- --------------------------------------------------------------------------------
LOGO
THE BLANCHARD
GROUP OF FUNDS
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
Blanchard Funds (the "Trust"), which currently consists of ten investment
portfolios, and Blanchard Precious Metals Fund, Inc. (the "Company"), which
currently consists of one investment portfolio (each portfolio individually
referred to as a "Fund" and collectively as the "Funds") are open-end management
investment companies, which offer separate investment alternatives for different
investor needs. Virtus Capital Management, Inc. is the Funds' overall manager.
There is no guarantee that the Funds will achieve their investment objectives.
There can be no assurance that Blanchard 100% Treasury Money Market Fund will
maintain a stable $1.00 share price.
Highlights ................................................................. 3
Fee Table .................................................................. 5
Financial Highlights ...................................................... 6
The Funds' Investment Objectives and Policies ............................. 10
Management of the Funds ................................................... 26
Portfolio Advisory Services ............................................... 28
How to Invest ............................................................. 32
Investor Services ......................................................... 34
How to Redeem ............................................................. 36
Distribution of Shares of the Funds ....................................... 37
Tax Matters ............................................................... 39
Performance Information ................................................... 41
Additional Information About the Funds .................................... 42
Additional Investment Information ......................................... 44
Certain Investment Strategies and Policies ................................ 48
Risk Factors and Special Considerations ................................... 55
Appendix A-Description of Bond Ratings .................................... A-1
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Please read this Prospectus carefully and retain it for future reference. A
copy of each Fund's Statement of Additional Information, dated August 7 1995,
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. The Statements of Additional Information are
available upon request to the Funds at 1-800-829-3863.
Investment products offered through Signet Financial Services, Inc. are not
deposits, obligations of, or guaranteed by Signet Bank, and are not insured by
FDIC or any Federal agency. In addition, they involve risk, including possible
loss of principal invested. Member NASD.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated August 7, 1995
- --------------------------------------------------------------------------------
<PAGE>
The Funds' investment objectives and policies are summarized below.
See "The Funds' Investment Objectives and Policies" for
a more complete discussion.
Blanchard Global Growth Fund ("BGGF") seeks to provide long-term capital
growth. As worldwide investment and economic trends change rapidly, the flexible
investment strategy of the Fund permits it to follow a global allocation
strategy that contemplates shifts among strategic market sectors. These include
the following: U.S. Equities; Foreign Fixed Income; Foreign Equities; Precious
Metals Securities and Bullion; U.S. Fixed Income; and Emerging Markets.
Blanchard American Equity Fund ("BAEF") seeks to provide long-term growth of
capital. The Fund invests primarily in equity securities, consisting of common
stocks and securities having the characteristics of common stocks, such as
convertible preferred stocks, convertible debt securities and warrants. In
pursuing its investment objective of long-term growth of capital, the Fund will
invest at least 65% and under normal circumstances expects to invest at least
80% of its assets in equity securities of companies of various sizes which are
currently experiencing a rate of earnings growth greater than the average of
such rate for all companies included in Standard & Poor's 500-Stock Index.
Blanchard Precious Metals Fund, Inc. ("BPMF") seeks to provide long-term
capital appreciation and preservation of purchasing power through investments in
physical precious metals, such as gold, silver, platinum and palladium, and in
securities of companies involved with precious metals. A secondary objective of
the Fund is to reduce the risk of loss of capital and decrease the volatility
often associated with precious metals investments by changing the allocation of
its assets from precious metals securities to physical precious metals and/or
investing in short-term instruments and government securities during periods
when the Fund's portfolio manager believes the precious metals markets may
experience declines.
Blanchard Short-Term Global Income Fund ("BSTGIF") seeks to produce high
current income with minimum risk of principal and relative stability of net
asset value. The Fund seeks to achieve its objective by investing primarily in a
portfolio of debt obligations rated in the four highest rating categories of
nationally recognized rating services, denominated in the U.S. dollar and
various foreign currencies, which have average remaining maturities not
exceeding three years.
Accordingly, it will seek investment opportunities in foreign, as well as
domestic, securities markets. The Fund is designed for investors who seek higher
yield than a money market fund and less fluctuation in net asset value than a
longer-term bond fund.
Blanchard Short-Term Bond Fund ("BSTBF") seeks to provide a high level of
current income consistent with preservation of capital by investing primarily in
a broad range of short-term debt securities. The Fund will normally maintain a
dollar-weighted average portfolio maturity of three years or less. The Fund
intends to invest primarily in investment-grade securities.
Blanchard Flexible Tax-Free Bond Fund ("BFTFBF") seeks to provide a high
level of current interest income exempt from Federal income tax consistent with
the preservation of principal. The Fund invests primarily in bonds of varying
maturities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities and instrumentalities, the interest from which, in the
opinion of bond counsel for the issuer, is exempt from Federal income tax. The
Fund has no restrictions on the maturities of bonds that it may purchase.
Rather, it retains the flexibility to lengthen or shorten the overall maturity
of its portfolio based on its portfolio adviser's outlook on interest rate
movements, as it attempts to reduce any price volatility. The Fund invests
primarily in high quality, investment-grade bonds.
2
<PAGE>
Blanchard 100% Treasury Money Market Fund ("BTMMF") seeks to offer the
highest level of current income as is consistent with the preservation of
capital and maintenance of liquidity, by investing exclusively in short-term,
direct obligations of the U.S. Treasury. The Fund will not invest in repurchase
agreements, certificates of deposit of commercial banks or savings and loan
institutions, nor will it invest in obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, or in corporate debt securities.
Portfolio securities of the Fund are considered by many to be among the safest
investments available. However, shares of this Fund are neither insured nor
guaranteed by the U.S. Government. There is no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share.
Blanchard Flexible Income Fund ("BFIF") seeks to provide high current income
while seeking opportunities for capital appreciation. The Fund is designed for
fixed-income investors with a long-term investment horizon. The Fund invests in
different fixed income securities markets: U.S. Government Securities,
Investment Grade Fixed Income Securities, High Yield Securities and
International Fixed Income Securities. In seeking its objective of high current
income, the Fund also takes into consideration preservation of capital.
Blanchard Worldwide Emerging Markets Fund ("BWEMF") seeks to provide capital
appreciation and current income by investing primarily in equity and fixed
income securities in emerging markets around the world. The Fund is designed for
investors who seek an easy way to capitalize on opportunities in developing
countries. While investments in emerging markets offer potential for substantial
gains, they also entail risks that may not be present in developed markets.
These markets are growing rapidly, but many are still young and relatively
small. Therefore, investors can expect to see volatility and reduced liquidity
at times, which is why investments in emerging markets are best suited for
investors with a longer investment horizon.
HIGHLIGHTS
Fund Management
Virtus Capital Management, Inc. ("VCM") provides the overall management
services necessary for the Funds' operations. As of April 30, 1995, VCM had more
than $3 billion in assets under management. VCM selected, continually monitors
and evaluates the Funds' Portfolio Advisers. The Portfolio Advisers are
responsible for the selection of each Fund's portfolio investments (except BTMMF
which is managed directly by VCM).
VCM receives monthly compensation from each Fund based on the amount of
assets under management. VCM, not the Fund, pays the fees of each Portfolio
Adviser pursuant to a sub-advisory agreement. See "Management of the Funds" and
"Portfolio Advisory Services".
How to Invest and Redeem
You may purchase shares directly from Federated Securities Corp. (the
"Distributor"), which is each Fund's principal distributor. You may also
purchase shares from broker-dealers who have entered into a dealer agreement
with the Distributor.
The minimum amount required to open an account in any of the Funds (other
than BTMMF) is $3,000 ($2,000 for qualified retirement plans, such as IRAs and
Keoghs). The minimum initial investment requirement for BTMMF is only $1,000.
The minimum subsequent investment requirement for all Funds is $200. There is no
fee for additional investments made to existing accounts, nor is there a fee
charged when redeeming shares, sometimes called a back-end load. Each Fund
(other than BTMMF) has also adopted a Distribution and Marketing Plan which
permits the reimbursement of distribution expenses by the Fund on an annual
basis. See "How to Invest" and "Distribution of Shares of the Funds".
3
<PAGE>
You may redeem your shares on any business day at the next determined net
asset value calculated after the Transfer Agent has received the redemption
request in proper form. See "How to Redeem".
Each Fund reserves the right to close to further new investments if such
Fund's Portfolio Adviser believes that the Fund's size may hamper their
effectiveness in managing the portfolio. In this event, no new investments will
be accepted until further review. Shareholders who have established accounts
prior to the closure date will be allowed to add to their accounts.
Investor Services and Privileges
The Funds offer certain investor services and privileges that may be suited
to your particular investment needs, including free Telephone Exchange
Privileges, Investment and Withdrawal Plans and various Retirement Plans. See
"Investor Services".
Dividends
The growth funds intend to declare dividends at least annually from net
investment income. The income funds intend to declare dividends monthly or
quarterly from net investment income. Dividends are automatically reinvested in
additional Fund shares at net asset value on the payment date and are reflected
in the statements we send you, unless you elect to receive them in cash, in
which case we will send you a quarterly check. See "Tax Matters".
Special Considerations
BTMMF is a diversified fund, and the other Funds are non-diversified funds.
Non-diversified Funds may be invested in a limited number of issues; thus, there
may be greater risk in an investment in these Funds other than in diversified
investment companies. Moreover, there are potential risks associated with
certain of the Funds' investments and additional risk considerations that may be
associated with certain techniques and strategies employed by the Funds,
including those relating to investments in foreign securities and futures and
options transactions. Such risks may not be incurred by other investment
companies which have similar investment objectives, but which do not use these
techniques and strategies.
Blanchard Funds is organized as a Massachusetts business trust and the
Blanchard Precious Metals Funds, Inc. is organized as a Maryland corporation. In
each state, nomenclature varies. For convenience, in this Prospectus, you will
be referred to as "shareholders," your Fund shares as "shares" and your
directors or trustees as "Board Members." In addition, the portfolio advisers,
sector managers and the allocation strategist will be collectively referred to
as "Portfolio Advisers".
4
<PAGE>
FEE TABLE
For a better understanding of the expenses you will incur when investing in
the Funds, a summary of expenses based on the year ended April 30, 1995 is set
forth below. There is no sales commission on any purchase of Fund shares.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses BGGF BTMMF BSTGIF BFIF BSTBF BWEMF BAEF BFTFBF BPMF
---- ----- ------ ---- ----- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Commission on
Purchase of Shares .................. NONE NONE NONE NONE NONE NONE NONE NONE NONE
Sales Commission on
Reinvestment of Dividends ........... NONE NONE NONE NONE NONE NONE NONE NONE NONE
Sales Commission on
Redemption of Shares ................ NONE NONE NONE NONE NONE NONE NONE NONE NONE
Annual Fund Operating
Expenses
(as a % of average net assets)
Management Fees (After Fee Waiver) (See
"Management of the Funds") .......... 1.00% .42% .71% .74%1 .17%1 .59% .31% .11% 1.00%
12b-1 Fees ............................ .75%4 NONE .24%2 .25%2 .23%2 .50%3 .50%3 0% .75%4
Other Expenses
(See "Management of the Funds")5 .... .76% .57% .56% .59% .98% 2.50% 2.24% .89% .74%
Total Fund Operating Expenses6 ........ 2.51% .99% 1.51% 1.58% 1.38% 3.59% 3.05% 1.00% 2.49%
Example:
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at
the end of each time period
1 year .............................. $ 26 $ 10 $ 15 $ 16 $ 14 $ 37 $ 31 $ 10 $ 26
3 years ............................. 79 32 48 50 44 112 96 32 78
5 years ............................. 135 55 83 87 76 189 162 55 134
10 years ............................ 287 122 181 189 167 391 340 123 285
</TABLE>
This example should not be considered a representation of past or future
expenses, and actual expenses may be greater or less than those shown. In
addition, the 5% annual return should not be considered representative of past
or future returns, and actual returns may be greater or less than the
illustration above.
- ----------------------
1. VCM has conditioned its right to receive a portion of any earned but deferred
fees and expenses based upon these Funds reaching and maintaining a certain
level of net assets. See "Management of the Funds."
2. As a result of distribution fees of .25% per annum of the Fund's average
daily net assets, a shareholder who has been in the Fund for 29 years may pay
more than the economic equivalent of the maximum front-end sales charges
permitted by the Rules of the National Association of Securities Dealers,
Inc.
3. As a result of distribution fees of .50% per annum of the Fund's average
daily net assets, a shareholder who has been in the Fund for 14.5 years may
pay more than the economic equivalent of the maximum front-end sales charges
permitted by the Rules of the National Association of Securities Dealers,
Inc.
4. As a result of distribution fees of .75% per annum of the Fund's average
daily net assets, a shareholder who has been in the Fund for 9.6 years may
pay more than the economic equivalent of the maximum front-end sales charges
permitted by the Rules of the National Association of Securities Dealers,
Inc.
5. Other Expenses include, among other costs, custodian, transfer agent,
administration, legal and auditing fees.
6. VCM has agreed to cap the Fund's total operating expenses until July 11,
1997, so that the expense ratio of each Fund will not exceed the Fund expense
ratio for the fiscal year ended April 30, 1995.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding throughout each Period)
The following selected per share data and ratios, insofar as they relate to
each of the years in the period ended April 30, 1995, have been audited by Price
Waterhouse LLP, independent accountants. The related financial statements and
unqualified report of independent accountants thereon for the five years ended
April 30, 1995 are included in each Fund's Statement of Additional Information.
This information should be read in conjunction with the financial statements and
notes thereto. Further information about the Funds' performance is contained in
each Funds' annual report, which may be obtained without charge by writing to
the address or calling the number set forth on the cover page of this
Prospectus.
BLANCHARD GLOBAL GROWTH FUND
<TABLE>
<CAPTION>
Dividends
to
Total Share- Distribu-
Realized from holders tions to Distri-
and Invest- from Share- butions Net Net Asset Net Net
Net Asset Invest- Unrealized ment Invest- holders in excess Asset Total at End of Expenses Investment
Year Value at ment Gain (Loss) Income ment from of net Value at Invest- Year to Income to Port-
Ended Beginning Income on invest Opera- Income Realized Realized End ment (000 Average Average folio
April 30 of Period --Net ments--Net tions --Net Gains--Net Gains of Period Return omitted) Net Assets Net Assets Turnover
- -------- --------- ------- ----------- ------ ------- ---------- ------- --------- ------ --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ..... $10.04 $ .08 $(.19) $(.11) $ - $ - $ (.22) $ 9.71 (1.04%) $ 87,000 2.51% .76% 221.0%
1994 ..... 10.00 .03 1.29 1.32 0 (1.28) - 10.04 12.91% 109,805 2.61% .67% 166.0%
1993 ..... 9.92 .25 .32 .57 (.30) (.19) - 10.00 6.08% 84,780 2.40% 1.72% 138.0%
1992 ..... 9.64 .33 .26 .59 - 0 - 9.92 6.24% 128,047 2.31% 2.31% 108.6%
1991 ..... 9.62 .30 .135 .435 (.2075) (.2075) - 9.64 4.61% 193,593 2.36% 2.84% 78.3%
1990 ..... 10.11 .30 .09 .39 (.375) (.505) - 9.62 3.74% 233,300 2.28% 2.86% 88.4%
1989 ..... 9.68 .22 .49 .71 (.10) (.18) - 10.11 7.54% 244,048 2.29% 2.27% 85.2%
1988 ..... 10.51 .14 (.21) (.07) (.12) (.64) - 9.68 (.57%) 246,569 2.28% 1.42% 119.8%
1987(a) .. 8.00 .01 2.50 2.51 - - - 10.51 31.38%d 149,018 3.10%(b)(c) .34%(b)(c) 69.7%
<FN>
- ----------
(a) Represents period from June 1, 1986 (commencement of the Fund's operations) to April 30, 1987.
(b) Net of expense reimbursement.
(c) Annualized.
(d) Not annualized.
</FN>
</TABLE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
<TABLE>
<CAPTION>
Realized Dividends Distri-
and to butions
Unrealized Share- to
Gain Total holders Share- Net Net Ratio of
(Loss) from from holders Total Asset Asset Ratio of Net
Net Asset Invest- on Invest- Invest- from Dividends Value Total at End Net Investment
Year Value at ment Invest- ment ment Realized and at Invest- of Year Expenses Income to
Ended Beginning Income ments Income Income Gains Distri- End of ment (000 to Average Average Net
April 30 of Period --Net --Net Operations --Net --Net butions Period Return omitted) Net Assets Assets
- -------- --------- ------ ------- ---------- ------- -------- --------- ------ ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .... $1.00 $.04 - $.04 $(.04) - $(.04) $1.00 4.02% $165,000 .99%(c)(d) 3.83%(c)(d)
1994 .... 1.00 .03 - .03 (.03) - (.03) 1.00 2.76% 230,790 .41%(c)(d) 2.80%(c)(d)
1993 .... 1.00 .03 - .03 (.03) - (.03) 1.00 3.42% 164,974 .08%(c)(d) 3.27%(c)(d)
1992 .... 1.00 .04 - .04 (.04) - (.04) 1.00 4.60% 57,847 .86%(c)(d) 4.52%(c)(d)
1991 .... 1.00 .07 - .07 (.07) - (.07) 1.00 6.80% 38,472 1.11%(c)(d) 6.62%(c)(d)
1990 .... 1.00 .08 - .08 (.08) - (.08) 1.00 8.11% 44,906 1.04%(d) 7.63%(c)(d)
1989(b) . 1.00 .02 - .02 (.02) - (.02) 1.00 1.67%(e) 24,833 .42%(a)(c)(d)9.12%(a)(d)
<FN>
- -----------
(a) Annualized.
(b) Represents period from February 24, 1989 (commencement of the Fund's operations) to April 30, 1989.
(c) Net of expenses borne by Sheffield Management Company (the "prior manager").
(d) The net expense ratio to average net assets and investment income ratio to average net assets would have been 1.07% and 3.75%,
respectively, for the year ended April 30, 1995, .93% and 2.29% respectively for the year ended April 30, 1994, .92% and 2.43%
respectively, for the year ended April 30, 1993, 1.46% and 3.92%, respectively, for the year ended April 30, 1992, 1.23% and
6.50%, respectively, for the year ended April 30, 1991, 1.16% and 7.51%, respectively, for the year ended April 30, 1990, and
3.50% and 6.05%, respectively, for the period ended April 30, 1989, if the management fee had not been waived and other
expenses had not been borne by the prior manager.
(e) Not annualized.
</FN>
</TABLE>
6
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
<TABLE>
<CAPTION>
Realized Dividends
and to
Unrealized Share-
Gain Total holders Net Net Ratio of
(Loss) from from Asset Asset Ratio of Net
Net Asset Invest- on Invest- Invest- Tax Change Value Total at end Net Investment
Year Value at ment Invest- ment ment Return in net at Invest- of Year Expenses Income to
Ended Beginning Income ments Income Income of Asset End of ment (000 to Average Average Net Portfolio
April 30 of Period --Net --Net Operations --Net Capital Value Period Return omitted) Net Assets Assets Turnover
- -------- --------- ------ ------- ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .... $1.79 $.10(D)$(.07)(D)$(.03) $ - $(.10) $(.13) $1.66 (1.45%) $ 234,000 1.51%(2) 5.95%(2) 386%
1994 .... 1.85 .12 (.06) .06 (.01) (.11) (.06) 1.79 3.12% 535,141 1.44% 6.41% 327%
1993 .... 1.89 .13 (.04) .09 (.13) - (.04) 1.85 4.94% 699,182 1.44%** 6.97%** 610%
1992 .... 1.95 .17** (.06) .11 (.17) - (.06) 1.89 5.85% 1,240,563 1.32%**(2) 8.50%**(2) 412%
1991* 1.97 .06** (.02) .04 (.06) - (.02) 1.95 2.15%(3) 230,233 .38%**(1)(2) 11.30%**(1)(2) 63%
<FN>
- ----------
* Represents period from January 8, 1991 (commencement of the Fund's operations) to April 30, 1991.
** Net of fees waived by the prior manager and Sheffield Investments, Inc. (the "prior distributor") and expenses borne
by the prior manager.
(1) Annualized.
(2) The net expense ratio to average net assets and investment income ratio to average net assets would have been 1.56% and 5.90%,
respectively, for the year ended April 30, 1995, 1.41% and 8.41%, respectively, for the year ended April 30, 1992 and 2.23% and
9.45%, respectively, for the period ended April 30,1991 if the management and distribution fees had not been waived and other
expenses had not been borne by the prior manager.
(3) Not annualized.
(D) Calculated based on average shares outstanding.
</FN>
</TABLE>
BLANCHARD FLEXIBLE INCOME FUND
<TABLE>
<CAPTION>
Realized Dividends Distri-
and to butions
Unrealized Share- to
Gain Total holders Share- Net Net Ratio of
(Loss) from from holders Asset Asset Ratio of Net
Net Asset Invest- on Invest- Invest- from Tax Value Total at end Net Investment
Year Value at ment Invest- ment ment Realized Return at Invest- of Year Expenses Income to
Ended Beginning Income ments Income Income Gains of End of ment (000 to Average Average Net Portfolio
April 30 of Period --Net --Net Operations --Net --Net Capital Period Return omitted) Net Assets Assets Turnover
- -------- --------- ------ ------- ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .... $4.85 $ .30(4) $(.13) $ .47 $(.00)(5)$.00 $ .31 $4.71 3.74% $262,000 1.58% 6.52% 455%
1994 .... 5.09 .40 (.17) .23 (.36) (.08) (.03) 4.85 4.11% 550,254 1.30% 7.10% 346%
1993 .... 5.00 .21 .09 .30 (.21) .00 - 5.09 6.17%(3) 315,844 .20%*(1)(2) 9.02%*(1)(2) 129%
<FN>
- ----------
* Net of fees deferred and expenses absorbed.
(1) Annualized.
(2) The ratios of expenses to average net assets and investment income-net to average net assets would have been 1.59% and 6.51%,
respectively, for the year ended April 30, 1995, 1.41% and 6.99%, respectively, for the period ended April 30, 1994 and 1.59%
and 7.62%, respectively, for the period ended April 30, 1993, if a portion of the Fund's expenses had not been deferred and
absorbed.
(3) Not annualized.
(4) Calculated based on average shares outstanding.
(5) Less than one cent per share.
</FN>
</TABLE>
7
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Realized Dividends
and to
Unrealized Share-
Gain Total holders Distri- Net Net Ratio of
(Loss) from from Dividends butions Asset Asset Ratio of Net
Net Asset Invest- on Invest- Invest- in excess from Value Total at end Net Investment
Year Value at ment Invest- ment ment of net Realized at Invest- of Year Expenses Income to
Ended Beginning Income ments Income Income Investment Gains End of ment (000 to Average Average Net Portfolio
April 30 of Period --Net --Net Operations --Net Income --Net Period Return omitted) Net Assets Assets Turnover
- -------- --------- ------ ------- ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ... $2.93 .15 $.00(3) $.15 $(.14) $(.00)(3) $(.00) $2.94 5.34% $23,000 1.38%(2) 4.80%(2) 84%
1994 ... 3.00 .17 (.06) .11 (.17) - (.01) 2.93 3.72% 42,381 .63%(2) 5.64%(2) 212%
1993 ... $3.00 0.00(3) 0.00(3) 0.00(3) 0.00(3) - (0.00)(3) $3.00 0.15%(4) 2,000 3.03%(1) 3.89%(1) 36%
<FN>
- ------------
(1) Annualized.
(2) The ratios of expenses to average net assets and net investment income to average net assets would have been 2.13% and 4.05%,
respectively, for the year ended April 30, 1995, 2.05% and 4.22%, respectively, for the year ended April 30, 1994, and 2.10%
and 4.15%, respectively, for the period ended April 30, 1993, if a portion of the Fund's expenses had not been voluntarily
deferred and absorbed by the prior manager and prior distributor.
(3) Less than one cent per share.
(4) Not annualized.
