declare and pay dividends and capital gains distribu-
tions so as to avoid imposition of a four percent Federal excise tax. To do
so, each series expects to distribute during the calendar year at least an
amount equal to (i) 98% of its calendar year ordinary income, (ii) 98% of its
capital gain net income (the excess of short and long-term capital gain over
short and long-term capital loss) for each one-year period ending October 31,
and (iii) 100% of any undistributed ordinary or capital gain net income from
the prior calendar year which has not been taxed to such series. Dividends de-
clared in October, November or December made payable to shareholders of record
in such a month, and paid in the following January would be deemed to have
been paid by the Fund and received by shareholders as of December 31st of the
year declared.
Dividends paid by any series will not qualify for the 70 percent dividends-
received deduction generally available to corporate shareholders because none
of any series' gross income will consist of dividends from domestic corpora-
tions. Shareholders will be subject to federal and state taxes on distribu-
tions attributable to interest earned on certificates issued by U.S. agencies
(e.g., GNMA, FNMA, and FHLMC).
A series may engage in various defensive hedging transactions. Under various
Code provisions, such transactions may change the character of recognized
gains and losses, accelerate the recognition of certain gains and losses, and
defer the recognition of certain losses. If a shareholder receives an exempt-
interest dividend with respect to any share of a series and such share is held
by such shareholder for less than six months, any loss on the sale or exchange
of such share shall be disallowed to the extent of such exempt-interest divi-
dend. Also, if a capital gain dividend is paid with respect to any shares of a
series which are sold at a loss after being held for less than six months, any
loss realized upon the sale of such shares will be treated as a long-term cap-
ital loss to the extent of such capital gain dividend. There are special rules
for determining holding periods for purposes of these rules.
EXCHANGE AND REINVESTMENT PRIVILEGE
Any Class of Shares which have been registered in a shareholder's name for
at least 15 calendar days, may be exchanged, on the basis of relative net as-
set value per share, for shares of any other tax exempt, cash management,
stock, or utility mutual fund or series thereof distributed by Flagship Funds
Inc. ("Substitute Fund"). Class A Shares may only be exchanged for other
shares which are sold subject to an initial sales charge in any state where
such exchange may legally be made. Any Class B and Class C Shares may be ex-
changed without the payment of any contingent deferred sales charge otherwise
due upon redemption of Class B and Class C Shares for shares of any other Sub-
stitute Fund which are sold pursuant to a deferred sales charge arrangement in
any state where such exchange may legally be made. Any Class R Shares may be
exchanged for any other series of Class R Shares. Shares must be on deposit at
the transfer agent before the exchange can be made. Before effecting an ex-
change, a shareholder should obtain and read a current prospectus of the Sub-
stitute Fund.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for Federal income tax purposes and, depending upon the circumstances, a
short or long-term capital gain or loss may be realized. However, shareholders
who exchange between funds within 90 days of the initial purchase date may not
take as a loss the amount of the sales charge paid, if a sales charge was as-
sessed on the exchanged shares.
The exchange privilege may be modified or terminated at any time. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. To exercise the exchange privilege, you must either con-
tact your dealer or broker, who will advise the Fund of the exchange, or com-
plete the Exchange Application available from the Fund's Transfer Agent and
submit it to the Transfer Agent. If you have certificates for any shares being
exchanged, you must surrender such certificates.
A shareholder who has redeemed Class A Shares may repurchase shares (or
shares of any other fund distributed by the Distributor or series thereof
which are sold subject to a sales charge) at net asset value without incurring
the applicable sales charge. Such a purchase must, however, be in an amount
between the stated
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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.
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