</FN>
</TABLE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
<TABLE>
<CAPTION>
Realized Dividends Distri-
and to butions
Unrealized Share- to
Gain Total holders Share- Net Net Ratio of Ratio of
(Loss) from from holders Asset Asset Net Net
Net Asset Invest- on Invest- Invest- from Change Value Total at end Expenses Investment
Year Value at ment Invest- ment ment Realized in Net at Invest- of Year to Income to
Ended Beginning Income ments Income Income Gains Asset End of ment (000 Average Net Average Net Portfolio
April 30 of Period --Net --Net Operations --Net --Net Value Period Return omitted) Assets Assets Turnover
- -------- --------- ------ ------ ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995..... $7.98 $(.11) $(1.47) $1.58 $ - $ - $(1.58) $6.40 (19.80%) $12,000 3.59%(c) (1.44%)(c) 132%
1994(a).. 8.00 (.00)(d) (.02) (.02) - - (.02) 7.98 (.25%)(e) 8,042 3.07%(b)(c) (.10%)(b)(c) 0%
<FN>
- -----------
(a) Represents period from March 1, 1994 (commencement of the Fund's operations) to April 30, 1994.
(b) Annualized.
(c) The ratios of expenses to average net assets and net investment (loss) income to average net assets would have been 4.22% and
(2.07%) respectively, for the year ended April 30, 1995 and 4.42% and (1.45%) respectively, for the period ended April 30,
1994 if a portion of the Fund's expenses had not been voluntarily waived and absorbed by the prior manager.
(d) Less than one cent per share.
(e) Not annualized.
</FN>
</TABLE>
8
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
<TABLE>
<CAPTION>
Realized
and
Unrealized Total Net Net Ratio of Ratio of
(Loss) from Asset Asset Net Net
Net Asset Invest- on Invest- Tax Change Value Total at end Expenses Investment
Year Value at ment Invest- ment Return in net at Invest- of Year to Income to Port-
Ended Beginning Income ments Income of Asset End of ment (000 Average Net Average Net folio
April 30 of Period --Net --Net Operations Capital Value Period Return omitted) Assets Assets Turnover
- -------- --------- ------ ------ ---------- ------- --------- ------ ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ... $ 9.42 $(.01)(DD) $ .45 $ .44 $(.23) .21 $9.63 4.83% $10,000 3.05%(1) (1.87%)(1) 45%
1994 ... 9.10 (.20)(DD) .52 .32 - .32 9.42 3.52% 13,970 3.00% (2.04%)(1) 97%
1993 ... 10.00 (.03)(DD) (.87) (.90) - (.90) 9.10 (9.0%)(3) 31,148 3.13%*(1)(2) (1.66%)*(1)(2) 49%
<FN>
- ------------
* Net of expense reimbursement.
(1) The ratios of expenses to average net assets and net investment income to average net assets would have been 3.79% and
(2.61%), respectively, for the year ended April 30, 1995, 3.00% and (2.05%), respectively for the year ended April 30, 1994,
and 3.73% and (2.26%), respectively, for the period ended April 30, 1993, if a portion of the Fund's expenses had not been
waived and absorbed.
(2) Annualized.
(3) Not annualized.
(DD)Calculated based on average shares outstanding.
</FN>
</TABLE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Realized Dividends
and to Unrealized Share-
Gain Total holders Dividends Distri- Net Net Ratio of Ratio of
(Loss) from from in excess butions Asset Asset Net Net
Net Asset Invest- on Invest- Invest- of From Value Total at end Expenses Investment
Year Value at ment Invest- ment ment Investment Realized at Invest- of Year to Income to Port-
Ended Beginning Income ments Income Income Income Gains End of ment (000 Average Net Average Net folio
April 30 of Period --Net --Net Operations --Net --Net --Net Period Return omitted) Assets Assets Turnover
- -------- --------- ------ ------ ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ... $4.77 .24 .26 .50 (.23) (.01) _ $5.03 10.74% $19,000 1.00%*(2) 4.87%*(2) 170%
1994 ... 5.00 .18 (.20) (.02) (.18) - (.03) 4.77 (.48%)(3) 23,267 0%*(1)(2) 6.79%*(1)(2) 190%
<FN>
- ------------
* Net of fees waived and expenses absorbed.
(1) Annualized.
(2) The ratios of expenses to average net assets and net investment income to average net assets would have been 2.17% and 6.04%,
respectively, for the year ended April 30, 1995 and 2.22% and 4.57%, respectively, for the period ended April 30, 1994, if the
Fund's expenses had not been voluntarily waived and absorbed by the prior manager.
(3) Not annualized.
</FN>
</TABLE>
BLANCHARD PRECIOUS METALS FUND, INC.
<TABLE>
<CAPTION>
Realized
and Distri- Distri-
Unrealized tions to butions
Gain Total Share- in Net Net Ratio of Ratio of
(Loss) from holders Excess Asset Asset Net Net
Net Asset Invest- on Invest- from of Tax Value Total at end Expenses Investment
Year Value at ment Invest- ment Realized Realized Return at Invest- of Year to Income to Port-
Ended Beginning Income ments Income Gains Gains of End of ment (000 Average Net Average Net folio
April 30 of Period --Net --Net Operations --Net --Net Capital Period Return omitted) Assets Assets Turnover
- -------- --------- ------ ------ ---------- ------- -------- --------- ------ ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ... $8.73 $(.02) $(.41) $(.43) $(.03) $(1.06) $(.09) $7.12 (4.39%) $75,000 2.49% (1.48%) 116%
1994 ... 6.83 (.11)(f) 2.01(f) 1.90 - - - 8.73 27.8% 68,092 2.46% (1.21%) 174%
1993 ... 5.04 (.08)(f) 1.87B:(f) 1.79 - - - 6.83 35.5% 32,636 3.24% (1.46%) 66%
1992 ... 5.29 (.09)(f) (.16)(f) (.25) - - - 5.04 (4.7%) 20,900 3.09% (1.57%) 62%
1991 ... 6.30 (.08)(f) (.93)(f) (1.01) - - - 5.29 (16%) 24,924 3.05% (1.28%) 57%
1990 ... 7.19 (.03)(f) (.725)(f) (.755) (.03) (.105) (.135) 6.30 (10.9%) 31,539 2.95% (.40%) 56%
1989(c). 8.00 .02 (.83) (.81) - - - 7.19 (10.2%)(g) 25,837 3.99%(a)(b)(d) .77%(a)(b)(e) 21%
<FN>
- --------------
(a) Net of expense reimbursement.
(b) Annualized.
(c) Represents period from June 22, 1988 (commencement of the Fund's operations) to April 30, 1989.
(d) During the first year (1989), the net expense ratio to average net assets would have been 4.03%, if a portion of the
12b-1 distribution and management fees had not been waived by the prior distributor and prior manager, respectively.
(e) The investment income net ratio to average net assets would have been .72%, if a portion of the 12b-1 distribution
and management fees had not been waived by the prior distributor and prior manager, respectively.
(f) Calculated based on average shares outstanding--prior years' amounts restated for comparative purposes.
(g) Not annualized.
</FN>
</TABLE>
9
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Fund are described below.
Specific investment techniques that may be employed by the Funds are described
in a separate section of this Prospectus and in each Fund's Statement of
Additional Information. Our investment objectives and certain policies, except
as noted, are fundamental and can only be changed by vote of a majority of the
outstanding shares of a particular Fund. We may not always achieve our
objectives, but will follow the investment standards described below.
Blanchard Global Growth Fund
The Fund seeks to provide long-term capital growth. Current income is
incidental to the Fund's objective. The Fund attempts to achieve its objective
through the implementation of the strategy outlined below.
The Fund's investment policies reflect VCM's opinion that the U.S. economic
system is characterized by various cycles affecting, among other things,
business activities, inflation, interest rates, currencies and price levels and
that by shifting its assets among the six investment sectors, the Fund can take
advantage of investment opportunities created by such cycles. VCM believes that
within each cycle, certain investment sectors offer more investment
opportunities than others. Naturally, there can be no guarantee that VCM can
predict business cycles with 100% accuracy or that the objective of the Fund can
be achieved.
When Fund management believes that market conditions warrant a temporary
defensive position, it may invest up to 100% of the Fund's assets in cash,
including foreign currencies, short-term instruments such as commercial paper,
bank certificates of deposit, bankers' acceptances, or repurchase agreements for
such securities and securities of the U.S. Government and its agencies and
instrumentalities.
VCM has identified the following six strategic investment sectors which have
generally responded, both positively and negatively, to almost all major
economic trends. A percentage of the Fund's assets need not be allocated into
all sectors. The following illustrations indicate, in VCM's opinion, in what
economic circumstances the six investment sectors might approach the Fund's
maximum permitted allocation levels. The Fund may have zero percent allocated to
any sector when the Global Allocation Strategist deems it appropriate.
Percentage of Total
Assets of the Fund in
each Sector
---------------------
Sectors Maximum
------- -------
U.S. Equities Sector ..................................... 65%
Foreign Equities Sector ................................... 65%
American Fixed Income Sector .............................. 65%
Foreign Fixed Income Sector ............................... 65%
Precious Metals Securities and Bullion Sector ............. 65%
Emerging Markets Sector ................................... 15%
Each sector is managed by a separate sector portfolio manager ("Sector
Managers"). Generally, the services of the Sector Managers are not readily
available to most individual investors because they manage primarily very large
private or institutional accounts. The Global Allocation Strategist of the Fund
determines what percentage of the Fund's total assets are to be allocated into
the individual sectors within
10
<PAGE>
the maximum percentages set forth above and makes changes in allocation
percentages as investment and economic conditions change. Accordingly, the Fund
will not be managed as a balanced portfolio and during the course of a business
cycle the Fund may be invested in as few as two sectors. The strategy is to
shift percentage allocation among the six investment sectors at the most
advantageous time and price. VCM has intentionally separated the asset
allocation function from the investment selection function. It has sought to
identify and select specialists in each of the six investment sectors, as well
as the allocation function, who have demonstrated success in their particular
area of expertise.
It is possible that an overlapping of investments among the six investment
sectors may occur. For example, investments in U.S. equity securities are not
limited only to the U.S. Equities sector as the Precious Metals Securities and
Bullion sector may invest in common stocks of U.S. precious metals-related
companies as well. Therefore, if the U.S. Equities sector was at its maximum
allocation of 65% of the Fund's assets, and the Precious Metals Securities and
Bullion sector had investments in U.S. common stocks of precious metals
companies, the total assets of the Fund invested in U.S. equity securities could
exceed 65%.
U.S. Equities Sector. The Sector Manager is, Shufro, Rose & Ehrman. The
Allocation Strategist will increase the allocation in the U.S. Equities sector
to near the maximum level during periods of strong corporate earnings, stable
economic growth, low interest rates, and low or declining inflation rates. The
Allocation Strategist will reduce the allocation for this sector to near the
minimum level during periods of rapidly rising or high interest rates, abruptly
declining inflation, or uncertain economic conditions.
In addition, the Sector Manager may invest in undervalued companies that may
have profit potential regardless of overall economic conditions. Undervalued
companies are, in the opinion of the Sector Manager, companies whose balance
sheet, management ability, and product line or service are worth more on a
collective basis than the market value of the company. The U.S. Equities sector
is expected to perform well during periods of declining interest rates, average
or high corporate profits and stable economic conditions. It will be invested
primarily in common stocks of companies traded on national exchanges in the
United States, and secondarily in preferred stocks or convertible securities
traded on such exchanges. Securities are selected based on fundamental research
of the earning power and management of companies and industries. Major emphasis
is placed on stocks of companies considered by the U.S. Equities Sector Manager
to have potential for long-term capital appreciation.
Foreign Equities Sector. The Sector Manager, Fiduciary International, Inc.,
invests in publicly-traded equity securities of companies domiciled outside of
the United States. This sector invests in non-U.S. companies whose securities
are traded on exchanges located in the countries in which the issuers are
principally based, including companies located in: Australia, Austria, Belgium,
Canada, Denmark, France, Finland, Germany, Hong Kong, Italy, Japan, Mexico, the
Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the United
Kingdom. The sector will maintain investments in a minimum of five countries.
When the Foreign Equities Sector Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. It may also enter into such
contracts to protect against loss between trade and settlement dates resulting
from changes in foreign currency exchange rates. Such contracts will also have
the effect of limiting any gains to the Fund between trade and settlement dates
resulting from changes in such rates. These contracts will be purchased for
hedging purposes only. The decision to increase or decrease the percentage
allocation to this strategic sector will depend on a combination of the
following
11
<PAGE>
factors: (1) specific opportunities in individual issues; (2) favorable
economic, political and business conditions in individual countries; and (3)
timely participation in specific worldwide industry groups, such as automobiles,
electronics, oils, etc., irrespective of their location.
While the pursuit of foreign currency gain for U.S. dollar-based investors
is not a primary objective of this sector, currency profits may occur if
investments in this sector take place during a period of dollar depreciation.
For example, during periods of declining U.S. dollar exchange values, it may be
possible to benefit from the decline by purchasing short-term foreign currency
denominated instruments, as well as foreign currency denominated equities and
bonds. There are certain risks in foreign securities that may not be present in
domestic investments.
American Fixed Income Sector. As fixed income securities have historically
shown the greatest appreciation during periods of falling interest rates, the
Sector Manager, Investment Advisors, Inc., intends to increase the allocation
percentage in this sector during such periods. Conversely, the Sector Manager
intends to de-emphasize this sector during periods of stable or rising interest
rates. In the event of generalized worldwide deflation, similar to that
experienced during the 1930's, the Sector Manager intends to increase the
allocation of government securities in this sector to the maximum.
This sector of the Fund invests in:
1. Corporate debt obligations rated at the time of purchase within the four
highest investment grades assigned by Moody's, or Standard & Poor's. While
obligations in these categories are generally deemed to have adequate to very
strong protection of principal and interest, those rated within the lowest of
these categories (i.e., Baa by Moody's and BBB by Standard & Poor's) may have
speculative characteristics as well and may be more likely to experience a
weakened capacity to make principal and interest payments during times of
changing economic conditions or other circumstances than higher grade
obligations. For a description of the ratings used by Moody's and Standard &
Poor's, see Appendix A to this Prospectus.
2. Securities of, or guaranteed by, the United States Government, its
agencies or instrumentalities.
3. Securities (payable in United States dollars) of, or guaranteed by, the
government of Canada or of a province of Canada or any instrumentality or
political subdivision thereof, such securities not to exceed 25% of the Fund's
total assets.
Foreign Fixed Income Sector. The Foreign Fixed Income Sector Manager,
Fiduciary International, Inc., will purchase rated or unrated fixed income
securities which, in its opinion, equate generally to United States standards of
"investment grade" obligations. U.S. investment grade obligations are generally
considered to be obligations of issuers having an issue of bonds rated within
the four highest quality grades as determined by a nationally recognized
statistical rating organization such as Moody's or Standard & Poor's. The Fund
invests in publicly-traded common stocks of companies engaged in the
exploration, refining, development, manufacture, production or marketing of
precious metals. As fixed income securities have historically shown the greatest
appreciation during periods of falling interest rates, the Sector Manager
intends to increase the allocation percentage in this sector during such
periods. Conversely, the Sector Manager intends to de-emphasize this sector
during periods of stable or rising interest rates. The Sector Manager intends to
maintain, in normal circumstances, a substantial portion of the Foreign Fixed
Income sector's assets in high quality debt obligations denominated in a range
of foreign currencies. This sector may engage in futures and options
transactions to the extent permissible under the Fund's current investment
guidelines.
Precious Metals Securities and Bullion Sector. Prices of bullion and common
stocks of precious metals-related companies have generally tended to rise during
periods of accelerating inflation, and, to a
12
<PAGE>
lesser extent, during periods of social, political and financial instability.
The Sector Manager, Cavelti Capital Management, Ltd., intends to increase the
allocation in the Precious Metals Securities and Bullion sector when it
perceives that inflation is beginning to accelerate. The Sector Manager also
intends to increase the allocation, although probably to a lesser extent than
during strong inflationary periods, when destabilizing financial, political or
social conditions arise outside of the United States. During periods of low
inflation, stable economic and political conditions, and low or declining
interest rates, it is likely that demand for precious metals will be low, the
potential for appreciation small, and the risk of price erosion large;
therefore, the allocation for this sector would tend to be close to the minimum
level during these periods.
While the Fund's investment policy is not to invest its assets in any one
industry, it may invest up to 65% of its assets in this sector of the portfolio
during strong inflationary periods, and to a lesser extent, during periods when
social, political and financial instability warrant taking such a position. For
the purposes of this sector, the definition of Precious Metals Securities is
"publicly-traded common stocks of metal mining producer and non-producer
companies that are engaged in the exploration, refining and development of gold,
silver, palladium, and platinum; other companies that are engaged in the
manufacture or production of products incorporating such precious metals, for
example, jewelry, photographic supplies and medical equipment and supplies; and
companies that are engaged in the marketing of precious metals or precious
metals products. Such marketing companies may be in the industries named above
or in separate industries that fall into the category of wholesale-retail
trade." A company will be considered to be "engaged in" such activity if it
derives more than 50% of its revenues from or devotes more than 50% of its
assets to such activity.
As so defined, the Fund may invest up to 65% of its assets in the Precious
Metals Securities and Bullion sector provided that not more than 25% of the
Fund's assets will be in any of the individual industries named above, as such
industries are defined in the SIC/SEC Industries Code, and further provided that
not more than 10% of the Fund's assets will be in Physical Precious Metals
Investments, which are defined as gold, silver, platinum and palladium, through
holdings in bullion or precious metals certificates or storage receipts
representing precious metals.
In particular, the Sector Manager may invest in (1) publicly-traded common
stocks, (2) securities convertible into common stocks, such as convertible
preferred stock, convertible debentures, convertible rights and warrants (to the
extent permissible by the Fund's investment policies), and (3) debt securities
of such companies, all of which are believed by the Sector Manager to have the
potential for appreciation. Where the Precious Metals Securities and Bullion
Sector Manager deems it appropriate, the Fund may, for purposes of this sector,
engage in certain hedging transactions with options listed on foreign exchanges.
Emerging Markets Sector. Emerging countries overall have experienced a
higher gross domestic product ("GDP") growth rate than industrialized countries
in the last ten years. The Sector Manager, Martin Currie Inc., believes that
emerging countries, as a group, will continue to experience growth rates in
excess of those experienced by industrialized countries, and therefore will
allocate up to a maximum of 15% of the Fund's net assets in this sector.
In addition to the normal determinants of interest rates, inflation,
economic growth and currency movements, country selections and weighings in
emerging growth markets are determined by developmental trends, credit ratings,
the political environment, market liquidity, progress towards privatization and
the degree of foreign investor interest. In addition to emphasizing industries
which are crucial to the development trend in a country and assessing financial
reporting standards and the availability of public information, stock selection
is based on a fundamental analysis of specific criteria including (i) quality of
management; (ii) stock fundamentals (strong earnings growth and profit
potential, positive cash flow, sound
13
<PAGE>
balance sheet, geographical sales and profit spread, and good marketability in
shares); and (iii) price and timing.
An emerging country is any country that the International Bank for
Reconstruction and Development (more commonly known as the World Bank) has
determined to have a low or middle income economy. There are currently over 130
countries which are considered to be emerging countries, approximately 40 of
which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Currently investing in many
emerging countries is not feasible or may involve unacceptable political risks.
The Emerging Markets sector will focus its investments on those emerging market
countries in which the Sector Manager believes the economies are developing
strongly and in which the markets are becoming more sophisticated.
An emerging country equity security is defined as common stock, preferred
stock (including convertible preferred stock), bonds, notes and debentures
convertible into common or preferred stock, stock purchase warrants and rights,
equity interests in trusts and partnerships and American, Global or other types
of Depository Receipts of companies: (i) the principal securities trading market
for which is in an emerging country; (ii) that alone or on a consolidated basis
derive 50% or more of their annual revenue from either goods produced, sales
made or services performed in emerging countries; or (iii) that are organized
under the laws of, and with a principal office in, an emerging country.
Determinations as to eligibility will be made by the Sector Manager based upon
publicly available information and inquiries made to the companies.
Depository Receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted. In addition, the
issuers of the stock of unsponsored Depository Receipts are not obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of the Depository
Receipts.
While the foregoing represent economic scenarios that often occur, markets
are not entirely predictable,and do not always react in the same way to the same
economic stimuli. Therefore, there is no assurance that such patterns will
always occur in a standardized and predictable format. Consideration of
historical patterns of economic and market interaction is only one of the
factors that will be used when making allocation and investment decisions. The
selection of investments for the Fund also will be guided by research and
investment data. We can provide no assurance that the premises on which this
investment strategy is based will prove to be correct or that the Fund will
actually achieve its objective.
Blanchard American Equity Fund
The investment objective of the Fund is to provide long-term growth of
capital. The Fund's Portfolio Adviser is Provident Investment Counsel, Inc. The
Fund will invest in equity securities, consisting of common stocks and
securities having the characteristics of common stocks, specifically convertible
preferred stocks, convertible debt securities and warrants. Such equity
securities will be issued by companies which are (a) organized under U.S. law,
(b) for which the principal securities trading market is in the U.S. or (c)
which derive a significant proportion (at least 50%) of their revenues or
profits from goods produced or sold, investments made, or services performed in
the U.S., or which have at least 50% of their assets situated in the U.S. The
Fund will invest at least 65% and under normal circumstances expects to invest
at least 80% of its assets in such equity securities. In selecting investments
for the Fund, the Portfolio Adviser will select equity securities of companies
of various sizes which are currently experiencing a rate of earnings growth
greater than the average of such rate for all companies included in Standard &
Poor's 500-Stock Index. It is expected that approximately half of the equity
securities in which the Fund will invest will be listed and traded on the New
York Stock Exchange, and the remainder will be traded on the National
14
<PAGE>
Association of Securities Dealers' NASDAQ system or are otherwise traded over
the counter. The Portfolio Adviser supports its selection of individual
securities through intensive research and uses qualitative and quantitative
discipline to determine when securities should be sold.
Short-Term Investments. During those times when the Portfolio Adviser does
not believe that substantially all of the Fund's assets should be invested in
equity securities, all or part of the Fund's assets may be invested temporarily
in short-term investments. Under normal market conditions, it is expected that
investments in such short-term instruments may range from zero (fully invested)
to 30% of the Fund's assets. The short-term investments that may be purchased by
the Fund consist of high quality debt obligations maturing in one year or less
from the date of purchase, such as U.S. government securities, certificates of
deposit, bankers' acceptances and commercial paper. High quality means the
obligations have been rated at least A-1 by Standard & Poor's or Prime-1 by
Moody's, or have an outstanding issue of debt securities rated at least A by
Standard & Poor's or Moody's, or are of comparable quality in the opinion of the
Portfolio Adviser. Short-term investments also include repurchase agreements
with respect to the high quality debt obligations listed above. See "Repurchase
Agreements" below.
Blanchard Precious Metals Fund, Inc.
The Fund's primary investment objective is to provide long-term capital
appreciation and preservation of purchasing power through investments in
physical precious metals and securities of companies involved with precious
metals. A secondary objective is to reduce the risk of loss of capital and
decrease the volatility often associated with precious metals investments by
changing the allocation of the Fund's assets from Precious Metals Securities to
Physical Precious Metals Investments and/or investing in short-term instruments
and government securities during periods when the Portfolio Adviser, Cavelti
Capital Management Ltd., believes the precious metal is markets may experience
declines.
For purpose of this Fund, the term "Precious Metals Securities" refers to
the debt and equity securities of domestic and foreign companies listed on
domestic and foreign exchanges which are directly involved in the exploration,
development, mining, refining, manufacturing, dealing or marketing of precious
metals or precious metals products. A company will be considered to be "involved
in" such activity if it derives more than 50% of its revenues from or devotes
more than 50% of its assets to such activity. The Fund may invest in (1)
publicly-traded common stocks, (2) securities convertible into common stocks,
such as convertible preferred stock, convertible debentures, convertible rights
and warrants (to the extent permissible by the Fund's investment policies), and
(3) debt securities of such companies, all of which are believed by the
Portfolio Adviser to have the potential for appreciation. In addition, when the
Portfolio Adviser believes that market conditions warrant, the Fund may invest
up to 100% of its assets in certain short-term instruments.
The Fund may, from time to time, invest up to 5% of its assets in unrated
foreign debt securities which are judged by the Portfolio Adviser to be of at
least comparable quality to lower-rated U.S. debt securities (usually defined as
Baa or lower by Moody's or BBB or lower by Standard & Poor's). The selection of
unrated foreign debt securities will depend to a great extent on the credit
analysis performed by the Portfolio Adviser. Since it is possible that the Fund
could have up to 100% of its total assets in equity securities of domestic and
foreign companies directly involved in the exploration, development, mining,
refining, manufacturing, dealing or marketing of precious metals or precious
metals products, the Fund may be subject to greater risks and greater market
fluctuations than funds with a more diversified general equity portfolio.
The Fund may invest up to 49% of its total assets in physical precious metal
of gold, silver, platinum or palladium through holdings in bullion or precious
metals certificates or storage receipts representing the physical metals. When
the Fund invests in precious metals certificates and storage receipts, it
receives certificates evidencing ownership of specific amounts of precious
metals bullion, instead of taking physical possession of the bullion represented
by the certificate. The Fund relies on the issuers of such documents to
15
<PAGE>
maintain the underlying precious metal on deposit. A default by any of the
issuers could expose the Fund to loss of the metal on deposit. The Fund will
purchase certificates from institutions where the certificate is 100% backed by
physical precious metals in the possession of the institutions and enter into
such transactions only with banks, brokers, dealers and clearinghouses which
have assets of over $1 billion and in the Portfolio Adviser's opinion, have a
high degree of creditworthiness. The creditworthiness of the issuers will be
monitored by the Portfolio Adviser on an ongoing basis.
The Fund will not invest in coins. The Fund may purchase contracts for
forward delivery of physical precious metals. Forward contracts for precious
metals are contracts between the Fund and institutions dealing in precious
metals for the future receipt or delivery of metals at a price fixed at the time
of the transaction. While some of the Fund's investments may earn interest or
dividends, the Fund is not designed for investors seeking income. The Fund's
investment strategy calls for different approaches to the precious metals
markets in different economic and investment conditions.
As Precious Metals Securities have historically out-performed the price of
the physical metals during periods of generally rising precious metals prices,
the Fund will ordinarily tend to emphasize Precious Metals Securities over
Physical Precious Metals Investments during such periods. However, to the extent
that the current behavior of precious metals markets does not conform to
historical patterns at any given time, investments of the Fund will be placed in
those markets believed by the Portfolio Adviser to have the most promising
potential for appreciation. Conversely, during periods of stable or falling
precious metals prices, physical precious metals have generally held their value
better than Precious Metals Securities. Therefore, during those periods, the
Fund will tend to emphasize investments in Physical Precious Metals Investments.
As the Fund can invest in all four precious metals; gold, silver, platinum
and palladium, the Portfolio Adviser will attempt to capitalize on price
differentials in the metals markets. Although the Portfolio Adviser believes
that prices of gold, silver, platinum or palladium generally tend to move in the
same direction at the same time, with gold often setting the pace, experience
has proven that this is not always the case. The Fund, therefore, may emphasize
some metals over others when the Portfolio Adviser believes it is advisable to
do so. There is no assurance that the Portfolio Adviser's forecasts of precious
metals prices and the resulting allocation of the Fund's assets among precious
metals or between Precious Metals Securities and Physical Precious Metals
Investments will always be correct.
When the Portfolio Adviser believes that precious metals prices may suffer
declines, it may protect against market risk by increasing the Fund's cash
position. Under normal conditions, the Fund will have at least 65% of its total
assets invested in Precious Metals Securities and Physical Precious Metals
Investments. Under other circumstances, the Fund may invest up to 100% of its
assets in short-term instruments, including commercial paper, bank certificates
of deposit, bankers' acceptances and securities of the U.S. Government and its
agencies and instrumentalities as well as in cash and cash equivalents dominated
in foreign currency.
The Portfolio Adviser believes that precious metals and securities of
precious metals related companies continue to offer excellent prospects for
capital appreciation and protection of your purchasing power, during any
economic environment, and especially during periods of inflation, as well as
periods of political and economic instability. The market for precious metals is
worldwide; therefore, precious metals prices are subject to many political,
social and economic influences, often resulting in high volatility. See
"Investment Techniques and Associated Risks-Precious Metals and Precious Metals
Securities" for further details.
As physical precious metals earn no income, appreciation in the market price
of gold and other precious metals is the sole manner in which the Fund is able
to realize gains on these investments. Furthermore, the
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Fund encounters storage and transaction costs in connection with its ownership
of physical precious metals which are higher than those attendant to the
purchase, holding and disposition of more traditional types of investments.
The production and marketing of gold and precious metals may be affected by
the action of certain governments and changes in existing governments. For
example, the mining of gold is highly concentrated in a few countries. Economic
and political conditions prevailing in these countries may have a direct effect
on the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the Fund will invest will be located within the United States and Canada. For a
further discussion on this subject, including certain risk considerations and
limitations regarding investments in South African issuers, see "Investment
Techniques and Associated Risks-Precious Metals and Precious Metals Securities."
Blanchard Short-Term Global Income Fund
The Fund's objective is to provide high current income with minimum risk of
principal and relative stability of net asset value. To achieve this objective,
the Portfolio Adviser, Lombard Odier International Portfolio Management Limited,
will invest primarily in a portfolio of debt obligations rated in the four
highest rating categories of nationally recognized rating services denominated
in various currencies, which have average remaining maturities not exceeding
three years (as the useful life of individual pools of assets underlying certain
obligations in which the Fund may invest may at times be of a shorter duration
than the stated maturity of the obligation itself, the Fund may consider the
useful life of such underlying assets as the maturity of the obligation owned by
the Fund). The Fund may also invest up to 10% of its assets in securities rated
Ba by Moody's or BB by Standard & Poor's (or if unrated, determined by the
Portfolio Adviser to be of equivalent quality), in repurchase agreements, cash
or cash equivalents or such other debt instruments as is consistent with its
investment objective. In addition, the Fund is authorized, for the purpose of
increasing its yield or hedging its currency exposure, to engage in any one or
more of the specialized investment techniques and strategies described below
under the caption "Certain Investment Techniques and Policies".
The Fund will seek investment opportunities in foreign, as well as domestic,
securities markets. While the Fund normally will maintain a substantial portion
of its assets in debt securities denominated in foreign currencies, it is
anticipated that, in normal circumstances, the Fund's assets will include
securities in at least three countries, including the United States. The Fund is
designed for the investor who seeks a higher yield than a money market Fund and
less fluctuation in net asset value than a longer term bond fund. There can be
no assurance that the Fund's yield will at all times exceed that of a money
market fund. To the extent domestic short-term interest rates are higher than
domestic long-term or foreign short or long-term interest rates, and the Fund is
not substantially invested in U.S. Dollar denominated money market instruments,
the Fund's yield may not be higher than that of a money market fund.
In pursuing its investment objective, the Fund seeks to minimize credit risk
and fluctuations in net asset value by investing only in short-term debt
obligations. Although the Fund may invest in debt obligations having average
remaining maturities of up to three years, it reserves the right to invest
without limitation in debt obligations having substantially shorter remaining
maturities during times of rapidly changing currency exchange rates or other
uncertain market or economic conditions, or in anticipation of such times. The
Fund also reserves the right to invest in floating and variable rate demand
obligations that provide for a periodic adjustment in the interest rate paid on
the obligation and/or permit the holder to demand payment upon a specified
number of days' notice of the unpaid principal balance and accrued interest
either from the issuer or by drawing on a bank letter of credit, a guarantee or
insurance issued with respect to such obligation.
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The Fund's portfolio is managed in accordance with a global investment
strategy, which means that the Fund's investments will be allocated among
securities denominated in the U.S. Dollar and the currencies of a number of
foreign countries and, within each such country, among different types of debt
securities. The Fund's exposure with respect to each currency is adjusted based
on Fund management's perception of the most favorable markets and issuers. In
this regard, the percentage of assets invested in securities of a particular
country or denominated in a particular currency will vary in accordance with
Fund management's assessment of the relative yield and appreciation potential of
such securities and the relationship of a country's currency to the U.S. Dollar.
Fundamental economic strength, credit quality and interest rate trends are the
principal factors considered by Fund management in determining whether to
increase or decrease the emphasis placed upon a particular type of security or
industry sector within the Fund's investment portfolio. The Fund will not invest
more than 25% of its total assets in debt obligations denominated in a single
currency other than the U.S. Dollar.
The attractive returns currently available from short-term foreign currency
denominated debt obligations can be adversely affected by changes in exchange
rates. The Portfolio Adviser believes that the use of foreign currency hedging
techniques, including "crosshedges", can help protect against declines in the
U.S. Dollar value of income available for distribution to shareholders and
declines in the net asset value of the Fund's shares resulting from adverse
changes in currency exchange rates. For example, the return available from
securities denominated in a particular foreign currency would diminish in the
event the value of the U.S. Dollar increased against such currency. Such a
decline could be partially or completely offset by an increase in value of a
crosshedge involving a forward currency contract, where such contract is
available on terms more advantageous to the Fund than a contract to sell the
currency in which the position being hedged is denominated. It is the Portfolio
Adviser's belief that crosshedges can therefore provide significant protection
of net asset value in the event of a general rise in the U.S. Dollar against
foreign currencies. However, a crosshedge cannot protect completely against
exchange rate risks, and if Fund management is incorrect in its judgment of
future exchange rate relationships, the Fund could be in a less advantageous
position than if such a hedge had not been established.
In addition to the U.S. Dollar, such currencies include, among others, the
Australian Dollar, the Austrian Schilling, British Pound Sterling, Canadian
dollar, Danish Kroner, Dutch Guilder, European Currency Unit ("ECU"), Finnish
Markka, French Franc, German Mark, Italian Lira, Japanese Yen, New Zealand
Dollar, Norwegian Kroner, Portuguese Escudo, Spanish Peseta, Swedish Krona and
the Swiss Franc. An issuer of debt securities purchased by the Fund may be
domiciled in a country other than the country in whose currency the instrument
is denominated.
The Fund seeks to minimize investment risk by primarily limiting its
portfolio investments to debt securities rated no lower than Baa by Moody's or
BBB by Standard & Poor's. However, the Fund may invest up to 10% of its assets
in securities rated Ba by Moody's or BB by Standard & Poor's (or, if unrated,
determined by the Portfolio Manager to be of equivalent quality). Accordingly,
with respect to the debt securities and other investments described above, the
Fund's portfolio consists only of: (i) debt securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities; (ii) obligations issued
or guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational entities (which
are described below) (collectively referred to as "Foreign Government
Obligations"), which are rated no lower than Ba by Moody's or BB by Standard &
Poor's or, if unrated, determined by Fund management to be of equivalent
quality; (iii) corporate debt securities rated no lower than Ba by Moody's or BB
by Standard & Poor's or, if unrated, determined by Fund management to be of
equivalent quality; (iv) certificates of deposit and banker's acceptances issued
or guaranteed by, or time deposits maintained at, banks, including foreign
branches or subsidiaries of U.S. depository institutions ("Eurodollar"
obligations) or U.S. branches or subsidiaries of foreign depository institutions
("Yankeedollar"
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obligations) or foreign branches or subsidiaries of foreign depository
institutions, having total assets of more than $500 million and determined by
Fund management to be of high quality; (v) commercial paper rated A-1 or A-2 by
Standard & Poor's, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch
Investors Services, Inc., Duff 1 or Duff 2 by Duff & Phelps Inc. or, if not
rated, issued by U.S. or foreign companies having outstanding debt securities
rated AAA, AA or A by Standard & Poor's, or Aaa Aa or A by Moody's and
determined by Fund management to be of high quality, and loan participation
interests having a remaining term of or not exceeding one year in loans extended
to such companies by commercial banks or other commercial lending institutions
whose long-term debt and commercial paper is rated AAA or AA by Standard &
Poor's or Aaa or Aa by Moody's ("a High Quality Rating"); (vi) repurchase
agreements with respect to the foregoing debt securities; and (vii) futures
contracts, options on futures contracts, options on foreign currencies, options
on portfolio securities, and forward foreign currency exchange contracts. To
minimize investment risk, the Fund may only invest (a) up to 25% of its assets
in securities rated no lower than A by Moody's or Standard & Poor's (or, if
unrated, determined by the Portfolio Adviser to be of equivalent quality); (b)
up to 10% of its assets in securities rated no lower than Ba by Moody's or BB by
Standard & Poor's (or, if unrated determined by the Portfolio Manager to be of
equivalent quality); and (c) (up to 10% of its assets in any such Foreign
Government Obligations issued in any one country. The medium to lower-rated and
unrated Foreign Government Obligations in which the Fund invests tend to offer
higher yields than higher-rated securities with the same maturities. Debt
obligations rated lower than A by Standard & Poor's or Moody's tend to have
speculative characteristics and generally involve more risk of loss of principal
and income than higher-rated securities. For a description of the various
ratings used by the ratings agencies, see Appendix A.
The Fund may invest without limitation in commercial paper which is indexed
to certain specific foreign currency rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect change in the exchange rate between two
currencies while the obligation is outstanding. The Fund will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereof in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
While such commercial paper entails the risk of loss of principal, the potential
for realizing gains as a result of changes in foreign currency exchange rates
enables the Fund to hedge (or crosshedge) against a decline in the U.S. Dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return. The Fund will purchase such commercial
paper for hedging purposes only, not for speculation. The staff of the SEC is
currently considering whether the purchase of this type of commercial paper
would result in the issuance of a "senior security" within the meaning of the
Investment Company Act of 1940 (the "1940 Act"). The Portfolio Adviser believes
that such investments do not involve the creation of such a senior security but
nevertheless has undertaken, pending the resolution of this issue by the staff,
to establish a segregated account with respect to the Fund's investments in this
type of commercial paper and to maintain in such account cash not available for
investment or U.S. Government Securities or other liquid high quality debt
securities having a value equal to the aggregate principal amount on outstanding
commercial paper of this type held by the Fund.
The Fund may invest in debt securities issued by the supranational
organizations such as: the World Bank, which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
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Pacific regions; and other such organizations, including the European Investment
Bank and the Inter-American Development Bank. The foregoing entities and other
such supranational organizations are not considered by the Fund or its
management to be "banks" for purposes of computing investment restrictions
regarding non-diversification or concentration policies and, as a result, the
debt securities issued by such supranational organizations will not be included
as banks for determination of compliance with the percentage limitations of such
investment policies.
The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Portfolio Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-dominated
obligations.
Blanchard Short-Term Bond Fund
The investment objective of the Fund is to provide a high level of current
income consistent with preservation of capital by investing primarily in
short-term investment grade debt securities. The Fund's Portfolio Adviser is
OFFITBANK. The Fund is designed for investors seeking higher yields than are
available from money market funds, but who also want more price stability than
is offered by longer-term bond funds. Under normal market conditions, the Fund
will invest at least 80% of its assets in a broad range of U.S. debt securities
of all types. The Fund may invest up to 20% of the value of its assets in
securities of foreign issuers denominated in foreign currency and not publicly
traded in the United States.
Under normal market conditions, at least 65% of the value of the Fund's
assets will be invested in investment-grade bonds, which are considered to be
those rated at least Baa by Moody's or at least BBB by Standard & Poor's or, if
unrated, deemed to be of comparable quality by the Portfolio Adviser. The Fund
may invest less than 35% of its assets in lower-quality debt securities if the
Portfolio Adviser deems that such securities present attractive investment
opportunities. The Fund will not invest in debt securities rated lower than Caa
by Moody's and CCC by Standard & Poor's, or, if unrated, of comparable quality
in the Portfolio Adviser's opinion. Debt securities rated Baa by Moody's and BBB
by Standard & Poor's are considered investment grade obligations which lack
outstanding investment characteristics and may have speculative characteristics
as well. Debt securities rated Caa by Moody's and CCC by Standard & Poor's are
considered to have predominantly speculative characteristics with respect to
capacity to pay interest and repay principal and to be of poor standing. See
"Risk Factors-Lower Quality Debt Securities" below for a discussion of certain
risks, and Appendix A.
Although it is intended that the average maturity of the Fund's portfolio
will be three years or less, the Fund retains the flexibility to increase the
average maturity to up to five years in times when abnormal market conditions
warrant temporary measures. Accordingly, the Fund's average maturity may vary,
based on the Portfolio Adviser's analysis of interest rate trends and other
data. In general, the Fund's average maturity will tend to be shorter when the
Portfolio Adviser expects interest rates to rise and longer when it expects
interest rates to decline. The Fund may invest in individual securities with
terms to maturity of greater than five years if the Fund's portfolio contains
sufficient short-term securities so that the weighted average maturity complies
with the above-stated policy. As the useful life of individual pools of assets
underlying certain obligations in which the Fund may invest may at times be of a
shorter duration than the stated maturity of the obligation itself, the Fund may
consider the useful life of such underlying assets as the maturity of the
obligation owned by the Fund.
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Under normal market conditions, the Fund does not expect to have a
substantial portion of its assets invested in money market instruments. However,
when the Portfolio Adviser determines that adverse market conditions exist, the
Fund may adopt a temporary defensive posture and hold cash or invest its entire
portfolio in money market instruments. In addition, during times of
international political or economic uncertainty, most or all of the Fund's
investments may be made in the U.S. and denominated in U.S. dollars. To the
extent the Fund is so invested, the Fund's investment objective may not be
achieved.
The Fund will invest in bonds, notes, mortgage securities, asset-backed
securities, government and government agency obligations, zero coupon securities
and convertible securities, and short-term obligations such as banker's
acceptances, certificates of deposit, repurchase agreements and commercial
paper, in any proportion that the Portfolio Adviser determines is appropriate
and in the best interest of shareholders. The Fund may invest in U.S. Government
securities and in options, futures contracts and repurchase transactions with
respect to such securities. See "Additional Investment Information".
The Fund may invest up to 20% of its assets in international securities
consisting of debt obligations and other fixed-income securities, in each case
denominated in non-U.S. currencies or composite currencies, including: debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (described below);
debt obligations of the U.S. Government issued in non-dollar securities; and
debt obligations and other fixed-income securities of foreign and U.S. corporate
issuers (non-dollar denominated).
When investing in international securities, the Fund is not limited to
purchasing debt securities rated at the time of purchase by Moody's or Standard
& Poor's. However, the Fund is limited to the extent that it may not invest more
than 34.9% of its assets in lower quality debt securities. In making
international securities investments, the Portfolio Adviser may consider, among
other things, the relative growth and inflation rates of different countries.
The Portfolio Adviser may also consider expected changes in foreign currency
exchange rates, including the prospects for central bank intervention, in
determining the anticipated returns of securities denominated in foreign
currencies. The Portfolio Adviser may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The Fund may invest in any country where the Portfolio Adviser sees
potential for high income. It presently expects to invest primarily in
non-dollar denominated securities of issuers in the industrialized Western
European countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. The Fund may invest up to 10% of its assets in the debt securities of
issuers in emerging market countries.
The Fund may invest, without limitation, in unrated debt securities issued
by foreign governments, their agencies and instrumentalities, where the foreign
government, its agency or instrumentality is rated less than Baa by Moody's or
less than BBB by Standard & Poor's, provided, however, that the Portfolio
Adviser has determined through its own credit analysis that the credit
characteristics of any such unrated security are equivalent to those of a
security rated at least Baa by Moody's or BBB by Standard & Poor's. To the
extent that the Portfolio Adviser has not made any such determination, such
unrated debt securities will be deemed to have the rating assigned by Moody's or
Standard & Poor's to the governmental entity. To the extent that such securities
are deemed to be rated less than Baa by Moody's or less than BBB by Standard &
Poor's, investment in such securities will be subject to the under 35%
limitation on investment in lower quality debt securities.
The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations issued or guaranteed
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by national, provincial, state or other governments with taxing power or by
their agencies. These obligations may or may not be supported by the full faith
and credit of a foreign government.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. The Fund does not have a policy of
concentrating investments in supranational entities.
Blanchard Flexible Tax-Free Bond Fund
The Fund's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the preservation
of principal. The Fund will invest at least 65% of its assets in municipal
bonds, except when maintaining a temporary defensive position. The Fund's
Portfolio Adviser is The United States Trust Company of New York.
The Fund invests in municipal obligations which are determined by the
Portfolio Adviser to present minimal credit risks. As a matter of fundamental
policy, except during temporary defensive periods, the Fund will maintain at
least 80% of its assets in tax-exempt obligations, including the alternative
minimum tax. (This policy may not be changed without the vote of the holders of
a majority of the Fund's outstanding shares.) However, from time to time on a
temporary defensive basis due to market conditions, the Fund may hold uninvested
cash reserves or invest in taxable obligations in such proportions as, in the
opinion of the Portfolio Adviser, prevailing market or economic conditions may
warrant. Uninvested cash reserves will not earn income. Interest income from
certain short-term holdings may be taxable to shareholders as ordinary income.
The municipal obligations purchased by the Fund will consist of: (1)
municipal bonds rated "A" or better by Moody's or by Standard & Poor's or, in
certain instances, municipal bonds with lower ratings if they are deemed by the
Portfolio Adviser to be comparable to A-rated issues; (2) municipal notes rated
"MIG-2" or better ("VMIG-2" or better in the case of variable rate notes) by
Moody's or "SP-2" or better by Standard & Poor's and (3) municipal commercial
paper rated "Prime-2" or better by Moody's or "A-2" (collectively, "Municipal
Obligations"). If not rated, securities purchased by the Fund will be of
comparable quality to the above ratings as determined by the Portfolio Adviser
under the supervision of the Board Members. A discussion of Moody's and Standard
& Poor's rating categories is contained in Appendix A. The Fund may purchase and
sell municipal bond index and interest rate futures contracts as a hedge against
changes in market condition. See "Risks" below.
The Fund may also invest in securities issued by money market funds which
are investment companies that invest in high-quality, short-term securities and
that determine their net asset value per share based on the amortized cost or
penny-rounding method. Such securities will be acquired by the Fund within the
limits prescribed by the 1940 Act. By investing in shares of money market funds,
the Fund pays a portion of the operating and management expenses of such money
market funds, as well as its own operating and management expenses. Investors
should consider the tax consequences of an investment by the Fund in money
market funds distributing taxable income. However, it is a policy of the Fund to
maximize the percentage of distributions to shareholders that are not subject to
Federal income taxes.
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Blanchard 100% Treasury Money Market Fund
The Fund seeks to provide the highest level of current income as is
consistent with the preservation of capital and maintenance of liquidity. The
Portfolio Adviser for the Fund is VCM. The Fund attempts to achieve its
investment objective by investing exclusively in U.S. dollar denominated,
short-term obligations of the U.S. Treasury maturing in 13 months or less with a
dollar weighted average portfolio maturity of 90 days or less, provided that
such obligations are deemed to present minimal credit risks pursuant to
procedures adopted by the Board Members. The Fund will not invest in repurchase
agreements, certificates of deposit of commercial banks or savings and loan
associations, nor will it invest in obligations issued or guaranteed by agencies
or instrumentalities of the U.S. Government (such as the Federal Savings and
Loan Insurance Corp., the Export-Import Bank of the United States, the Farmer's
Home Administration, the Federal Farm Credit Bureaus, etc.), or in corporate
debt securities. Although the Fund's shares are not insured or guaranteed by the
U.S. Government, the Treasury obligations in which the Fund invests are general
obligations of the U.S. Government, which are believed by many to be among the
safest investments available with respect to credit risk. The Treasury
obligations in which the Fund will invest may not yield as high a level of
current income as longer term or lower grade securities which generally have
less liquidity and experience greater price fluctuation.
Blanchard Flexible Income Fund
The investment objective of the Fund is to provide high current income while
seeking opportunities for capital appreciation. The Portfolio Adviser for the
Fund is OFFITBANK. The Fund intends to invest in the following fixed income
securities markets:
U.S. Government Securities. This consists of debt obligations of the U.S.
Government and its agencies and instrumentalities and related options, futures
contracts and repurchase agreements.
Investment Grade Fixed Income Securities. This consists of investment grade
fixed income securities, including mortgage related and asset backed securities.
High Yield Securities. This consists of higher yielding (and, therefore,
higher risk), lower rated U.S. corporate fixed income securities.
International Fixed Income Securities. This consists of obligations of
foreign governments, their agencies and instrumentalities and other fixed income
securities denominated in foreign currencies or composite currencies including:
debt obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (see discussion in
"Blanchard Short Term Bond Fund" above); debt obligations of the U.S. Government
issued in non-dollar securities; and debt obligations and other fixed income
securities of foreign and U.S. corporate issuers (non-dollar denominated). The
Fund is not limited to purchasing debt securities rated at the time of purchase
by Moody's or Standard & Poor's.
The Fund may invest in any country where the Portfolio Adviser sees
potential for high income. It presently expects to invest primarily in
non-dollar denominated securities of issuers in the industrialized Western
European countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. In making international fixed income securities investments, the
Portfolio Adviser may consider, among other things, the relative growth and
inflation rates of different countries. The Portfolio Adviser may also consider
expected changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of securities
denominated in foreign currencies. The Portfolio Adviser
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may further evaluate, among other things, foreign yield curves and regulatory
and political factors, including the fiscal and monetary policies of such
countries. The Fund may also invest up to 25% of its assets in the fixed income
securities of issuers in emerging market countries. It is the policy of the Fund
not to invest more than 10% of its assets in any one emerging market country,
except that the Fund may invest up to 15% of its assets in fixed income
securities of issuers in Mexico. For additional information on each of these
securities markets see "Additional Investment Information."
The Portfolio Adviser believes that the ability to invest the Fund's assets
among these markets, as opposed to investing in any one, may enable the Fund to
enhance current income and increase opportunities for capital appreciation while
taking risk to principal into consideration. The Fund may invest up to 35% of
its assets in lower quality fixed income securities. There is no limit on the
percentage of Fund assets invested in any of the fixed income markets except for
High Yield Securities which is limited to less than 35%, and further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio. At least 65% of the Fund's
total assets generally will be invested in income producing securities; however,
the Fund expects that substantially all of its total assets will be invested in
income-producing securities, together with certain futures, options and foreign
currency contracts and other investments described below. When the Portfolio
Adviser determines that adverse market conditions exist, the Fund may adopt a
temporary defensive posture and hold cash or invest its entire portfolio in
money market instruments. In addition, during times of international political
or economic uncertainty, most or all of the Fund's investments may be made in
the U.S. and denominated in U.S. dollars. For a complete discussion of the types
of investments in which the Fund will invest-see "Additional Investment
Information" below.
Blanchard Worldwide Emerging Markets Fund
The Fund is designed for investors wishing to participate in the investment
opportunities available in smaller, emerging markets around the world. The
Portfolio Adviser for the Equity Securities sector of the Fund is Martin Currie
Inc. The Portfolio Adviser for the Fixed Income Securities sector of the Fund is
OFFITBANK. The Portfolio Advisers believe that the economies of these emerging
markets will continue to have among the world's fastest rates of economic growth
over the next decade. In many instances, the growth in these countries is
brought on by a move away from governmental intervention in the marketplace, and
an aggressive move towards free market capitalism. Their development is enhanced
by a high degree of infrastructure development brought about by increased trade,
accelerating demand for consumer products and a growing middle class. Generally,
these economies are characterized by large, hard-working labor pools, low labor
costs and a growing middle class.
Many companies in these emerging market countries are experiencing rising
productivity and profit growth due to increased focus on higher value added,
increased demand for their products from internal and external markets, more
profitable product lines and enhanced capital investment in technology. In
addition, because many governments are opening capital markets to foreign
investors, foreign capital is beginning to be attracted to these countries,
further fueling growth to levels which are generally higher than in the U.S. and
other more developed countries. As a result, the stock markets in many of these
emerging market countries have, in recent years, outperformed our own.
Additionally, the Fund is able to invest in emerging market fixed income
securities. The Portfolio Advisers believe that this will be advantageous to
investors for three reasons: (1) shareholders will receive income distributions,
when available, on a quarterly basis, (2) the Fund may seek capital appreciation
from its fixed income component, and (3) by diversifying the Fund's portfolio
between both equities and fixed income, the Fund expects to be able to enjoy the
risk-reducing benefit of diversifying between asset classes. When an emerging
market is less developed, and therefore carries more risk, emerging market
issuers
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have to offer higher yields on fixed income securities in order to attract the
capital needed to continue to develop. Once an emerging market issuer has shown
the ability to service its debt, it may be able to reduce yields, thereby
providing existing holders of its fixed income securities with opportunities for
capital appreciation.
Investing directly in foreign securities is usually impractical for
individual investors. Investors frequently find it difficult to arrange
purchases and sales, and to obtain current market, industry or economic data.
The Portfolio Advisers' experience in emerging market investing, coupled with
the convenience and service advantages associated with a U.S. based mutual fund,
including free telephone transfers and liquidations, shareholder services,
professional management and diversification between a broad basket of
securities, may make the Fund a more appropriate emerging markets investment
vehicle for individual investors.
The investment objective of the Fund is capital appreciation and current
income. The Fund's investment objective is deemed fundamental and may not be
changed without shareholder approval. The Fund seeks to achieve its objective by
investing primarily in equity and fixed income securities in emerging markets
around the world. There can be no assurance that the Fund's investment objective
will be achieved.
The proportions invested in each of the Fund's two portfolio sectors will be
varied from time to time in accordance with Fund management's interpretation of
economic conditions and investment opportunities. Under normal circumstances,
however, the Fund expects to maintain a minimum of 65% in equity and
equity-related securities. To the extent that the Fund's assets are not invested
in securities of issuers whose principal activities are in emerging markets, the
remainder of the assets maybe invested in: (i) equity or fixed income securities
of corporate or governmental issues located in industrialized countries; and
(ii) money market instruments.
An emerging market is any country that the World Bank has determined to have
a low or middle income economy and may include every country in the world except
the United States, Australia, Canada, Japan, New Zealand and most countries
located in Western Europe such as Belgium, Denmark, France, Germany, Great
Britain, Italy, the Netherlands, Norway, Spain, Sweden and Switzerland. Under
normal conditions, the Fund will invest at least 65% of its total assets in
securities of issuers whose principal activities are in emerging markets.
However, for temporary defensive purposes, the Portfolio Advisers may invest
less than 65% of the Fund's assets in securities of issuers whose principal
activities are in emerging markets, in which case the Fund may invest in U.S.
Treasury securities and high quality fixed income securities.
The Fund may invest indirectly in emerging markets by investing in other
investment companies. Due to restrictions on direct investment by foreign
entities in certain emerging market countries, investment in other investment
companies may be the most practical or the only manner in which the Fund can
invest in the securities markets of certain emerging market countries. Such
investments may involve the payment of premiums above the net asset value of
such issuers' portfolio securities, are subject to limitations under the 1940
Act, are constrained by market availability and may constitute passive foreign
investment companies for Federal income tax purposes. As a shareholder in an
investment company, the Fund would bear its ratable share of that investment
company's expenses, including its advisory and administration fees. The
Portfolio Advisers have agreed to waive their management (advisory) fees with
respect to the portion of the Fund's assets invested in shares of other open-end
investment companies. The Fund would continue to pay its own management fees and
other expenses with respect to its investments in shares of a closed-end
investment company.
The Portfolio Adviser for Fixed Income Securities may invest all of the
fixed income sector's total assets in lower-quality fixed income securities if
the Portfolio Adviser deems that such high yield/high risk securities present
attractive investment opportunities. Most fixed income securities in emerging
markets, even
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government obligations, are rated lower than investment grade by U.S. rating
services. "Investment grade" fixed income securities are those rated within the
four highest ratings categories of Standard & Poor's or Moody's or, if a
security is unrated, determined to be of comparable quality. Securities rated
BBB by Standard & Poor's and Baa by Moody's are investment grade fixed income
securities but may have speculative characteristics. Many emerging market fixed
income securities are not rated by U.S. ratings agencies. Investment in
non-investment grade fixed income securities involves a high degree of risk and
can be speculative. See "Risk Factors and Special Considerations" for a
discussion of certain risks. For temporary defensive purposes, the Portfolio
Advisers may invest less than 65% of the Fund's assets in securities of issuers
whose principal activities are in emerging markets, in which case the Fund may
invest in U.S. Treasury securities and high quality fixed income securities.
The Fund may invest up to 15% of its total assets in repurchase agreements,
borrow money and enter into forward foreign currency exchange contracts and
foreign currency futures contracts, as well as purchase put or call options on
foreign currency. See "Certain Investment Strategies and Policies".
MANAGEMENT OF THE FUNDS
Board of Trustees/Directors. The Board of Trustees of Blanchard Funds and
the Board of Directors of BPMF (the "Boards" or the "Board Members") are
responsible for managing the business affairs of the Funds and for exercising
all of the powers of the Funds except those reserved for the shareholders. The
Executive Committee of the Boards handle the Boards' responsibilities between
meetings of the Boards.
Manager. VCM is responsible for managing the Funds and overseeing the
investment of their assets, subject at all times to the supervision of the Board
Members. In addition, VCM selects, monitors and evaluates the Portfolio
Advisers. VCM will review the Portfolio Advisers' performance records
periodically, and will make changes if necessary, subject to Board Member and
Shareholder approval.
Management Fees. VCM receives an annual management fee at annual rates
equal to percentages of the relevant Fund's average net assets as follows:
Blanchard Global Growth Fund- 1.00% of the Fund's first $150 million of
average daily net assets, .875% of the Fund's average daily net assets in excess
of $150 million but not exceeding $300 million and .75% of the Fund's average
daily net assets in excess of $300 million. Blanchard 100% Treasury Money Market
Fund-.50% of the first $500 million of the Fund's average daily net assets,
.475% of the Fund's average daily net assets in excess of $500 million but not
exceeding $1 billion, plus .45% of the Fund's average daily net assets in excess
of $1 billion; Blanchard Short-Term Global Income Fund-.75%; Blanchard American
Equity Fund-1.10%; Blanchard Precious Metals Fund, Inc. -1% of the first $150
million of the Fund's average daily net assets, .875% of the Fund's average
daily net assets in excess of $150 million but not exeeding $300 million and
.75% of the Fund's average daily net assets in excess of $300 million. Blanchard
Flexible Income Fund-.75%; Blanchard Short-Term Bond Fund-.75%; Blanchard
Flexible Tax-Free Bond Fund-.75% and Blanchard Worldwide Emerging Markets
Fund-1.25%.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The management contract provides for the voluntary waiver of expenses by
VCM from time to time. VCM can terminate this voluntary waiver of expenses at
any time with respect to a Fund at its sole discretion. VCM has also undertaken
to reimburse the Funds for operating expenses in excess of limitations
established by certain states.
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VCM's Background. Virtus Capital Management, Inc., a Maryland corporation
formed in 1995, is a wholly owned subsidiary of Signet Banking Corporation.
Signet Banking Corporation is a multi-state, multi-bank holding company which
has provided investment management services since 1956. VCM, which is a
registered investment adviser, manages, in addition to the Funds, The Virtus
Funds, three equity common trust funds with $39 million in assets and three
fixed income common trust funds with $221 million in assets.
For the fiscal year ended April 30, 1995 the prior manager received from
each Fund a monthly fee at the following annual rates: BGGF: 1.00%; BTMMF: .42%;
BSTGIF: .71%; BFIF: .74%; BSTBF: .17%; BWEMF: .59%; BAEF: .31%; BFTFBF: .11%;
and BPMF: 1.00% of average daily net assets. These fees (except for BTMMF) are
higher than the fees paid by most investment companies because of the complexity
of managing these types of Funds.
VCM has conditioned its right to receive a portion of any earned but
deferred fees from BFIF and BSTBF and to receive reimbursement for absorbed
expenses (measured on a rolling two-year period, starting from the date the
portion of the fee is deferred and/or the expenses are absorbed) upon these
Funds reaching and then maintaining the following specified levels of net assets
for a period of 30 continuous days (excluding assets exchanged into a Fund after
June 1, 1993 from other funds in the Blanchard Group of Funds), provided that
such reimbursement would not cause the Fund's expenses in such year to exceed
1.75%:
Specified Level of Conditional Portion of Earned But
Fund's Net Assets Deferred Fees to be Received
------------------ ---------------------------------
BFIF $600 million 20%
$630 million 20%
$660 million 20%
$690 million 20%
$720 million 20%
----
100%
BSTBF $ 50 million 25%
$ 60 million 25%
$ 70 million 25%
$ 80 million 25%
----
100%
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PORTFOLIO ADVISORY SERVICES
The Portfolio Advisers.
To provide portfolio advisory services for the Funds, VCM has entered into
sub-advisory agreements with the Portfolio Advisers set forth below. The
Portfolio Advisers have extensive experience in investing and managing large
private and institutional accounts. Under the terms of each sub-advisory
agreement, the Portfolio Adviser has discretion to purchase and sell securities
for that Fund, except as limited by such Fund's investment objective, policies
and restrictions. Although each Portfolio Adviser's activities are subject to
general oversight by VCM and the Board Members, selection of specific securities
in which the Fund may invest are made by the Portfolio Adviser.
Blanchard Global Growth Fund
Shufro Rose & Ehrman ("Shufro") manages the U.S. Equities Sector of the
Fund. Shufro is a registered investment adviser. Founded in 1938, Shufro is a
member of the New York and American Stock Exchanges. It is among the oldest of
those firms specializing in the management of investment portfolios. As of
December 31, 1994, Shufro managed assets of more than $1.2 billion from private
and institutional accounts.
Shufro's investment philosophy is one of "fundamentals". This involves
selecting securities backed by assets, finances and current earning power.
Shufro's principals conduct research as well as portfolio management, including
examination of source materials such as annual and other corporate reports,
published speeches by the company officers, and other pertinent data. In
addition, Shufro's principals conduct visits to companies to attain depth of
understanding not achieved solely through inspection of written materials.
Robert Weiss, a General Partner of Shufro, with more than 30 years of experience
as a portfolio manager, is responsible for the day-to-day management of this
sector's portfolio.
The Foreign Equities Sector and the Foreign Fixed Income Sector are managed
by Fiduciary International, Inc., a New York corporation that was organized in
1982 as Fir Tree Advisers, Inc. Fiduciary International, Inc. has also been
chosen by the Fund to perform the duties of Global Allocation Strategist.
Fiduciary International, Inc. is a wholly-owned subsidiary of Fiduciary
Investment Corporation, which, in turn, is a wholly-owned subsidiary of
Fiduciary Trust Company International. Fiduciary Trust Company International was
chartered in 1931 as a New York State bank and is headquartered in New York
City. This sector is managed by a committee headed by Mr. Jeremy H. Biggs, Vice
Chairman and Chief Investment Officer.
The American Fixed Income Sector is managed by Investment Advisers, Inc. of
Minneapolis, Minnesota, a registered investment adviser established in 1947. As
of December 31, 1994, it managed over $14 billion in assets. Investment
Advisers, Inc. furnishes investment advice to pension and profit sharing trusts,
religious, educational, and charitable trusts, investment companies,
municipalities and individuals. Larry R. Hill, an Executive Vice President of
Investment Advisers, Inc., with more than 10 years of experience as a Fixed
Income Portfolio Manager, is responsible for the day-to-day management of this
sector's portfolio.
The Precious Metals Securities and Bullion Sector Manager is managed by
Cavelti Capital Management, Ltd., of Toronto, Canada. Cavelti Capital
Management, Ltd. is a Canadian money management firm specializing in bullion and
precious metals mining shares and is a registered investment adviser with the
SEC. Peter C. Cavelti, the company's President, has extensive investment
experience in the field of precious metals and the firm's clients include
government agencies, financial institutions, mining companies and Canadian
mutual funds. Cavelti Capital Management, Ltd. also acts as Portfolio Adviser to
BPMF.
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Martin Currie Inc., a member of the Martin Currie Group, manages the
Emerging Markets sector. Based in Edinburgh, the Martin Currie Group is one of
Scotland's leading international equity houses and has experience and expertise
in emerging markets. The Martin Currie Group currently manages over $5.5 billion
in global assets and has been involved in managing investment portfolios for
over 100 years. Martin Currie Inc., incorporated in 1978, is an investment
adviser registered with the SEC and currently manages over $1.15 billion in
global assets.
Currently, the Martin Currie Group operates its investment business through
four companies: in North America, through Martin Currie Inc. (the Sector
Manager), and in the U.K., Martin Currie Investment Management, Martin Currie
Unit Trusts and Martin Currie Private Clients. All are wholly-owned subsidiaries
of Martin Currie Limited.
An asset allocation committee headed by Mr. James Fairweather, a director
and senior portfolio manager with Martin Currie, with more than 10 years of
experience as a portfolio manager, coordinates the company's investments in
emerging markets. The committee determines asset allocation and country
weighting for emerging markets and Mr. Fairweather, together with Mr. Tristan
Clube (also a director and senior portfolio manager), select stocks in
conjunction with members of regional investment teams. Martin Currie Inc. also
acts as portfolio adviser to BWEMF.
VCM has chosen Fiduciary International, Inc. to act as the Global Allocation
Strategist for the Fund. As such, Fiduciary International has a global
allocation committee headed by Mr. Jeremy H. Biggs, Vice Chairman and Chief
Investment Officer, whose role is to review, evaluate and allocate the
percentages in which the total assets of the Fund will be divided among its six
investment sectors, subject to review by VCM and the Board Members. The
allocations for each sector may be changed at any time. Allocations will vary
depending on a variety of factors, such as economic and market conditions,
interest rates, currency fluctuations, inflationary or deflationary
expectations, geopolitical circumstances and other factors. The ability of the
Fund to achieve its investment objective will be dependent in part on the
success of the Global Allocation Strategist in anticipating the onset, duration
and termination of broad economic cycles. Failure to anticipate the onset or
termination of such cycles could result in the assets of the Fund being
disproportionately weighted toward one sector at the expense of another.
VCM feels that Fiduciary International, Inc. is uniquely qualified for the
job of Global Allocation Strategist. Fiduciary International, Inc. is a
registered investment adviser with the SEC and has been engaged in the business
of providing investment advisory services since 1982. In addition to its role as
Global Allocation Strategist, Fiduciary International, Inc. has been chosen to
manage the Foreign Fixed Income and Foreign Equities sectors of the Fund.
Fiduciary International, Inc. was founded in 1931 and currently manages over
$30 billion in global assets for large institutional and corporate accounts as
well as those of wealthy individuals. Clients include the United Nations pension
fund, Princeton University and Duke University. Mr. Jeremy H. Biggs, Vice
Chairman and Chief Investment Officer of Fiduciary International, Inc., oversees
the portfolio allocation process for the Fund. Mr. Biggs is a graduate of Yale
University and has done postgraduate work at the London School of Economics. Mr.
Biggs has extensive experience in global investing and in finance. Mr. Biggs is
supported by a team of researchers and analysts.
Fiduciary International, Inc.'s method of security analysis includes credit
analysis to gauge the creditworthiness of issuers of securities, analysis of
economic background, industry analysis, balance sheet and income statement
analysis and assessment of the macro-economic environment and the outlook for
the currencies in the countries where the companies operate. In addition,
Fiduciary International, Inc.
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<PAGE>
may use outside sources of information, including economic consultants,
technical industry specialists and market technicians.
The Sub-Advisory Agreements. The sub-advisory agreements between VCM and the
Sector Managers provide for payment by VCM of annual fees, payable to the Sector
Managers on a monthly basis. The aggregate of fees payable to the Sector
Managers for the services they provide, as a group, equals approximately 35% of
the management fees paid to VCM by the Fund. For a detailed description of the
sub-advisory agreements and of the Fund's expenses, see "Management of the
Funds" in the Fund's Statement of Additional Information.
Blanchard Short-Term Global Income Fund
VCM has retained Lombard Odier International Portfolio Management Limited,
Norfolk House, 13 Southampton Place, London WC1A 2AJ, England ("Lombard Odier")
to provide portfolio advisory services to the Fund. Lombard Odier is the
institutional investment management arm of Geneva-based Lombard Odier & Cie, one
of the oldest and largest private Swiss banks, founded in 1798. The Lombard
Odier Group currently manages in excess of $30 billion and has nearly 200 years
experience in global fixed income investment management. Lombard Odier is
registered as an investment adviser with the SEC. Paul Abberley, a Director of
Lombard Odier, has more than 8 years of experience as a portfolio manager and is
responsible for the day-to-day management of the Fund's portfolio.
The Portfolio Adviser has retained WLO Global Management, as sub-adviser, to
assist in the investment management of the Fund pursuant to a Sub-Advisory
Agreement, and subject to the direction of the Manager, the Portfolio Adviser
and the Board of Trustees of the Fund. Under the Sub-Advisory Agreement, the
Sub-Adviser has primary responsibility for providing investment advice to the
Fund and managing the domestic (U.S.) investment of the Fund's assets, while the
Portfolio Adviser retains responsibility for international investments.
WLO Global Management, a partnership between the Lombard Odier and Western
Asset groups of companies, was established in 1992 to offer international and
global fixed income portfolio management services to U.S. plan sponsors and
foreign institutions. WLO Global Management is registered with the Securities
and Exchange Commission as an investment adviser. WLO Global Management is
structured to combine the proven expertise of two independent yet mutually
compatible firms: Western Asset (for U.S. domestic fixed-income management) and
Lombard Odier (for non-dollar fixed income management).
The California-based partner, Western Asset Management International, is
registered with the Securities and Exchange Commission as an investment adviser.
As of December 31, 1994, the Group managed $12.8 billion of U.S. fixed-income
assets.
The Sub-Advisory Agreement. The sub-advisory agreement between VCM and
Lombard Odier provides for the payment by VCM to Lombard Odier of a monthly fee
at the annual rate of .35% of the first $10 million of the Fund's average daily
net assets; .30% of the next $10 million of average daily net assets; .25% of
the next $10 million of average daily net assets; .20% of the next $10 million
of average daily net assets; and .15% of average daily net assets in excess of
$40 million.
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<PAGE>
Blanchard Short-Term Bond Fund
Blanchard Flexible Income Fund
VCM has retained OFFITBANK, 520 Madison Avenue, New York, New York 10022
(the "Sub-Adviser") to provide portfolio advisory services to the Funds.
OFFITBANK, a New York State chartered trust bank, is the continuation of the
business of Offit Associates, Inc., a registered investment adviser founded in
December, 1982. The firm converted to a trust bank in July, 1990. The core
business of OFFITBANK is portfolio management for institutions, non-profit
organizations and wealthy family groups. OFFITBANK specializes in fixed income
management and offers its clients a complete range of fixed income investments
in capital markets throughout the world. OFFITBANK currently manages in excess
of $6 billion in assets. Jack D. Burks, Managing Director of OFFITBANK, has
over 10 years of experience in Fixed Income Portfolio Management and is
responsible for the day-to-day management of the Funds' portfolio.
The Sub-Advisory Agreements. The sub-advisory agreements between VCM and
OFFITBANK, provide for the payment by VCM to OFFITBANK of a monthly fee at the
annual rate of .30% of the first $25 million of each Fund's average daily net
assets; .25% of the next $25 million of average daily net assets; and .20% of
average daily net assets in excess of $50 million.
Blanchard Flexible Tax-Free Bond Fund
VCM has retained The United States Trust Company of New York ("U.S. Trust")
to provide portfolio advisory services to the Fund. U.S. Trust, a New York State
chartered bank and trust company established in 1853, currently manages in
excess of $30 billion in assets. U.S. Trust is a financial services company that
specializes in asset management, private banking, fiduciary and securities
services. Kenneth J. McAlley, an executive vice president of U.S. Trust, has
over ten years of expertise in Municipal Obligation portfolio management and is
responsible for the day-to-day management of the Fund's Portfolio. Mr. McAlley
is a nationally recognized expert in municipal bond investment strategy and has
been favorably profiled in publications such as Barrons, Forbes and Financial
World.
The Sub-Advisory Agreement. Pursuant to the sub-advisory agreement between
VCM and U.S. Trust, VCM has agreed to pay U.S. Trust a monthly fee at the annual
rate of .20% of the Fund's average daily net assets.
Blanchard American Equity Fund
VCM has retained Provident Investment Counsel ("Provident"), 300 North Lake
Avenue, Pasadena, California 91101-4922, as the Portfolio Adviser to provide
portfolio advisory services. The Portfolio Adviser is a corporation that traces
its origins to an investment partnership formed in 1951. On February 15, 1995
Provident was acquired by, and became a wholly owned subsidiary of, United Asset
Management Corp. The Portfolio Adviser currently manages over $14.3 billion and
has nearly 40 years experience in equity management. The Portfolio Adviser is
registered as an investment adviser with the SEC. Jeffrey Miller, a Managing
Director of Provident, has more than 20 years of experience as a portfolio
manager and is responsible for the day-to-day management of the Fund's
portfolio.
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<PAGE>
The Sub-Advisory Agreement. The sub-advisory agreement between VCM and
Provident, provides for the payment by VCM to Provident of a monthly fee at the
annual rate of .50% of the first $150 million of the Fund's average daily net
assets; .45% of the next $100 million of average daily net assets; .40% of the
next $150 million of average daily net assets; and .35% of average daily net
assets in excess of $400 million.
Blanchard Worldwide Emerging Markets Fund
Martin Currie Inc. provides portfolio advisory services for the Equity
Securities sector of the Fund. For a discussion of Martin Currie Inc. see
"Blanchard Global Growth Fund" above.
OFFITBANK provides portfolio advisory services for the Fixed Income
Securities sector of the Fund. For a discussion of OFFITBANK see "Blanchard
Short-Term Bond Fund" above.
The Sub-Advisory Agreements. Pursuant to the sub-advisory agreement between
VCM and Martin Currie, VCM, not the Fund, has agreed to pay Martin Currie a
monthly fee at the annual rate of .50% of the first $150 million of the equity
sector's average daily net assets and .40% of the sector's average daily net
assets in excess of $150 million. Pursuant to the sub-advisory agreement between
VCM and OFFITBANK, VCM, not the Fund, has agreed to pay OFFITBANK a monthly fee
at the annual rate of .45% of the first $150 million of the fixed income
sector's average daily net assets and .35% of the sector's average daily net
assets in excess of $150 million.
Blanchard Precious Metals Fund, Inc.
Cavelti Capital Management, Ltd. provides portfolio advisory services for
the Fund. For a discussion of Cavelti Capital Management, Ltd. see "Blanchard
Global Growth Fund" above.
The Sub-Advisory Agreement. The sub-advisory agreement between VCM and
Cavelti provides for payment by VCM of annual fees, payable to Cavelti on a
monthly basis. For the services provided by Cavelti, VCM pays a fee of .30% of
the average daily net assets of the Fund on the first $150 million, plus .2625%
of the Fund's average net assets in excess of $150 million but less than $300
million, plus .225% of the Fund's average net assets in excess of $300 million.
HOW TO INVEST
You may purchase shares of any Fund from Federated Securities Corp., the
Funds' principal Distributor. You may also purchase shares from broker-dealers
who have entered into a dealer agreement with the Distributor at net asset value
which is computed once daily for BAEF and BTMMF as of the close of the New York
Stock Exchange (currently 4:00 p.m., New York time) and for the other Funds as
of the close of the options exchanges (normally 4:15 P.M. New York time). If
your order is received after the above times, your shares will be purchased at
the net asset value on the next business day. Each Fund's net asset value per
share is determined by dividing the value of that Fund's net assets by the total
number of its shares outstanding. Each Fund determines the net asset value of
its shares on each day that the New York Stock Exchange is open for business and
on such other days as there is sufficient trading in its securities to affect
materially its net asset value per share.
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For all Funds other than BTMMF the minimum initial investment requirement is
$3,000 and the minimum initial investment requirement for qualified pension
plans (IRAs, Keoghs, etc.) is $2,000. The minimum initial investment in BTMMF is
$1,000 which is reduced to $500 for qualified pension plans. The minimum
investment requirement for additional investments in all of the Funds is at
least $200 per investment. (The foregoing minimum investment requirements may be
modified or waived at any time at our discretion.)
Purchases By Mail
To purchase shares of a Fund by mail, simply send a completed Application
(included with this Prospectus or obtainable from the Fund), to the Blanchard
Group of Funds, c/o Mutual Funds Service Company, P.O. Box 2798, Boston,
Massachusetts 02208-2798, together with a check payable to the Blanchard Group
of Funds in payment for the shares. Mutual Funds Service Company is an affiliate
of United States Trust Company of New York. If you need assistance in completing
the application, call 1-800-829-3863.
All purchases must be made in U.S. dollars and checks must be drawn on a
United States bank. Payment for shares may not be made by third party checks;
however, second party checks are acceptable when properly endorsed. We reserve
the right to limit the number of checks for one account processed at one time.
If your check does not clear, your purchase will be cancelled and you could be
liable for any losses or fees incurred. Payments transmitted by check are
accepted subject to collection at full face amount.
Your purchase order becomes effective when it is received in proper form by
the Fund's Transfer Agent. A purchase order will not become effective until it
is received in proper form by the Transfer Agent.
Purchases By Wire. You may also purchase shares by bank wire. For opening
new accounts in this manner, please call 1-800-829-3863 (toll free) before
wiring your funds, and furnish the following information: the account
registration and address, and your taxpayer identification number (for
individuals, a Social Security number). When making additional investments by
wire to your existing accounts, please provide your account numbers. You must
include your name and telephone number, the amount being wired and the name of
the wiring bank with both new and existing account purchases. Initial purchases
by wire must be followed by a completed Application within seven days.
You should instruct your bank to wire Federal funds: United States Trust
Company of New York, 114 West 47th Street, New York, New York 10036 ABA
#021001318 Credit Account #20-7324-2, indicating the name of the Fund, your
account number and the account registration.
Automatic Investment Plans. Regular monthly purchases of shares may be made
by direct deposit of Social Security and certain other government checks into
your account. Fund shares may be purchased at regular intervals selected by you
by automatic transferral of funds from a bank checking account that you may
designate. All such purchases require a minimum of $100 per transaction. Call
(1-800-829-3863) for information and forms required to establish these Plans.
Electronic Funds Transfers (EFT)--Subsequent investments may be made by
electronic transfer of funds from an account maintained in a bank or other
domestic financial institution that is an Automated Clearing House member (ACH).
To enroll in this program, you must file an application with the Blanchard
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<PAGE>
Group of Funds by calling 1-800-829-3863. You may begin transferring funds under
the program only after 15 days from the date your EFT Application is received by
the transfer agent, Mutual Funds Service Co. You must direct the institution to
transmit immediately available funds through the Automated Clearing House to
U.S. Trust Co. of New York ABA #021001318, CR A/C #20-7324-2 with instructions
to credit your Fund account. The instructions must specify your Fund account
registration and your Fund account number. Redemption proceeds will be on
deposit in your designated account at an Automated Clearing House member bank
ordinarily two days after receipt of the redemption request.
Direct deposit of monthly dividends or systematic disbursements from your
account will be on deposit in your designated account at an Automated Clearing
House member bank ordinarily two days after a dividend payment or disbursement
is effected.
General Information
All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares unless we
receive written notice from you, at least 30 days prior to the record day of
such distribution, requesting that your dividends and distributions be
distributed to you in cash. See "Tax Matters".
We reserve the right to suspend the offering of any Fund shares for a period
of time. We also reserve the right to reject any purchase order.
No share certificates will be issued for shares unless requested in writing.
In order to facilitate redemptions and transfers, most shareholders elect not to
receive certificates. Shares are held in unissued form by the Transfer Agent.
Shares for which certificates have been issued cannot be redeemed, unless the
certificates are received together with the redemption request in proper form.
Share certificates are not issued for fractional shares.
INVESTOR SERVICES
Automatic Withdrawal Plan
If you purchase $10,000 or more of Fund shares, you may establish an
Automatic Withdrawal Plan to authorize a specified dollar amount to be paid
periodically to a designated payee. Under this Plan, all income dividends and
capital gains distributions will be reinvested in shares in your account at the
applicable payment dates' closing net asset value.
Your specified withdrawal payments are made monthly or quarterly (on or
about the 10th day) in any amount you choose, but not less than $100 per month
or $300 quarterly. Please note that any redemptions of your shares, which may
result in a gain or loss for tax purposes, may involve the use of principal, and
may eventually use up all of the shares in your account. Such payments do not
provide a guaranteed annuity and may be terminated for any shareholder by a Fund
if the value of the account drops below $10,000 due to transfer or redemption of
shares. In such a case, the shareholder will be notified that the withdrawal
payments will be terminated. The cost of administering the Automatic Withdrawal
Plan for the benefit of shareholders is a Fund expense.
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Retirement Plans
We offer a Prototype Pension and Profit Sharing Plan, including Keogh Plans,
IRAs SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan support
services are available by calling 1-800-829-3863.
Exchange Privilege
You may exchange your Fund shares for shares of another Fund in the
Blanchard Group of Funds on the basis of relative net asset values per share at
the time of exchange. No fees are charged when you exchange from one Fund to
another within the Blanchard Group of Funds. Before making an exchange, you
should read the Prospectus concerning the Fund into which your exchange is being
made.
To request an exchange by telephone, simply call 1-800- , prior to
4:00 P.M. New York time. Exchanges can be made in this manner only after you
have completed and sent to the Transfer Agent the telephone exchange
authorization form that is included on the New Account Application accompanying
this Prospectus and only if your account registration has not changed within the
last 30 days.
It is the Funds' policy to mail to you at your address of record, within
five business days after any telephone call transaction, a written confirmation
statement of the transaction. All calls will be recorded for your protection. As
a result of the Funds' policy, neither a Fund nor its transfer agent will be
responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. Since you may bear the
risk of loss in the event of an unauthorized telephone transaction, you should
verify the accuracy of telephone transactions immediately upon receipt of your
confirmation statement.
Exchanges can only be made between accounts with identical account
registration and in states where shares of the other Funds are qualified for
sale. We do not place any limit on the number of exchanges that may be made and
charge no fee for affecting an exchange. The dollar amount of an exchange must
meet the initial investment requirement of the Fund into which the exchange is
being made. All subsequent exchanges into that Fund must be at least $1,000. We
may modify or suspend the Exchange Privilege at any time upon 60 days' written
notice.
Any exchange of shares is, in effect, a redemption of shares in one Fund and
a purchase of the other fund. You should consider the possible tax effects of an
exchange. To prevent excessive trading between Funds to the disadvantage of
other shareholders, we reserve the right to modify or terminate this Privilege
with respect to any shareholder.
Check-Writing Privilege. If you are a shareholder of BSTGIF, BFIF, BSTBF or
BTMMF (other than IRAs, Keoghs and other qualified pension plan shareholders),
you may elect a service which allows you to write an unlimited number of checks,
at no charge, in any amount of $250 or more which will clear through the
Transfer Agent. If the amount of your check exceeds the value of the shares in
your account, your check will be returned and a $10 fee deducted from your
account. You may not use the Check-Writing Privilege to close out your account
as you will not be able to ascertain the exact account balance of your account
on the date your check clears. To close out your account completely, you should
use the telephone or mail redemption procedures described below. Stop orders may
be placed on checks for a fee of $10. For further information on this service,
call the Distributor.
The payee of a check may cash or deposit it in a bank, however checks cannot
be presented in person at a branch office of the Transfer Agent for cash. When a
check is presented to the Transfer Agent for payment,
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it will cause the Fund to redeem a sufficient number of shares to cover the
amount of the check. You will continue to earn daily income until the check is
presented to the Transfer Agent for payment.
A completed Purchase Application must be received by the Transfer Agent
before the Withdrawal Plan, Exchange or Check-Writing Privileges may be used.
HOW TO REDEEM
You may redeem your shares on any business day at the next determined net
asset value calculated after your redemption request has been accepted by the
Transfer Agent as described below.
By Telephone. You may redeem your shares by telephone if you call the Funds'
Transfer Agent at 1-800-829-3863, prior to 4:15 P.M., New York time (4:00 P.M.
New York time for BAEF and BTMMF). All calls will be recorded. Redemptions of
Fund shares can be made in this manner only after you have executed and filed
with the Transfer Agent the telephone redemption authorization form which may be
obtained from your Fund or the Transfer Agent.
You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate. Should
you wish to review these instructions, simply complete and file a new telephone
redemption authorization form. There is no charge for this service. Neither your
Fund nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that they reasonably believe to be
genuine. See "Investor Services--Exchange Privilege," for additional information
with respect to losses resulting from unauthorized telephone transactions.
You may also request, by placing a call to the applicable telephone number
set forth above, redemption proceeds to be wired directly to the bank account
that you have designated on the authorization form. The minimum amount that may
be redeemed in this manner is $1,000. A check for proceeds of less than $1,000
will be mailed to your address of record. The Funds do not impose a charge for
this service. However, the proceeds of a wire redemption may be subject to the
usual and customary charges imposed by United States Trust Company of New York
for the wiring of funds.
Under extraordinary market conditions, it may be difficult for you to redeem
your shares by telephone. Under these circumstances, you should consider
redeeming your shares by mail, as described below.
By Mail. All other redemption requests should be made in writing to the
Blanchard Group of Funds, c/o Mutual Funds Service Company (an affiliate of
United States Trust Company of New York), P.O. Box 2798, Boston, Massachusetts
02208-2798, the Funds' Transfer Agent. Where share certificates have been
issued, the certificates must be endorsed and must accompany the redemption
request. Signatures on redemption request for amounts in excess of $25,000 and
endorsed share certificates submitted for redemption must be accompanied by
signature guarantees from any eligible guarantor institution approved by the
Transfer Agent in accordance with its Standards, Procedures and Guidelines for
the Acceptance of Signature Guarantees ("Signature Guarantee Guidelines").
Eligible guarantor institutions generally include banks, broker-dealers, credit
unions, national securities exchanges, registered securities association,
clearing agencies and savings associations. All eligible guarantor institutions
must participate in the Securities Transfer Agents Medallion Program ("STAMP")
in order to be approved by the Transfer Agent pursuant to the Signature
Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
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information on STAMP can be obtained from the Transfer Agent at (800) 462-9102.
Signatures on redemption requests for any amount must be guaranteed (as
described above) if the proceeds are not to be paid to the registered owner at
the registered address, or the registered address has changed within the
previous 60 days. The letter of instruction or a stock assignment must specify
the account number and the exact number of shares or dollar amount to be
redeemed. It must be signed by all registered shareholders in precisely the same
way as originally registered. The letter of instruction must also include any
other supporting legal documents, if required, in the case of estates, trusts,
guardianships, custodianships, corporations, partnerships, pension or profit
sharing plans, or other organizations.
General Information.
Your redemption request becomes effective when it is received in proper form
by the Funds' Transfer Agent prior to 4:00 P.M. New York time for BAEF and BTMMF
and prior to 4:15 P.M., New York time, for the other Funds or your redemption
will occur on the following business day. We will make payment for redeemed
shares within seven days after receipt by the Transfer Agent. However, we may
delay the forwarding of redemption proceeds on shares which were recently
purchased until the purchase check has cleared, which may take up to 15 days or
more. We may suspend the right of redemption when the New York Stock Exchange is
closed or when trading on the Exchange is restricted, and under certain
extraordinary circumstances in accordance with the rules of the SEC. Due to the
relatively high cost of handling small investments, we reserve the right upon 60
days' written notice to redeem, at net asset value, the shares of any
shareholder whose account has a value of less than $1,000, other than as a
result of a decline in the net asset value per share. We do not presently
contemplate making such involuntary redemptions and will not redeem any shares
held in tax-sheltered retirement plans in this category. We also reserve the
right upon notice to shareholders to charge a fee for any services provided
herein that are currently free of charge.
DISTRIBUTION OF SHARES OF THE FUNDS
Federated Securities Corp. is the principal distributor for shares of the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
Distribution Plan. According to the provisions of a distribution plan
adopted pursuant to Investment Company Act Rule 12b-1, the distributor may
select brokers and dealers to provide distribution and administrative services
as to shares of the Funds. The distributor may also select administrators
(including financial institutions, fiduciaries, custodians for public funds and
investment advisers) to provide administrative services. Administrative services
may include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as each Fund reasonably requests for its shares.
Brokers, dealers, and administrators will receive fees based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined
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from time to time by the Boards, provided that for any period the total amount
of fees representing an expense to the Trust or the Company shall not exceed an
annual rate of .25 of 1% of the average daily net assets of shares of BSTGIF,
BFIF, BSTBF and BFTFBF; .50 of 1% of the average daily net assets of shares of
BGIF, BCGF, BWEMF and BAEF; and .75 of 1% of the average daily net assets of
shares of BGGF and BPMF held in the accounts during the period for which the
brokers, dealers, and administrators provide services. Any fees paid by the
distributor with respect to shares of a Fund pursuant to the distribution plan
will be reimbursed by the Trust or the Company from the assets of the shares of
that Fund.
The distributor will, periodically, uniformly offer to pay cash or
promotional incentives in the form of trips to sales seminars at luxury resorts,
tickets or other items to all dealers selling shares of the Funds. Such payments
will be predicated upon the amount of shares of the Funds that are sold by the
dealer. Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of a Fund.
Administrative Arrangements. The distributor may pay financial institutions
a fee based upon the average net asset value of shares of their customers
invested in the Funds for providing administrative services. This fee, if paid,
will be reimbursed by VCM and not the Funds.
Glass-Steagall Act. The Glass-Steagall Act prohibits a depository
institution (such as a commercial bank or a savings and loan association) from
being an underwriter or distributor of most securities. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions from acting in
the administrative capacities described above or should Congress relax current
restrictions on depository institutions, the Boards will consider appropriate
changes in the administrative services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to state
law.
Administrative Services. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate each Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as specified below:
Maximum Average Aggregate Daily Net
Administrative Fee Assets of the Trust/Corporation
------------------ -------------------------------
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$75,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
Brokerage Transactions. Subject to the supervision of the Board Members and
VCM, decisions to buy and sell specific securities for a Fund are made by its
Portfolio Adviser. The Portfolio Advisers are authorized, subject to most
favorable price and execution, to place portfolio transactions with brokerage
firms that provide assistance in the distribution of Fund shares and/or supply
research. The Board Members have also authorized the Funds to allocate brokerage
to the Portfolio Advisers or an affiliated broker-dealer as well as to use the
Distributor, on an agency basis, or affiliates thereof, to effect portfolio
transactions
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which are executed on United States and foreign stock exchanges or which are
traded in the over-the-counter market. The Funds have adopted certain procedures
incorporating the standards of Rule 17e-1 of the 1940 Act, which require that
the commissions paid to a Portfolio Adviser or the Distributor or to affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee, or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." From time to time, a Fund may purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by that Fund. Transactions are allocated to various dealers
selected by VCM or the Portfolio Advisers primarily on the basis of prompt
execution of orders at the most favorable prices. Transactions may be allocated
based on the sale of Fund shares. The Funds have determined that the foregoing
arrangements are in the best interest of the Funds' shareholders. See "Portfolio
Transactions" in each Fund's Statement of Additional Information for further
information.
TAX MATTERS
Each Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), including the requirements with respect to diversification
of assets, distribution of income and sources of income. It is each Fund's
policy to distribute to its shareholders all of their investment income (net of
expenses) and any capital gains (net of capital losses) in accordance with the
timing requirements imposed by the Code, so that each Fund will satisfy the
distribution requirement of Subchapter M and not be subject to Federal income
taxes or the 4% excise tax. If a Fund fails to satisfy any of the Code
requirements for qualification as a regulated investment company, it will be
taxed at regular corporate tax rates on all of its taxable income (including any
capital gains) without any deduction for distributions to shareholders, and
distributions to you will be taxable as ordinary dividends (even if derived from
the Fund's net long-term capital gains) to the extent of the Fund's current and
accumulated earnings and profits.
Distributions by a Fund of the excess, if any, of its net long-term capital
gain over its net short-term capital loss that are designated as capital gain
dividends are taxable to shareholders as long-term capital gains, regardless of
the length of time a shareholder has held his shares. The Blanchard 100%
Treasury Money Market Fund will be managed in a way so that it will not have any
long-term capital gains or losses. Distributions by a Fund of its net investment
income and the excess, if any, of its net short-term capital gain over its net
long-term capital loss are taxable to shareholders as ordinary income. Depending
on a Fund's investments, part or all of such ordinary income dividends could be
treated as: (1) dividends attributable to interest from obligations of the
United States Government ("U.S. Government Interest Dividends") that would be
exempt from state and local taxes; (2) dividends attributable to qualifying
dividends ("Qualifying Dividends") that for corporate shareholders would qualify
for the 70% dividends-received deduction; or (3) dividends attributable to
municipal obligations that would be excluded from regular federal tax and
partially exempt from state and local tax ("Exempt Interest Dividends").
A portion of such dividends from the Blanchard Precious Metals Fund,
Blanchard Global Growth Fund, and Blanchard American Equity Fund may be
Qualifying Dividends. However, this portion cannot exceed the aggregate amount
of Qualifying Dividends from domestic corporations received by such Funds during
the year, and substantially less than 100% of the ordinary income dividends paid
by such Funds may qualify for the deduction.
Distributions by the Blanchard Flexible Tax-Free Bond Fund of its tax-exempt
interest income (net of expenses) that are designated as Exempt Interest
Dividends should be excluded from gross income for federal income tax purposes.
However, you are required to report the receipt of Exempt Interest Dividends,
together with other tax-exempt interest, on your federal income tax return. In
addition, Exempt Interest Dividends may be subject to the federal alternative
minimum tax and to state and local income tax, and will
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be taken into account in determining the portion, if any, of Social Security
benefits received which must be included in gross income for federal income tax
purposes.
Distributions by the Blanchard 100% Treasury Money Market Fund are U.S.
Government Interest Dividends. The laws of most states exempt from personal
income taxes U.S. Government Interest Dividends from the Fund, which are
attributable to interest on United States Treasury obligations. The Fund will
advise you each year of the percentage of the Fund's ordinary income dividends
which are attributable to U.S. Government Interest Dividends.
Investment income that may be received by the Blanchard Short-Term Global
Income Fund, Blanchard Short-Term Bond Fund, Blanchard Precious Metals Fund,
Blanchard Global Growth Fund, Blanchard Flexible Income Fund, and Blanchard
Worldwide Emerging Markets Fund from sources within foreign countries may be
subject to foreign taxes withheld at the source. The United States has entered
into tax treaties with many foreign countries which entitle such Funds to a
reduced rate of, or exemption from, taxes on such income. It is impossible to
determine the effective rate of foreign tax in advance since the amount of a
Fund's total assets to be invested in various countries is not known. If more
than 50% of the value of a Fund's total assets at the close of its taxable year
consist of stock or securities of foreign corporations, such Fund may elect to
"pass through" to its shareholders the amount of foreign taxes paid by the Fund.
If the Fund so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Fund, and would be treated as having paid his pro rata share
of such foreign taxes and therefore be allowed to either deduct such amount in
computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax.
Distributions to you will be treated in the same manner for federal income
tax purposes whether you elect to receive them in cash or reinvest them in
additional shares. In general, you take distributions into account in the year
in which they are made. However, you are required to treat certain distributions
made during January as having been paid by a Fund and received by you on
December 31 of the preceding year. A statement setting forth the federal income
tax status (i.e., U.S. Government Interest Dividends, Qualifying Dividends,
Exempt Interest Dividends, or net capital gain dividends) of all distributions
made (or deemed made) during the year will be sent to you promptly after the end
of each year. If you purchase shares of a Fund just prior to the record date,
you will be taxed on the entire amount of the dividend received, even though the
net asset value per share on the date of such purchase may have reflected the
amount of such dividend.
Upon the sale or redemption of shares of a Fund, you will recognize gain or
loss in an amount equal to the difference between the proceeds of the sale or
redemption and your adjusted tax basis in the shares. Any loss realized upon a
taxable disposition of shares within six months from the date of their purchase
will be disallowed to the extent of any exempt-interest dividends received on
the shares and, to the extent not disallowed, will be treated as long-term
capital loss to the extent of any capital gain dividends received on such
shares. All or a portion of any loss realized upon a taxable disposition of
shares of a Fund may be disallowed if other shares of the Fund are purchased
within thirty days before or after such disposition.
If you are a non-resident alien or foreign entity shareholder, ordinary
income dividends paid to you generally will be subject to United States
withholding at a rate of 30% (or a lower rate under an applicable treaty). If
you are a non-United States shareholder, we urge you to consult your own tax
advisor concerning the applicability of United States withholding tax.
Under the back-up withholding rules of the Code, you may be subject to 31%
withholding of federal income tax on ordinary income dividends, capital gain
dividends, and redemption payments made by the
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Funds. In order to avoid this back-up withholding, you must provide the Fund
with a correct taxpayer identification number (which, if you are an individual,
is usually your Social Security number), and certify that you are a corporation
or otherwise exempt from or not subject to back-up withholding.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds that is
contained in the Funds' Statement of Additional Information. In addition, you
should consult with your own tax advisor as to the tax consequences of
investments in the Funds.
PERFORMANCE INFORMATION
Advertisements and communications to investors regarding the Funds may cite
certain performance and ranking information and may make performance comparisons
to other Funds or to relevant indices, as described below. In addition, the
Funds' Portfolio Advisers and other outside analysts may, from time to time,
report on the market outlook for their investments as well as comment on the
historical reasons for these investments including as a hedge against inflation.
The Funds' performance may be calculated both in terms of total return and on
the basis of current yield over any period of time and may include a computation
of a Fund's distribution rate.
Total Return. Cumulative total return data is computed by considering all
elements of return, including reinvestment of dividends and capital gains
distribution, over a stated period of time. Cumulative total return figures are
not annualized and represent the aggregate percentage or dollar value change
over the period in question.
Average annual return will be quoted for at least the one, five and ten year
periods ending on a recent calendar quarter (or if such periods have not yet
elapsed, at the end of a shorter period corresponding to the life of a Fund for
performance purposes). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question.
Yield Information. The term "yield" refers to the income generated by an
investment over a one-month or 30-day period. This income is computed by
dividing the net investment income per share earned during such period by the
maximum public offering price per share on the last day of the period, and then
annualizing such 30-day (or one month) yield in accordance with a formula
prescribed by the SEC which provides for compounding on a semi-annual basis. The
Funds may also quote tax-equivalent yield, which shows the taxable yield that an
investor would have to earn before taxes to equal a Fund's tax-free yield. The
tax-equivalent yield is calculated by dividing a Fund's tax-exempt yield by the
result of one minus any combination of the stated federal, state, or city tax
rate. If only a portion of a Fund's income is tax-exempt, only that portion is
adjusted in the calculation.
Distribution Rate. The Funds may also quote distribution rates and/or
effective distribution rates in sales literature or other shareholders
communications. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized by dividing the distribution
rate by the ratio used to annualize the distribution and reinvesting the
resulting amount for a full year on the basis of such ratio. The effective
distribution rate will be higher than the distribution rate because of the
compounding effect of the assumed reinvestment. A Fund's distribution rate may
differ from its yield because the distribution rate may contain net investment
income and other items of income (such as returns of capital), while yield
reflects only earned interest and dividend items of income.
Comparative Results. From time to time in advertisements or sales material,
a Fund may discuss its performance rating and may be compared to the performance
of other mutual funds or mutual fund indexes
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as published by widely recognized independent mutual fund reporting services
such as Lipper Analytical Services, Inc., CDA and Morningstar, Inc. A Fund may
also discuss the past performance and ranking of its Portfolio Adviser, and
compare its performance to various investment indexes. The Funds may use
performance information as reported in publications of general interest,
national, financial and industry publications such as Forbes or Money Magazine
and various investment newsletters such as Donoghue's Money Letter. In addition,
the Funds may compare their total return to the total return of indexes of U.S.
markets or world markets, to that of other mutual funds, individual country
indexes, or other recognized indexes.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various investments, performance indexes of those investments or economic
indicators. In addition, the Funds may reprint articles about a Fund and provide
them to prospective shareholders. The Distributor may also make available
economic, financial and investment reports to shareholders and prospective
shareholders. In order to describe these reports, the Funds may include
descriptive information on the reports in advertising literature sent to the
public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparisons
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
Performance information will vary from time to time and past results are not
necessarily representative of future results. You should remember that a Fund's
performance is a function of portfolio management in selecting the type and
quality of securities in which a Fund may invest, and is affected by operating,
distribution and marketing expenses.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Blanchard Funds
Blanchard Funds (the "Trust"), is a Massachusetts business trust organized
on January 24, 1986 which currently consists of ten series. All of the series
are non-diversified series of the Trust other than BTMMF which is diversified.
Under Massachusetts law, the Trust and its series are generally not required to
hold annual or special shareholder meetings. However, special meetings of
shareholders may be held for such purposes as electing trustees, changing
fundamental policies, approving an investment management/advisory agreement or
approving a distribution and marketing plan, if any, and, at the request of the
shareholders, to replace trustees. Shareholders holding 10% or more of the
Trust's outstanding shares may call a special meeting of shareholders.
Shareholders may remove trustees from office whenever not less than two-thirds
of the outstanding shares either present a written declaration to the Transfer
Agent or vote at a meeting called for this purpose. In certain circumstances,
shareholders shall be given access to a list of the names and addresses of all
other shareholders, the number of shareholders and the cost of mailing a request
to them.
Blanchard Precious Metals Fund, Inc.
BPMF is a non-diversified investment company organized as a Maryland
corporation on June 1, 1987. As such, no annual or special meetings of Fund
shareholders will be held except as may be required by the Maryland General
Corporation Law or the 1940 Act, or as the Board of Directors of the Fund may
determine.
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A director of the Fund generally may be removed by the holders of not less
than a majority of the Fund's outstanding shares. In addition, the directors of
the Fund will promptly call a meeting of shareholders for any purpose or
purposes, including to vote on whether to remove any director(s) when requested
to do so in writing by record holders of not less than 10% of the outstanding
shares of the Fund. Finally, in certain circumstances, shareholders shall be
given access to a list of the names and addresses of all other shareholders or
be informed by the Fund of the number of shareholders and the cost of mailing
their request.
All Funds
Shares of each series of the Trust represent shares of beneficial interest.
Shares of BPMF represent shares of common stock. Each share has equal rights
with respect to voting matters of that series or of BPMF. In the event of
dissolution or liquidation of a series or of BPMF, holders of shares will
receive pro rata, subject to the rights of creditors, the proceeds of the sale
of the assets less its liabilities. There are no preemptive or conversion rights
applicable to the shares of a Fund. Shares of a Fund, when issued, will be fully
paid, non-assessable and transferable. The Board Members may create additional
series of shares without shareholder approval. BPMF and each series of the Trust
is individually responsible only for its own expenses and operating costs and
incurs no liability with respect to the expenses and costs of any other series
or for BPMF, other than those which affect the Blanchard Group Funds as a group
and are allocated among the series and/or BPMF based upon their relative average
net assets during the year. There is a remote possibility that one Fund might
become liable for any misstatement in the Prospectus about another Fund.
This Prospectus omits certain information contained in the registration
statement as filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. Each Fund's Statement of Additional
Information included in this registration statement may be obtained without
charge from your Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statements of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by a Fund. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.
The Code of Ethics of the Investment Adviser and the Funds prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Code of Ethics of both the Funds and
Investment Adviser is that their operations be carried out for the exclusive
benefit of the Funds' shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.
Independent Accountants. Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, New York 10036, has been appointed the independent accountants for the
Funds.
Custodian, Transfer Agent and Dividend Disbursing Agent. United States Trust
Company of New York, 770 Broadway, New York, New York 10003, is the Funds'
Custodian, Transfer Agent and Dividend Disbursing Agent.
Shareholder Inquiries. Shareholder inquiries concerning the status of an
account or information concerning the Funds should be directed to Signet
Financial Services, Inc. at 41 Madison Avenue, 24th Floor, New York, New YOrk
10010, or calling 1-800-829-3863.
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ADDITIONAL INVESTMENT INFORMATION
Municipal Obligations (BFTFBF)
The two principal classifications of Municipal Obligations which may be held
by the Fund are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Fund are in most
cases revenues currencies and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue bonds
is usually directly related to the credit standing of the corporate user of the
facility involved.
The Fund's portfolio may also include "moral obligation" securities, which
are normally issued by special-purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligation from
current revenues, it may draw on a reserve fund the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Fund.
The Fund may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Obligations ("Stripped Municipal
Obligations"). In a typical custodial receipt arrangement, an issuer or a third
party owner of Municipal Obligation deposits such obligations with a custodian
in exchange for two classes of custodial receipts. The two classes have
different characteristics, but, in each case, payments on the two classes are
based on payments received on the underlying Municipal Obligations. One class
has the characteristics of a typical auction mechanism. This class' interest
rate generally is expected to be below the coupon rate of the underlying
Municipal Obligations and interest rate adjustments. The second class bears
interest at a rate that exceeds the interest rate typically borne by a security
of comparable quality and maturity; this rate also is adjusted, but in this case
inversely to changes in the rate of interest of the first class. If the interest
rate on the first class exceeds the coupon rate of the underlying Municipal
Obligations, its interest rate will exceed the rate paid on the second class. In
no event will the aggregate interest paid with respect to the two classes exceed
the interest paid by the underlying Municipal Obligations. The value of the
second class and similar securities should be expected to fluctuate more than
the value of a Municipal Obligation of comparable quality and maturity and their
purchase by the Fund should increase the volatility of its net assets value and,
thus, its price per share. These custodial receipts are sold in private
placements.The Fund also may purchase directly from issuers, and not in a
private placement, Municipal Obligations having the same characteristics as the
custodial receipts. The Fund intends to purchase Stripped Municipal Obligations
only when the yield thereon will be exempt from Federal income tax to the same
extent as interest on the underlying Municipal Obligations. Stripped Municipal
Obligations are considered illiquid securities subject to the 10% limit
described in "Investment Limitations" in the Statement of Additional
Information. The Fund may purchase and sell municipal bond index and interest
rate future contracts as a hedge against changes in market condition. See
"Risks" below.
U.S. Government Securities (BSTBF, BFIF, BAEF)
The term "U.S. Government Securities" refers to debt securities denominated
in U.S. dollars issued or guaranteed by the U.S. Government, by various of its
agencies, or by various instrumentalities established or sponsored by the U.S.
Government. Certain of these obligations including U.S. Treasury bills, notes
and bonds, mortgage participation certificates guaranteed by the Government
National Mortgage Association ("GNMA") and Federal Housing Administration
debentures, are supported by the full faith and credit of the
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United States. Other U.S. Government Securities issued or guaranteed by Federal
agencies or government sponsored enterprises are not supported by the full faith
and credit of the United States. These securities include obligations supported
by the right of the issuer to borrow from the U.S. Treasury, such as obligations
of Federal Home Loan Banks, and obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association bonds. When
purchasing securities in the U.S. Government market, the Portfolio Advisers may
take full advantage of the entire range of maturities of U.S. Government
Securities and may adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of relative yields of
securities of different maturities and its expectations of future changes in
interest rates. To the extent that a Fund invests in the mortgage market, the
Portfolio Advisers usually will evaluate, among other things, relevant economic,
environmental and security-specific variables such as housing starts, coupon and
age trends. To determine relative value among markets the Portfolio Advisers may
use tools such as yield/duration curves, break-even prepayment rate analysis and
holding-period-return scenario testing.
A Fund may seek to increase its current income by writing covered call or
put options with respect to some or all of the U.S. Government Securities held
in its portfolio. In addition, a Fund may at times, through the writing and
purchase of options on U.S. Government Securities, and the purchase and sale of
futures contracts and related options with respect to U.S. Government
Securities, seek to reduce fluctuations in net asset value by hedging against a
decline in the value of U.S. Government Securities owned by that Fund or an
increase in the price of such securities which such Fund plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities and futures and related
options are not considered U.S. Government Securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described in each Fund's Statement of Additional Information.
U.S. Government Securities are considered among the most creditworthy of
fixed income investments. Because of this added safety, the yields available
from U.S. Government Securities are generally lower than the yields available
from corporate debt securities. The value of U.S. Government Securities (like
those of fixed income securities generally) will change as interest rates
fluctuate. During periods of failing U.S. interest rates, the values of
outstanding long term U.S. Government Securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the Funds expect that their portfolios of
U.S. Government securities will be weighted towards the longer maturities at
least to the extent that they have written call options thereon. Although
changes in the value of U.S. Government Securities will not affect investment
income from those securities, they will affect a Fund's net asset value.
Investment Grade Fixed Income Securities (BSTBF, BFIF)
The Funds may invest in investment grade U.S. fixed income securities. Such
investments may include mortgage related securities that are not U.S. Government
Securities, asset backed securities and fixed income securities rated Baa or
higher by Moody's or BBB by Standard & Poor's. Fixed income securities rated Baa
by Moody's or BBB by Standard & Poor's are considered investment grade
obligations which lack outstanding investment characteristics and may have
speculative characteristics as well. See Appendix A for the descriptions of
these rating categories.
Mortgage Related Securities. Mortgage related securities issued by financial
institutions (or separate trusts or affiliates of such institutions), even where
backed by U.S. Government securities, are not considered U.S. Government
Securities. The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes
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in market yields will affect the value of these securities as the price of fixed
income securities generally increases when interest rates decline and decreases
when interest rates rise. Prices of longer term securities generally increase or
decrease more sharply than those of shorter term securities in response to
interest rate changes. In addition, prepayment of principal on mortgage
pass-through securities may make it difficult to lock in interest rates for a
fixed period of time. To the extent that mortgage securities are purchased at
prices that differ from par, these prepayments (which are received at par) may
make up a significant portion of the pass-through total return. Generally,
mortgage securities yield more than Treasury securities of the same average
life. For more information on mortgage-related securities, see "Investment
Objective and Policies" in each Fund's Statement of Additional Information.
Asset-Backed Securities. In general, asset-backed securities in which a
Fund may invest are issued as debt securities by special purpose corporations.
These securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among other
things, credit card receivables and automobiles. The Funds will invest in, to
the extent available, (i) loan pass-through certificates or participations
representing an undivided ownership interest in pools of installment sales
contracts and installment loans (the "Participations") and (ii) debt obligations
issued by special purpose corporations which hold subordinated equity interests
in such installment sales contracts and installment loans. The Funds anticipate
that a substantial portion of the asset-backed securities in which they invest
will consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually five
years) than most conventional mortgage-backed securities and historically have
been less likely to experience substantial prepayments. Furthermore, the effect
of prepayments on securities that have shorter maturities, such as asset-backed
securities,is much smaller than the effect of prepayments on securities having
longer maturities, such as mortgage-backed securities. The yield characteristics
of asset-backed securities differ from more traditional debt securities in that
interest and principal payments are paid more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if a Fund purchases an
asset-backed security at a discount, similar to conventional mortgage-backed
securities, a prepayment rate that is faster than expected will increase yield
to maturity, while a prepayment rate that is slower than expected will reduce
yield to maturity. Conversely, if a Fund purchases an asset-backed security at a
premium, faster than expected prepayments will reduce, while slower than
expected prepayments will increase, yield to maturity. Prepayments may result
from a number of factors, including trade-ins and liquidations due to default,
as well as the receipt of proceeds from physical damage, credit, life and
disability insurance policies. The rate of prepayments on asset-backed
securities may also be influenced by a variety of economic and social factors,
including general measures of consumer confidence; accordingly, from time to
time, substantial amounts of prepayment may be available for reinvestment by a
Fund and will be subject to the prevailing interest rates at the time of
prepayment.
Asset-backed securities often contain elements of credit support to lessen
the effect of the potential failure by obligors to make timely payments on
underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installments on
loans which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance polices or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The Funds will not pay any additional fees for such credit support.
However, the existence of credit support may
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increase the market price of the security. For more information on asset-backed
securities, see "Investment Objective and Policies" in each Fund's Statement of
Additional Information.
High Yield Securities (BSTBF, BSTGIF, BFIF)
Lower rated fixed income securities, including debt securities, convertible
securities and preferred stock and unrated corporate fixed income securities,
commonly referred to as "junk bonds," are considered speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated fixed income securities.
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. A Fund may continue to hold securities obtained as a
result of the conversion of convertible securities held by such Fund when the
Portfolio Adviser believes retaining such securities is consistent with the
Fund's investment objective.
Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. A Fund may invest in any security which is rated by
Moody's or Standard & Poor's, or in any unrated security which the Portfolio
Advisers determine is of suitable quality. Securities in the rating categories
below Baa as determined by Moody's and BBB as determined by Standard & Poor's
are considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristic of the lower categories, are set forth in Appendix A.
Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Although the Funds' Portfolio Advisers
will consider security ratings when making investment decisions in the High
Yield Market, they will perform their own investment analysis and will not rely
principally on the ratings assigned by the rating services. A Portfolio
Adviser's analysis generally may include, among other things, consideration of
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset and
earnings prospects.
The Blanchard Short-Term Global Income Fund ("BSTGIF") may invest in
collateralized mortgage obligations ("CMOs"). Collateralized mortgage
obligations are debt obligations collateralized either by mortgage loans or
mortgage pass-through securities (such collateral collectively being called
"Mortgage Assets"). Payments of principal and interest on the Mortgage Assets
and any reinvestment income thereon provide the funds to pay debt service on the
CMOs. CMOs may be issued by the U.S. Government, its agencies or
instrumentalities or by private originators of or investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers and special purpose subsidiaries of such entities. Typically,
CMOs are collateralized by GNMA certificates or other government mortgage-backed
securities, but they may also be collateralized by whole loans or private
mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or
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final distribution date. Principal prepayments on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution date. Interest is paid or accrues on all classes of the CMOs
(other than any "principal-only" class) on a monthly, quarterly or semi-annual
basis. The principal and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. In a common structure, payments of
principal (including any prepayments) on the Mortgage Assets are applied to the
classes of the series of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will be
made on any class of CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full.
BSTGIF may also invest in stripped mortgage-backed securities ("SMBS").
Stripped mortgage-backed securities are derivative multi-class mortgage
securities and may be issued by agencies or instrumentalities of the U.S.
Government or by private originators of or investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers and special purpose subsidiaries of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and/or principal distributions on a pool of Mortgage
Assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yields to maturity on both PO and IO classes
are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets. If the underlying
Mortgage Assets of an IO class of SMBS experience greater than anticipated
prepayments of principal, an investor may fail to recoup fully its initial
investment in these securities even if the securities are rated in the highest
rating category. SMBS experience greater volatility in market value than
mortgage securities in general.
CERTAIN INVESTMENT STRATEGIES AND POLICIES
Options and Futures Transactions (BSTBF, BSTGIF, BFIF, BWEMF, BPMF, BGGF)
General. The successful use of these investment techniques depends on the
ability of Fund management to forecast interest rate and currency exchange rate
movements correctly. Should interest or exchange rates move in an unexpected
manner, a Fund may not achieve the anticipated benefits of futures
contracts, options or forward contracts or may realize losses and thus be in a
worse position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are no
daily price fluctuation limits with respect to options on currencies and forward
contracts, and adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses. A Fund's ability to dispose of its positions in futures
contracts, options and forward contracts will depend on the availability of
liquid markets in such instruments. Markets in options and futures with respect
to a number of fixed income securities and currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of futures contracts, options and forward
contracts. If a secondary market does not exist with respect to an option
purchased or written by a Fund over-the-counter, it might not be possible to
effect a closing transaction in the option (i.e., dispose of the option) with
the result that (i) an option purchased by the Fund would have to be exercised
in order for the Fund to realize any profit and (ii) the Fund may not be able to
sell currencies or portfolio securities covering an option written by the Fund
until the option expires or it delivers the underlying futures
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contract or currency upon exercise. Therefore, no assurance can be given that
the Funds will be able to utilize these instruments effectively for the purposes
set forth above. The selection of futures and option strategies requires skills
different from those needed to select portfolio securities, however, the
Portfolio Advisers do have experience in the use of futures and options.
Furthermore, a Fund's ability to engage in options and futures transactions may
be limited by tax considerations. See "Tax Matters" in each Fund's Statement of
Additional Information.
Options on Portfolio Securities. (BSTBF, BSTGIF, BFIF) A Fund, in seeking to
generate high current income, may write covered call options on certain of its
portfolio securities at such time and from time to time as Fund management shall
determine to be appropriate and consistent with the investment objective of the
Fund. A covered call option means that the Fund owns the security on which the
option is written. Generally, the Funds expect that options written by them will
be traded on recognized securities exchanges. In certain instances, however, a
Fund may purchase and sell options in the over-the-counter market ("OTC
Options"). A Fund's ability to close option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Fund. In addition,
the staff of the SEC has taken the position that OTC Options and the assets used
as "cover" should be treated as illiquid securities. There is no fixed limit on
the percentage of a Fund's assets upon which options may be written.
The Funds will receive a premium (less any commissions) from the writing of
such contracts, and it is believed that the total return to the Funds can be
increased through such premiums consistent with each Fund's investment
objective. The writing of option contracts is a highly specialized activity
which involves investment techniques and risks different from those ordinarily
associated with investment companies, although the Funds believe that the
writing of covered call options listed on an exchange or traded in the
over-the-counter market, where the Fund owns the underlying security, tends to
reduce such risks. The writer forgoes the opportunity to profit from an increase
in market price of the underlying security above the exercise price so long as
the option remains open. See each Fund's Statement of Additional Information for
more information.
Futures Contracts and Options on Futures Contracts. (BSTBF, BFTFBF, BFIF) A
Fund may enter into contracts for the purchase or sale for future delivery of
interest rate instruments, fixed-income securities, foreign currencies, or
contracts based on financial indices including any index of U.S. Government
Securities, foreign government securities or corporate debt securities ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities or foreign currencies called for by the contract at a specified price
on a specified date. A "purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities or foreign currencies called
for by the contract at a specified price on a specified date. Options on futures
contracts to be written or purchased by a Fund will be traded on U.S. or foreign
exchanges or over-the-counter. See "Additional Risks of Futures Contracts and
Related Options, Forward Foreign Currency Exchange Contracts and Options on
Foreign Currencies" below and in each Fund's Statement of Additional Information
for further discussion of the use, risks and costs of futures contracts and
options on futures contracts.
Although most futures contracts call for making or taking delivery of the
underlying securities, these obligations are typically cancelled or closed out
before the scheduled settlement date. The closing is accomplished by purchasing
(or selling) an identical futures contract to offset a short (or long) position.
Such an offsetting transaction cancels the contractual obligations established
by the original futures transaction. Other financial futures contracts call for
cash settlements rather than delivery of securities.
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If the price of an offsetting futures transaction varies from the price of
the original futures transaction, the Funds will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities transaction, but may not always
or completely do so.
In contrast to the purchase or sale of a security, the full purchase price
of the futures contract is not paid or received by a Fund upon its purchase or
sale. Instead, the Funds will deposit in a segregated custodial account an
amount of cash or U.S. Treasury bills equal to approximately 5% of the value of
the contract. This amount is known as initial margin. The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
Funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments to and from the
broker, called variation margin, will be made on a daily basis as the price of
the underlying security fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as "mark to the market."
For example, when a Fund has purchased a futures contract and the price of the
underlying security has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying security has declined, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker. At any time prior to expiration of the futures contract, a Fund may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to that Fund, and the Fund realizes a loss or gain. No
assurance can be given that the Funds will be able to take an opposite position.
The Funds will not (i) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate of margin deposits on
all the outstanding futures contracts of a Fund and premiums paid on outstanding
options on futures contracts would exceed 5% of the market value of the total
assets of the Fund, or (ii) enter into any futures contracts or options on
futures contracts if the aggregate of the market value of the outstanding
futures contracts of a Fund and the market value of the currencies and futures
contracts subject to outstanding options written by the Fund would exceed 50% of
the market value of the total assets of that Fund.
Options on Foreign Currencies. (BSTBF, BSTGIF, BFIF) The Funds may purchase
and write put and call options on foreign currencies to increase a Fund's gross
income and for the purpose of protecting against declines in the U.S. dollar
value of foreign currency denominated portfolio securities and against increases
in the U.S. dollar cost of such securities to be acquired. As in the case of
other kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written or
purchased by a Fund are traded on U.S. and foreign exchanges or
over-the-counter. There is no specific percentage limitation on a Fund's
investments in options on foreign currencies. See each Fund's Statement of
Additional Information for further discussion on the use, risks and costs of
options on foreign currencies.
Forward Foreign Currency Exchange Contracts. (BSTBF, BSTGIF, BFIF, BWEMF)
The Funds will purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of their portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
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price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security ("transaction hedge"). Additionally, for example, when a
Fund believes that a foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a forward sale contract to sell an amount of
that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency, or when a Fund
believes that the U.S. dollar may suffer a substantial decline against foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, a Fund
may, in the alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Fund believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Fund are denominated ("cross-hedge"). The
Funds' custodian will place cash not available for investment or U.S. Government
Securities or other high quality debt securities in a separate account of a Fund
having a value equal to the aggregate amount of that Fund's commitments under
forward contracts entered into with respect to position hedges and crosshedges.
If the value of the securities placed in a separate account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
separate account, a Fund may purchase a call option permitting the Fund to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price or a Fund may purchase a
put option permitting the Fund to sell the amount of foreign currency subject to
a forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
Pursuant to the sub-advisory agreemehts, the Portfolio Advisers, where permitted
by law, will purchase and sell foreign exchange in the interbank dealer market
for a fee on behalf of a Fund, subject to certain procedures and reporting
requirements adopted by the Board Members.
Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies. The market prices
of futures contracts may be affected by certain factors. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the securities and futures
markets. Second, from the point of view of speculators, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the Funds may invest may be subject
to commodity exchange imposed limitations on fluctuations in futures contract
prices during a single day. Such regulations are referred to as "daily price
fluctuation limits" or "daily limits." During a single trading day no trades may
be executed at prices beyond the daily limit. Once the price of a futures
contract has increased or decreased by an amount equal to the daily limit,
positions in those futures cannot be taken or liquidated unless both a buyer and
seller are willing to effect trades at or within the limit. Daily limits, or
regulatory intervention in the commodity markets, could prevent a Fund from
promptly liquidating unfavorable positions and adversely affect operations and
profitability.
Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges,
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such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. In the forward currency market, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Moreover, a trader of forward
contracts could lose amounts substantially in excess of its initial investments,
due to the collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward contracts and
options on foreign currencies may be traded on foreign exchanges, to the extent
permitted by the CFTC. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (a) other
complex foreign political and economic factors, (b) lesser availability than in
the United States of data on which to make trading decisions, (c) delays in a
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (d) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (e) lesser trading volume.
Other Investment Policies
Repurchase Agreements. The Funds (other than BTMMF and BPMF) may enter into
repurchase agreements. Under a repurchase agreement, a Fund acquires a debt
instrument for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Fund to resell
such debt instrument at a fixed price. The resale price is in excess of the
purchase price in that it reflects an agreed-upon market interest rate effective
for the period of time during which that Fund's money is invested. The Funds'
repurchase agreements will at all times be fully collateralized in an amount at
least equal to the purchase price including accrued interest earned on the
underlying securities. The instruments held as collateral are valued daily, and
as the value of instruments declines, the Funds will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, a Fund may incur a loss. If such a defaulting
seller were to become insolvent and subject to liquidation or reorganization
under applicable bankruptcy or other laws, disposition of the underlying
securities could involve certain costs or delays pending court action. Finally,
it is not certain whether the Funds would be entitled, as against a claim of the
seller or its receiver, trustee in bankruptcy or creditors, to retain the
underlying securities. Repurchase agreements are considered by the staff of the
STE to be loans by a Fund.
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Lending of Porffolio Securities. (BSTBF, BFTFBF, BSTGIF, BFIF, BAEF) In
order to generate additional income, each Fund may lend its porffolio securities
in an amount up to 33-1/3% of total Fund assets to broker-dealers, major banks,
or other recognized domestic institutional borrowers of securities not
affiliated with Sheffield. The borrower at all times during the loan must
maintain cash or cash equivalent collateral or provide to the Fund an
irrevocable letter of credit equal in value to at least 100% of the value of the
securities loaned. During the time porffolio securities are on loan, the
borrower pays the Fund any dividends or interest paid on such securities, and
the Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of any loaned securities fail financially.
When-lssued and Forward Transactions and Stand-By Commitments. (BFTFBF) The
Fund may purchase eligible securities on a "when issued" basis and may purchase
or sell securities on a "forward commitment" basis. The Fund does not intend to
engage in "when issued" purchases and forward commitments for speculative
purposes, but only in furtherance of its investment objective. The Fund will
establish a segregated account with its custodian bank in which it will maintain
cash or other high quality debt securities determined daily to be equal in value
to the commitments for "when-issued" securities.
In addition, the Fund may acquire "stand-by commitments" with respect to
Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the Fund's option, specified Municipal Obligations at a
specified price. The Fund will acquire "stand-by commitments" solely to
facilitate porffolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the Fund
would be valued at zero in determining the Fund's net asset value.
Money Market Instruments. (BFTFBF, BWEMF, BPMF, BGGF, BFIF, BSTBF) Money
market instruments include, but are not limited to, the following instruments:
government securities; commercial paper; bank certificates of deposit and
bankers' acceptances; and repurchase agreements related to any of the foregoing.
A Fund will only purchase commercial paper if it is rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by Standard & Poor's or, if not rated, is considered by
Fund management to be of equivalent quality.
Under a defensive strategy, BSTBF and BFIF may concentrate their investments
in securities issued by banks. Such investments may include certificates of
deposit, time deposits, bankers' acceptances, and obligations issued by bank
holding companies, as well as repurchase agreements entered into with banks.
Illiquid Securities. (BSTBF, BSTGIF, BFIF, BAEF, BGGF) The Funds will not
invest in illiquid securities if immediately after such investment more than 10%
of a Fund's total assets (taken at market value) would be invested in such
securities. See each Fund's Statement of Additional Information. For this
purpose, illiquid securities include (a) securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed illiquid for purposes of this limitation.
SEC Rule 144A allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act of 1933 applicable to resales of certain securities to qualified
institutional buyers. The Porffolio Advisers anticipate that the market for
certain restricted securities such as institutional commercial paper will expand
further as a result of this relatively new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
security foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
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The Portfolio Adviser will monitor the liquidity of restricted securities in
each Fund's portfolio under the supervision of the Board Members. In reaching
liquidity decisions, the Portfolio Advisers will consider, inter alia, the
following factors: (1 ) the frequency of trades and quotes for the security; (2)
the number of dealers wanting to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Non-diversification. All of the Funds' portfolios (other than BTMMF) are
"non-diversified" which means the Funds are not limited in the proportion of
assets that may be invested in the securities of a single issuer.
However, each Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, which will relieve the Funds of any liability for Federal income tax to
the extent its earnings are distributed to shareholders. See "Tax Matters". To
so qualify, among other requirements, each Fund will limit its investments so
that, at the close of each fiscal quarter, (i) not more than 25% of the market
value of a Fund's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value will be invested in the securities of a
single issuer and a Fund will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of the Funds' requirements to
maintain diversification for tax purposes, the issuer of a loan participation
will be the underlying borrower. In cases where a Fund does not have recourse
directly against the borrower, both the borrower and each agent bank and
co-lender interposed between the Fund and the borrower will be deemed issuers of
the loan participation for tax diversification purposes. A Fund's investments in
U.S. Government Securities are not subject to these limitations. Since the Funds
may invest in a smaller number of individual issuers than diversified investment
companies, an investment in the Funds may, under certain circumstances, present
greater risks to an investor than an investment in a diversified company.
Porffolio Turnover. The Funds may engage in active short-term trading to
benefit from yield disparities among different issues of securities, to seek
short-term profits during periods of fluctuating interest rates, or for other
reasons. Such trading will increase a Fund's rate of turnover and the possible
incidence of short-term capital gain taxable as ordinary income. VCM anticipates
that the annual turnover in each Fund will not be in excess of 200%. An annual
turnover rate of 200% occurs, for example, when the dollar equivalent of all of
the securities in a Fund's portfolio are replaced twice in a period of one year.
A high rate of porffolio turnover involves correspondingly greater expenses than
a lower rate, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities, which expenses must be borne by that Fund and its shareholders. High
portfolio turnover rate also may result in the realization of substantial net
short-term capital gains. In order to continue to qualify as a regulated
investment company for Federal tax purposes, less than 30% of the annual gross
income of a Fund must be derived from the sale of securities held by the Fund
for less than three months. See "Tax Matters".
Concentration. Under normal circumstances, and as a matter of fundamental
policy, BSTGIF will "concentrate" at least 25% of its total assets in debt
instruments issued by domestic and foreign companies engaged in the banking
industry, including bank holding companies. Such investments may include
certificates of deposit, time deposits, bankers' acceptances, and obligations
issued by bank holding companies, as well as repurchase agreements entered into
with banks (as distinct from non-bank dealers) in accordance with the policies
set forth in "Repurchase Agreements". However, when business or financial
conditions warrant, the Fund may, for temporary defensive purposes, vary from
its policy of investing at least 25% of its total assets in the banking
industry. For example, the Fund may reduce its position in debt
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instruments issued by domestic and foreign banks and bank holding companies and
increase its position in U.S. Government Securities or cash equivalents.
Due to the Fund's investment policy with respect to investments in the
banking industry, the Fund will have greater exposure to the risk factors which
are characteristic of such investments. In particular, the value of and
investment return on the Fund's shares will be affected by economic or
regulatory developments in or related to the banking industry. Sustained
increases in interest rates can adversely affect the availability and cost of
funds for a bank's lending activities, and a deterioration in general economic
conditions could increase the exposure to credit losses. The banking industry is
also subject to the effects of the concentration of loan portfolios in
particular businesses such as real estate, energy, agriculture or high
technology-related companies; concentration of loan portfolios in lesser
developed country loans and highly leveraged transaction loans; national and
local regulation; and competition within those industries as well as with other
types of financial institutions. In addition, the Fund's investments in
commercial banks located in several foreign countries are subject to additional
risks due to the combination in such banks of commercial banking and diversified
securities activities. As discussed above, however, the Fund will seek to
minimize its exposure to such risks by investing only in debt securities which
are determined to be of high quality. The other Funds do not concentrate their
assets in any industry or industries other than for temporary defensive
purposes.
Borrowing. (BSTGIF, BWEMF) Each Fund may borrow up to one-third of the value
of its total assets from banks to increase its holdings of portfolio securities
or in order to meet redemption requests. Under the 1940 Act, a Fund is required
to maintain continuous asset coverage of 300% with respect to such borrowings
and to sell (within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if such liquidations of the Fund's holdings may be
disadvantageous from an investment standpoint. Leveraging by means of borrowing
may exaggerate the effect of any increase or decrease in the value of porffolio
securities or a Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the income
received from the securities purchased with borrowed funds.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Foreign Investments. (BSTBF, BSTGIF, BFIF, BWEMF, BGGF) Foreign investments
involve certain risks that are not present in domestic securities. Because the
Funds intend to purchase securities denominated in foreign currencies, a change
in the value of any such currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of a Fund's assets and a Fund's
income available for distribution. In addition, although a portion of a Fund's
investment income may be received or realized in such currencies, the Internal
Revenue Code of 1986 (the "Code") requires that each Fund compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate of any such currency
declines after the Fund's income has been earned and translated into U.S.
dollars but before payment, a Fund could be required to liquidate securities to
make such distributions. Similarly, if an exchange rate depreciates between the
time a Fund incurs expenses in U.S. dollars and the time such expenses are paid,
the amount of such currency required to be converted into U.S. dollars in order
to pay such expenses in U.S. dollars will be greater than the equivalent amount
in any such currency of such expenses at the time they were incurred. Under the
Code, changes in an exchange rate which occur between the time a Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable taxable net investment income.
Similarly, dispositions of certain debt securities (by sale, at maturity or
otherwise) at a U.S. dollar amount which is higher or lower than the Fund's
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original U.S. dollar cost may result in foreign exchange gains or losses, which
will increase or decrease distributable taxable net investment income.
The values of foreign investments and the investment income derived from
them may also be affected unfavorably by changes in currency exchange control
regulations. Although the Funds will invest only in securities denominated in
foreign currencies that are fully exchangeable into U.S. dollars without legal
restriction at the time of investment, there is no assurance that currency
controls will not be imposed subsequently. In addition, the values of foreign
fixed-income investments will fluctuate in response to changes in U.S. and
foreign interest rates.
There may be less information publicly available about a foreign issuer than
about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. The Portfolio Advisers do not
expect to invest the Funds' assets in countries where they believe such events
are likely to occur.
Income received by a Fund from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The Portfolio Advisers will attempt to minimize such taxes
by timing of transactions and other strategies, but there is no assurance that
such efforts will be successful. Any such taxes paid by a Fund will reduce its
net income available for distribution to shareholders.
Investors should recognize that investing in debt obligations and other
fixed-income securities of issuers in emerging countries involves certain
special considerations and risk factors, including those set forth below, which
are not typically associated with investing in debt obligations and other
fixed-income securities of U.S. issuers.
Trading volume in emerging country securities markets is substantially less
than in the United States. Further, securities of some emerging country issuers
are less liquid and more volatile than securities of comparable U.S. issuers.
Commissions for trading on emerging country stock exchanges are generally higher
than commissions for trading on U.S. exchanges although the Funds will endeavor
to achieve the most favorable net results on their portfolio transactions and
may, in certain instances, be able to purchase portfolio investments on other
stock exchanges where commissions are negotiable.
Issuers in emerging countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. issuers. Consequently, there
may be less publicly available information about an emerging country issuer than
about a U.S. issuer. Further, there is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed issuers than in the
United States.
The Funds may invest in unlisted emerging country debt obligations and other
fixed-income securities, including investments in new and early stage issuers,
which may involve a high degree of business and financial risk that can result
in substantial losses. Because of the absence of any trading market for these
investments, a Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on these sales couId
be less than those originally paid by the Fund. Further, issuers whose
securities are not
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publicly traded may not be subject to public disclosure and other investor
protection requirements applicable to publicly traded securities.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are dependent upon international
trade and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of a Fund's investments in those countries. In addition, it may be difficult to
obtain and enforce a judgment in a court outside of the United States.
From time to time, BGGF may invest in Eastern Europe as investment
opportunities emerge in those markets, if the Sector Manager deems it prudent in
light of then existing social, economic and political conditions. Investing in
the securities of issuers in Eastern Europe involves certain additional
considerations not usually associated with investing in securities of issuers in
more developed capital markets, including the following: (i) political and
economic considerations, such as greater risks of expropriation and
nationalization and less social, political and economic stability; (ii) the
small size of the markets for such securities, the low or nonexistent volume of
trading, the lack of liquidity and price volatility; (iii) restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; and (iv) the absence of developed legal structures governing private
and foreign investments and private property. Applicable accounting and
financial reporting standards in Eastern Europe may be substantially different
from U.S. accounting standards and, in certain Eastern European countries, no
reporting standards may exist. Consequently, substantially less information is
available to investors in Eastern Europe, and the information that is available
may not be conceptually comparable to, or prepared on the same basis as, that
available in more developed capital markets, which may make it difficult to
assess the financial status of particular companies. Upon the accession to power
of Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
There can be no assurance that the Fund's investments in Eastern Europe, if any,
would not also be appropriated, nationalized or otherwise confiscated, in which
case the Fund would lose its entire investment in the country involved. In
addition, any change in the leadership or policies of Eastern European countries
may halt the expansion of or reverse the liberalization of foreign investment
policies now occurring.
Precious Metals and Precious Metals Securities. (BPMF, BGGF) Investment in
securities of precious metals mining, exploration and processing companies
involves certain risks. Selective investment in such securities, however, may
offer a greater return than shares of domestic industrial issuers. The market
action of such securities has tended to move against, or independently of, the
market trend of industrial securities; therefore, the addition of securities of
companies involved in precious metals operations to an investor's porffolio may
increase the return and may reduce overall fluctuations in porffolio value.
Thus, an investment in a Fund should be considered part of an overall investment
program rather than as a complete investment program in itself.
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Prices of precious metals mining securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals. This
is due to the fact that the costs of mining precious metals remain relatively
fixed, so that an increase or decrease in the price of precious metals has a
direct and greater than proportional effect on the profitability of precious
metals mining companies. Investments tied to precious metals characteristically
involve high risk because of precious metals' price volatility. The price of
precious metals is affected by factors such as cyclical economic conditions,
political events and monetary policies of various countries (see "Investment
Objective and Policies-Additional Information Regarding Precious Metals and
Precious Metals Securities" in each Fund's Statement of Additional Information
of each Fund for historic price information on gold bullion). During periods of
rising precious metals prices, investments in Precious Metals Securities will
tend to be emphasized with respect to a Fund.
The mining of gold is highly concentrated in a few countries. Currently, the
five largest producers of gold are the Republic of South Africa, certain
republics of the former Soviet Union, Canada, the United States and Australia.
Economic and political conditions prevailing in these countries may have a
direct effect on the production and marketing of newly produced gold and sales
of central bank gold holdings. At any given time, a substantial portion of the
investments of a Fund may be concentrated in one or a few foreign countries. See
"Investment Objective and Policies-Additional Information Regarding Precious
Metals'and Precious Metals Securities" in each Fund's Statement of Additional
Information for further details on this subject.
Risk Factors-Lower Rated Fixed Income Securities. (BSTBF, BSTGIF, BFIF,
BWEMF) Lower quality fixed income securities generally produce a higher current
yield than do fixed income securities of higher ratings. However, these fixed
income securities are considered speculative because they involve greater price
volatility and risk than do higher rated fixed income securities and yields on
these fixed income securities will tend to fluctuate over time. Although the
market value of all fixed income securities varies as a result of changes in
prevailing interest rates (e.g., when interest rates rise, the market value of
fixed income securities can be expected to decline), values of lower rated fixed
income securities tend to react differently than the values of higher rated
fixed income securities. The prices of lower rated fixed income securities are
less sensitive to changes in interest rates than higher rated fixed income
securities. Conversely, lower rated fixed income securities also involve a
greater risk of default by the issuer in the payment of principal and income and
are more sensitive to economic downturns and recessions than higher rated fixed
income securities. The financial stress resulting from an economic downturn
could have a greater negative effect on the ability of issuers of lower rated
fixed income securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other fixed income securities
in a Fund's portfolio, the net asset value of that Fund will be negatively
affected. Moreover, as the market for lower rated fixed income securities is a
relatively new one, a severe economic downturn might increase the number of
defaults, thereby adversely affecting the value of all outstanding lower rated
fixed income securities and disrupting the market for such securities. Fixed
income securities purchased by a Fund as part of an initial underwriting present
an additional risk due to their lack of market history. These risks are
exacerbated with respect to fixed income securities rated Caa or lower by
Moody's or CCC or lower by Standard & Poor's. Unrated fixed income securities
generally carry the same risks as do lower rated fixed income securities.
Lower quality debt securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
quality debt securities tend to be institutions, rather than individuals, a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower quality debt securities
may not be as liquid as Treasury and investment grade bonds. The ability of a
Fund to sell lower quality debt securities will be adversely affected to the
extent that such securities are thinly traded or illiquid. Moreover, the ability
of a Fund to value lower
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quality debt securities becomes more difficult, and judgment plays a greater
role in valuation, as there is less reliable, objective data available with
respect to such securities that are thinly traded or illiquid. Unrated debt
securities are not necessarily of lower quality than rated debt securities, but
they may not be attractive to as many buyers.
Because investors may perceive that there are greater risks associated with
the lower quality debt securities of the type in which the Funds may invest, the
yields and prices of such securities may tend to fluctuate more than those for
higher quality debt securities. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the debt securities market than do changes in
higher quality segments of the debt security market, resulting in greater yield
and price volatility. The speculative characteristics of lower rated debt
securities are set forth in Appendix A.
The Funds' Portfolio Advisers believe that the risks of investing in such
high yielding, debt securities may be minimized through careful analysis of
prospective issuers, Although the opinions of ratings services such as Moody's
and Standard & Poor's are considered in selecting securities in which a Fund may
invest, they evaluate the safety of the principal and the interest payments of
the security, not their market value risk. Additionally credit rating agencies
may experience slight delays in updating ratings to reflect current events. The
Porffolio Advisers rely, primarily, on their own credit analysis. This may
suggest, however, that the achievement of the Fund's investment objective is
more dependent on the Porffolio Adviser's proprietary credit analysis, than is
otherwise the case for a Fund that invests exclusively in higher quality debt
securities. Once the rating of a porffolio security or the quality determination
ascribed by a Porffolio Adviser to an unrated debt security has been downgraded,
the Porffolio Adviser will consider all circumstances deemed relevant in
determining whether to continue to hold the security.
Risk Factors-Mortgage Securities. (BSTGIF) The yield characteristics of the
mortgage securities differ from those of traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently on mortgage securities, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally permit prepayment at any time. Evaluating the risks associated with
prepayment and determining the rate at which prepayments may occur depends on a
number of factors. The rate of prepayment is influenced by a variety of economic
geographic, demographic, social and other factors including interest rate
levels, changes in housing needs, net equity built by mortgagors in the
mortgaged properties, job transfers, and unemployment rates. If BSTGIF purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if BSTGIF purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Amounts available for reinvestment are likely to be
greater during a period of rising interest rates. Accelerated prepayments on
securities purchased by BSTGIF at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is repaid in full.
The rate of principal payments on the certificates, the aggregate amount of
each interest payment and the yield to maturity on mortgage securities are
related to the rate of principal payments on the underlying mortgage loans. Such
principal payments may be in the form of scheduled principal payments,
prepayments by mortgagors, liquidations due to default, casualty, condemnation
and certain events usually set forth in the related pooling and servicing
agreement. The rate of prepayment may be influenced by a variety of economic,
geographic, social and other factors. In general, however, if interest rates on
comparable obligations were to fall below the mortgage rates on the underlying
mortgage loans, which may be different from prevailing interest rates, the rate
of prepayment would be expected to increase.
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Conversely, if prevailing rates on comparable obligations were to rise above
the mortgage rates on the underlying mortgage loans, the mortgage loans would be
expected to prepay at lower rates than if prevailing rates on comparable
obligations were to remain at or below the mortgage rates on the underlying
mortgage loans.
The mortgage securities in which BSTGIF may invest differ from conventional
bonds in that principal is paid back over the life of the mortgage securities
rather than at maturity. As a result, the holder of the mortgage securities
(i.e., BSTGIF) receives monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing mortgage securities. For this reason,
mortgage-securities are less effective than other types of U.S. Government
securities as a means of "locking in" long-term interest rates.
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APPENDIX A
Description of Moody's Investors Service, Inc.'s Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
*A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
*Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
A-1
<PAGE>
Description of Standard & Poor's Corporation's Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
*AA: Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
*A: Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
*BBB: Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "C" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The rating "C1" is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P does not rate a particular type of obligation as a matter of policy.
A-2
<PAGE>
-------------------------------
BLANCHARD
GROUP OF FUNDS
-------------------------------
Blanchard Global Growth Fund
Blanchard Precious Metals Fund, Inc.
Blanchard 100% Treasury Money Market Fund
Blanchard Short-Term Global Income Fund
Blanchard American Equity Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Bond Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Worldwide Emerging Markets Fund
Prospectus
August 7, 1995
Please read and keep for your file
B L A N C H A R D
<PAGE>
Blanchard Group of Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
1-800-829-3863
-------------------------------
B L A N C H A R D
-------------------------------
<PAGE>
- ------------------------------------- LOGO -------------------------------------
THE BLANCHARD
GROUP OF FUNDS
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
Blanchard Funds (the "Trust"), which currently consists of ten investment
portfolios, and Blanchard Precious Metals Fund, Inc., which currently consists
of one investment portfolio (each portfolio individually referred to as a "Fund"
and collectively as the "Funds") are open-end management investment companies,
which offer separate investment alternatives for different investor needs.
Virtus Capital Management, Inc. is the Funds' overall investment adviser. There
is no guarantee that the Funds will achieve their investment objectives.
Highlights ................................................................. 3
Fee Table .................................................................. 5
Financial Highlights ....................................................... 6
Investment Objectives and Policies ......................................... 8
Additional Information on Investment Policies, Techniques and Risk Factors . 9
Management of the Funds .................................................... 12
` rtfolio Advisory Services ................................................ 12
How to Invest .............................................................. 14
Investor Services .......................................................... 15
How to Redeem .............................................................. 17
Distribution of Shares of the Funds ........................................ 18
Tax Matters ................................................................ 20
Performance Computation Information ........................................ 21
Additional Information about the Funds and the Portfolios .................. 22
Other Information .......................................................... 24
------------
Please read this Prospectus carefully and retain it for future reference.
The Funds Statements of Additional Information, dated August 7, 1995, has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. It is available upon request to the Funds at
1-800-723-9512.
Investments in the Funds are subject to risk-including possible loss of
principal-and will fluctuate in value. Shares of the Funds are not bank deposits
or obligations of, or guaranteed or endorsed by, Signet Bank or The Chase
Manhattan Bank, N.A. or any of their affiliates and are not insured by,
obligations of or otherwise supported by the U.S. Government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated August 7, 1995
- --------------------------------------------------------------------------------
<PAGE>
BLANCHARD GROWTH & INCOME FUND
BLANCHARD CAPITAL GROWTH FUND
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Blanchard Growth & Income Fund and Blanchard Capital Growth Fund, open-end
management investment companies, (individually referred to as a "Fund" and
collectively as the "Funds") offer two different investment alternatives for
investors' objectives.
Blanchard Growth & Income Fund seeks to provide long term capital
appreciation and to provide dividend income through a broad portfolio of common
stocks. To achieve its investment objectives, the Fund invests 100% of its
assets in Growth & Income Portfolio (individually referred to as "Growth &
Income Portfolio" and collectively with Capital Growth Portfolio as the
"Portfolios"), an open-end management investment company advised by The Chase
Manhattan Bank, N.A. (the "Portfolio Adviser"), with investment objectives,
policies and restrictions identical to those of the Fund.
The Portfolio invests primarily (i.e., at least 80% under normal
circumstances) in common stocks of issuers (including foreign issuers) ranging
from small to medium to large capitalizations. For the most part, the Portfolio
Adviser will pursue a "contrary opinion" investment approach selecting common
stocks that are currently out of favor with investors in the stock market. These
securities are usually characterized by a relatively low price/earnings ratio
(using normalized earnings), a low ratio of market price to book value, or
underlying asset values that the Portfolio Adviser believes are not fully
reflected in the current market price.
Blanchard Capital Growth Fund seeks to provide long term capital growth
through a broad portfolio of common stocks. To achieve its investment objective,
the Fund invests 100% of its assets in Capital Growth Portfolio (individually
referred to as "Capital Growth Portfolio" and collectively with Growth & Income
Portfolio as the "Portfolios"), an open-end management investment company
advised by the Portfolio Adviser, with investment objectives, policies and
restrictions identical to those of the Fund.
The Portfolio invests primarily (i.e., at least 80% under normal
circumstances) in common stocks of issuers (including foreign issuers) that the
Portfolio Adviser believes are likely to benefit from changes or trends brought
about by social, economic, demographic and legislative developments considered
significant by the Portfolio Adviser. It is expected that the investments will
emphasize small and medium-sized companies which the Portfolio Adviser believes
have the potential to profit from significant changes or trends of the type
described above. Dividend income, if any, is a consideration incidental to
obtaining the Fund's objective of growth of capital.
The performance of the Funds depends on the performance of the Portfolios.
The Fund and Portfolio structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
For more information on this unique structure, see "Additional Information About
the Funds and the Portfolios" on Page 21. There can be no guarantee that the
Funds and the Portfolios will achieve their investment objectives.
Virtus Capital Management, Inc. ("VCM") is the Funds' investment adviser.
2
<PAGE>
HIGHLIGHTS
The Funds' Objectives.
The Funds, which are open-end management investment companies, invest in the
Portfolios which, in turn, invest in securities in accordance with investment
objectives, policies and restrictions identical to those of each Fund. The
Growth & Income Portfolio seeks to provide long-term capital appreciation and
dividend income. The Capital Growth Portfolio seeks to provide long-term capital
growth. See "Investment Objectives and Policies" and "Additional Information on
Investment Policies, Techniques and Risk Factors".
Fund Management.
VCM provides investment advisory services necessary for the Funds'
operations. As of April 30, 1995, VCM had more than $ billion in assets under
management. VCM receives monthly compensation from each Fund based on the amount
of assets under management. VCM evaluates the performance of the Funds'
Portfolio Adviser. The Portfolio Adviser is responsible for the selection of
each Portfolio's investments. See "Management of the Trust".
The Portfolio Adviser, a wholly owned subsidiary of The Chase Manhattan
Corporation, a registered bank holding company, is a commercial bank offering a
wide range of banking and investment services to customers throughout the United
States and around the world. Its headquarters is at One Chase Manhattan Plaza,
New York, New York 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others.
How to Invest and Redeem.
You may purchase shares of each Fund directly from Federated Securities
Corp. (the "Distributor") who is the Funds' principal distributor. You may also
purchase shares from broker-dealers who have entered into a dealer agreement
with the Distributor.
The minimum amount required to open an account in a Fund is $3,000 ($2,000
for qualified retirement plans, such a IRAs and Keoghs). The minimum subsequent
investment requirement is $200. The Funds have also adopted a Distribution Plan
which permits the reimbursement of distribution expenses by a Fund in an amount
not to exceed .50% of the average daily net assets of the Fund on an annual
basis. See "How to Invest" and "Distribution of Shares of the Fund".
You may redeem your shares on any business day at the next determined net
asset value calculated after the Funds' Transfer Agent has received the
redemption request in proper form. See "Redeeming Shares".
Each Fund reserves the right to cease offering shares to new shareholders if
the Portfolio Adviser believes that a Fund's size may hamper its effectiveness
in managing the Portfolio. In this event, no new accounts will be accepted until
further review. Shareholders who have established accounts prior to the closure
date will be allowed to add to their investments.
Investor Services and Privileges.
The Funds offer certain investor services and privileges that may be suited
to your particular investment needs, including free Telephone Exchange
Privileges, Investment and Withdrawal Plans and various Retirement Plans. See
"Investor Services".
3
<PAGE>
Dividends.
The Funds intend to declare dividends, if any, at least annually for Capital
Growth Fund and semi-annually for Growth & Income Fund from net investment
income. Dividends, if any, are automatically reinvested in additional Fund
shares at net asset value on the payment date and are reflected in the
statements we send you, unless you elect to receive them in cash, in which case
we will send you a check. See "Tax Matters".
Additional Information on Investment Policies, Techniques and Risk Factors.
The Funds are non-diversified funds and may be invested in a limited number
of issues; thus, there may be greater risk in an investment in these Funds than
in diversified investment companies. Moreover, there are potential risks
associated with certain of the Funds' investments and additional risk
considerations that may be associated with certain techniques and strategies
employed by the Funds, including those relating to investments in foreign
securities and futures and options transactions. See "Additional Information on
Investment Policies, Techniques and Risk Factors".
4
<PAGE>
FEE TABLE
For a better understanding of the expenses you will incur directly or
indirectly when investing in a Fund, a summary for each Fund is set forth below.
The summary combines each Fund's operational expenses with the pro rata portion
of its Portfolio's operational expenses. See "Management of the Trust". There is
no sales commission on any purchase of Fund shares. The trustees believe that
the aggregate per share expenses of the Fund and the Portfolio will be
approximately equal to the expenses the Fund would incur if its assets were
invested directly in the type of securities held by the Portfolio.
Shareholder Transaction Expenses Growth & Income Capital Growth
Sales Commission on Purchase of Shares .......... NONE NONE
Sales Commission on Reinvestment of Dividends ... NONE NONE
Sales Commission on Redemption of Shares ........ NONE NONE
Estimated Annual Fund Operating Expenses
(as a % of average net assets)
Management Fees (See "Management of the Trust") . 1.10% 1.10%
12b-1 Fees1 ..................................... .50% .50%
Other Expenses (See "Management of the Trust") .. .96% .97%
---- ----
Total Fund Operating Expenses ....................... 2.56% 2.57%
Example:
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period
1 Year 3 Years
------ -------
Growth and Income ................................... $26 $81
Capital Growth ...................................... $26 $81
This example should not be considered a representation of past or future
expenses, and actual expenses may be greater or less than those shown. In
addition, the 5% annual return should not be considered representative of past
or future returns, and actual returns may be greater or less than the
illustration above.
- ----------
1 As of result of distribution fees of .50% per annum of a Fund's average daily
net assets, a shareholder who has been in a Fund for 14.5 years may pay more
than the economic equivalent of the maximum front-end sales charges permitted
by the Rules of the National Association of Securities Dealers, Inc.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Share Outstanding throughout the Period)
The following selected per share data and ratios, insofar as they relate to
the period ended February 28, 1995, have not been audited. The related financial
statements are included in each Fund's Statement of Additional Information. This
information should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Blanchard Blanchard
Capital Growth Fund Growth & Income Fund
For the Period For the Period
November 1, 1994* November 1, 1994*
through through
February 28, 1995 February 28, 1995
(unaudited) (unaudited)
----------------- -----------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ......... $ 7.00 $ 7.00
------ ------
Income from investment operations:
Net investment income ...................... .00#(3) .02
Net gains or losses on investments
(both realized and unrealized) ........... .04 .11
------ ------
Net income from investment operations .. .04 .13
------ ------
Less dividends and distributions:
Dividends from investment income-net ....... - (.01)
Distributions from realized gains-net ...... - -
Change in net asset value .............. .04 .12
------ ------
Net asset value, end of period ............... $ 7.04 $ 7.12
====== ======
Total return(1) .............................. .57% 1.86%
Ratios/Supplemental Data:
Net assets, end of year (000's omitted) .... $1,252 $2,806
Ratio of expenses to average net assets(2) . 2.57% 2.56%
Ratio of net investment loss
to average net assets(2) ................. (.17%) 1.45%
<FN>
- ----------
* Commencement of operations.
# Less than one cent per share.
(1) Not annualized.
(2) Annualized. Includes expenses of Capital Growth Portfolio and Growth &
Income Portfolio, respectively.
(3) Calculated based on average shares outstanding.
</FN>
</TABLE>
6
<PAGE>
PERFORMANCE OF THE PORTFOLIO ADVISER
To achieve its investment objectives, each Fund invests 100% of its assets
in a Portfolio which has identical investment objectives. The performance of
each Fund therefore depends on the performance of the Portfolio. Because the
Funds have no prior performance history, set forth below is a chart presenting
historical performance for each Portfolio for one year, five years, and since
inception. Each Portfolio's performance has been adjusted to reflect the account
opening fee and estimated operating expenses to be charged to shareholders of
the Funds. Past performance is not an indication of future performance.
2 CHARTS TO INSERT
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Blanchard Growth & Income Fund
Investment Objectives and Policies.
The Portfolio seeks to achieve its investment objectives of long-term
capital appreciation and secondarily, dividend income, by investing primarily
(i.e., at least 80% of its assets under normal market conditions) in common
stocks. In addition, the Portfolio may invest up to 10% of its net assets in
convertible debentures. Convertible debentures are securities which may be
converted or exchanged by the holder into shares of the underlying common stock
at a stated exchange ratio. A convertible debenture may also be subject to
redemption by the issuer but only after a date and under certain circumstances
(including a specified price) established on issue. The Portfolio will invest
its assets in stocks of issuers (including foreign issuers) ranging from small
to medium to large capitalizations. In the opinion of the Portfolio Adviser,
small capitalization issuers are those with a market capitalization of under
$500 million; medium capitalization issuers are those with a market
capitalization ranging between $500 million to $3 billion; and large
capitalization issuers are those issuers with a market capitalization in excess
of $3 billion. An investor should be aware that investment in small
capitalization issuers may be more volatile than investments in issuers with
market capitalizations greater than $500 million or less than $3 billion due to
the narrow scope of their business activities, and correspondingly greater
susceptibility to changes in the business cycle of such small capitalization
issuers. For the most part, the Portfolio Adviser will pursue a "contrary
opinion" investment approach, selecting common stocks that are currently out of
favor with investors in the stock market. These securities are usually
characterized by a relatively low price/earnings ratio (using normalized
earnings), a low ratio of market price to book value, or underlying assets
values that the Portfolio Adviser believes are not fully reflected in the
current market price. The Portfolio Adviser will use a similar approach in
selecting convertible debentures; in addition to the value of the underlying
equity security, the Portfolio Adviser will consider the added investment value
of the convertible debenture to produce income for the Portfolio. The Portfolio
Adviser believes that the market risk involved in this policy will be moderated
somewhat by the anticipated dividend returns on the stocks to be held by the
Portfolio.
Blanchard Capital Growth Fund
Investment Objective and Policies.
The Portfolio seeks to achieve its investment objective of long-term capital
growth by investing primarily (i.e., at least 80% of its assets under normal
circumstances) in common stocks. The Portfolio will invest in stocks of issuers
(including foreign issuers) that the Portfolio Adviser believes are likely to
benefit from changes or trends brought about by social, economic, demographic
and legislative developments considered significant by the Portfolio Adviser. It
is expected that the Portfolio's investments will emphasize small and
medium-sized companies which the Portfolio Adviser believes have the potential
to profit from significant changes or trends of the type described above. This
investment policy involves the risks that the changes or trends identified by
the Portfolio Adviser will not occur or will not be as significant as projected
and that, even if the changes or trends develop, the particular issues held by
the Portfolio will not benefit as anticipated from such changes or trends.
Dividend income, if any, is a consideration incidental to the Fund's objective
of growth of capital.
Policies Common to Both Funds
Both the Growth & Income Portfolio and the Capital Growth Portfolio will be
substantially fully invested and, in normal circumstances, each Portfolio will
invest at least 80% of its assets in common stocks which are traded on the New
York Stock Exchange and on NASDAQ. The number of stocks paying dividends will
8
<PAGE>
fluctuate based on portfolio holdings. U.S. stocks have historically been one of
the very best ways to achieve growth. However, each Portfolio also may invest up
to 20% of its net assets in stocks of foreign issuers. Investments in foreign
securities are subject to certain risks to which investments in domestic
securities are not subject, including political or economic instability of the
issuer or country of issue and the possibility of the imposition of exchange
controls. The Capital Growth Fund is managed somewhat more aggressively than the
Growth & Income Fund. However, each Portfolio reserves the right to invest more
than 20% of its assets in cash, cash equivalents and debt securities for
temporary defensive purposes during periods that the Portfolio Adviser considers
to be particularly risky for investment in common stocks. See "Additional
Information on Investment Policies Techniques and Risk Factors" on page 9 of
this Prospectus and in the discussion in the Statement of Additional
Information.
The Portfolios may enter into certain transactions commonly referred to as
"derivatives" such as stock index futures contracts, options on stock index
futures contracts, options on stock indexes and options on equity securities for
the purpose of hedging their portfolios. "Additional Information on Investment
Policies, Techniques and Risk Factors" and Appendix A contain a more complete
description of the hedging instruments to be traded, as well as further
information concerning the investment policies and techniques of the Portfolios.
In addition, the Statement of Additional Information includes a further
discussion of futures and option contracts to be entered into by the Portfolios.
Although the Portfolios will enter into futures and option contracts for hedging
purposes only, the use of such instruments does involve transaction costs and
certain risks, which are discussed below and in Appendix A and in the Statements
of Additional Information.
The investment objectives of the Funds and the Portfolios are fundamental
and may not be changed without approval by a majority of the outstanding shares,
as defined in the Investment Company Act of 1940 (the "1940 Act"). Shareholder
approval is not required to change the investment policies described above or in
"Additional Information on Investment Policies, Techniques and Risk Factors".
However, in the event of a change in a Fund's or Portfolio's investment
policies, shareholders will be given 30 days prior written notice.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
To the extent the assets of the Portfolios are not invested in common
stocks, they will consist of or be invested in cash, cash equivalents and
short-term debt securities, such as U.S. Government securities, bank obligations
and commercial paper, and in repurchase agreements. See "Investment Objectives,
Policies and Restrictions" in the Statements of Additional Information.
Among the common stocks in which the Portfolios may invest are stocks of
foreign issuers, although at present each Portfolio does not intend to invest
more than 20% of its assets in such securities. These securities may represent a
greater degree of risk (e.g., risk related to exchange rate fluctuation, tax
provisions, war or expropriation) than do securities of domestic issuers.
Because the value of securities and the income derived therefrom may
fluctuate according to the earnings of the issuers and changes in economic and
market conditions, there can be no assurance that the investment objectives of
the Funds and the Portfolios will be achieved.
Repurchase Agreements. The Portfolios may, when appropriate, enter into
repurchase agreements (a purchase of and simultaneous commitment to resell a
security at an agreed-upon price and date which is usually not more than seven
days from the date of purchase) only with member banks of the Federal Reserve
System and security dealers believed creditworthy and only if fully
collateralized by U.S. Government obligations or other securities in which that
Portfolio is permitted to invest. In the event the seller fails to pay the
agreed-to sum on the agreed-upon delivery date, the underlying security could be
sold by that Portfolio, but the Portfolio might incur a loss in doing so, and in
certain cases may not be permitted to
9
<PAGE>
sell the security. As an operating policy, the Portfolios, through the custodian
bank, take constructive possession of the collateral underlying repurchase
agreements. Additionally, procedures have been established for the Portfolios to
monitor, on a daily basis, the market value of the collateral underlying all
repurchase agreements to ensure that the collateral is at least 100% of the
value of the repurchase agreements. No more than 10% of the total assets of a
Portfolio will be invested in securities which are subject to legal or
contractual restrictions on resale, including securities that are not readily
marketable and repurchase agreements maturing in more than seven days.
Portfolio Turnover. It is not intended that the assets of either Portfolio
will be invested in securities for the purpose of short-term profits. The
Portfolio Adviser anticipates that the annual turnover in each Fund will not be
in excess of 100%. However, a Portfolio will dispose of portfolio securities
whenever the Portfolio Adviser believes that changes are appropriate. Generally,
the primary consideration in placing portfolio securities transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. For a complete discussion of portfolio transactions and brokerage
allocation, see "Portfolio Transactions" in the Statements of Additional
Information.
Portfolio Securities Lending. Although the Portfolios do not intend to
engage in such activity in the ordinary course of business, the Portfolios are
permitted to lend securities to broker-dealers and other institutional investors
in order to generate additional income. Such loans of portfolio securities may
not exceed 30% of the value of a Portfolio's total assets. In connection with
such loans, the Portfolios will receive collateral consisting of cash, cash
equivalents, U.S. Government securities or irrevocable letters of credit issued
by financial institutions. Such collateral will be maintained at all times in an
amount equal to at least 100% of the current market value of the securities
loaned. The Portfolios can increase their income through the investment of such
collateral. The Portfolios continue to be entitled to the interest payable or
any dividend-equivalent payments received on a loaned security and, in addition,
receive interest on the amount of the loan. However, the receipt of any
dividend-equivalent payments by a Portfolio on a loaned security from the
borrower will not qualify for the dividends received deduction. Such loans will
be terminable at any time upon specified notice. A Portfolio might experience
risk of loss if the institutions with which it has engaged in portfolio loan
transactions breach their agreements with the Portfolio. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
experience financial difficulty. Loans will be made only to firms deemed by the
Portfolio Adviser to be of good standing and will not be made unless, in the
judgment of the Portfolio Adviser, the consideration to be earned from such
loans justifies the risk.
Non-U.S. Securities. Investing in securities issued by foreign corporations
and governments involves considerations and possible risks not typically
associated with investing in securities issued by domestic corporations and the
U.S. Government. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the U.S. or other countries) or changed circumstances in
dealings between countries. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods.
The Portfolios may invest in securities denominated in the ECU, which is a
"basket" consisting of specified amounts of the currencies of certain member
states of the European Community. The specific
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amounts of currencies comprising the ECU may be adjusted by the Council of
Ministers of the European Community to reflect changes in relative values of the
underlying currencies. The Portfolios' trustees do not believe that such
adjustments will adversely affect holders of ECU-denominated securities or the
marketability of such securities. European governments and supranational
organizations (discussed below), in particular, issue ECU-denominated
securities.
The Portfolios may invest in securities issued by supranational
organizations such as: the World Bank, which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations of the
Asian and Pacific regions.
The Portfolios may invest their assets in securities of foreign issuers in
the form of sponsored ADRs, EDRs, or other similar securities representing
securities of foreign issuers. ADRs are receipts typically issued by an American
bank or trust company evidencing ownership of the underlying foreign securities.
EDRs are receipts issued by a European financial institution evidencing a
similar arrangement.
Futures and Options Transactions. A Portfolio may enter into transactions in
stock index futures contracts, options on stock index futures contracts, options
on stock indexes and options on equity securities, for the purpose of hedging
its portfolio to reduce the volatility of the net asset value of its shares. In
general, each such transaction involves the establishment of a position which is
expected to move in a direction opposite to that of the security or securities
being hedged. For example, a Portfolio may enter into a "short" futures or
option position for the purpose of protecting against an anticipated decline in
the value of securities held in its portfolio. In the event that such a decline
occurs, and the hedging transaction is successful, the reduced value of the
portfolio securities will be offset, in whole or in part, by a corresponding
gain on the futures or option position. Conversely, when a Portfolio is not
fully invested in the securities market, and a significant market advance is
expected, it may enter into "long" positions in futures or options contracts in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of securities intended for purchase.
Although the Portfolios are permitted to engage in the purchase and sale of
futures contracts and options thereon solely for hedging purposes, the use of
such instruments does involve certain transaction costs and risks. A Portfolio's
ability effectively to hedge all or a portion of its portfolio through
transactions in futures, options on futures or options on stock indexes depends
on the degree to which movements in the value of the securities or index
underlying such hedging instrument correlate with movements in the value of the
relevant portion of the Portfolio's portfolio. The trading of futures and
options on indexes involves the additional risk of imperfect correlation between
movements in the futures or option price and the value of the underlying index.
While the Portfolios will establish a future or option position only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular futures or option contract at any
specific time. In such event, it may not be possible to close out a position
held by a Portfolio, which could require the Portfolio to purchase or sell the
instrument underlying the position, make or receive a cash settlement, or meet
ongoing variation margin requirements. Investments in futures contracts on fixed
income securities and related indexes involve the risk that if the Portfolio
Adviser's investment judgment concerning the general direction of interest rates
is incorrect, a Portfolio's overall performance may be poorer than if it had not
entered into any such contract. For additional information concerning the use
and risks involved in the acquisition, ownership or sale of futures contracts
and options thereon, including certain percentage limitations on the use of such
instruments, see "Investment Objectives, Policies and Restrictions" in the
Statements of Additional Information.
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MANAGEMENT OF THE FUNDS
Board of Trustees. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the Funds and for exercising
all of the powers of the Funds except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
Investment Adviser. VCM is responsible for managing the Funds and overseeing
the investment of their assets, subject at all times to the supervision of the
Board members. In addition, VCM selects, monitors and evaluates the Portfolio
Advisers. VCM will review the Portfolio Advisers' performance records
periodically, and will make changes if necessary, subject to Board member and
shareholder approval.
Advisory Fees. Under the terms of the Investment Advisory Contract, VCM
receives a monthly fee of .70% of each Fund's average daily net assets and the
Portfolio Adviser receives .40% per annum of each Fund's average daily net
assets directly from the Portfolio, as described below.
The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The investment advisory contract provides for the voluntary waiver of
expenses by VCM from time to time. VCM can terminate this voluntary waiver of
expenses at any time with respect to a Fund at its sole discretion. VCM has also
undertaken to reimburse the Funds for operating expenses in excess of
limitations established by certain states.
The Portfolios pay for all their expenses including legal and auditing
expenses; registration fees; taxes on the sales of portfolio securities;
brokerage commissions; Portfolio trustee fees, expenses connected with the
execution, recording and settlement of security transactions; fees and expenses
of the Portfolios' custodian for all services to the Portfolios; expenses of
preparing and mailing reports to investors and to government agencies and
commissions; expenses of meetings of investors and the advisory fees of .40% of
each Portfolio's average daily net assets payable to the Portfolio Adviser under
the Investment Advisory Agreements. In addition, each Portfolio pays an
administrative fee to The Chase Manhattan Trust Corporation Limited ("CMTC"), at
an annual rate of .05% of the Portfolio's average daily net assets pursuant to
an Administration Agreement wherein CMTC provides facilities and personnel
necessary to operate the Portfolio.
VCM's Background. Virtus Capital Management, Inc., a Maryland corporation
formed in 1995, is a wholly owned subsidiary of Signet Banking Corporation.
Signet Banking Corporation is a multi-state, multi-bank holding company which
has provided investment management services since 1956. VCM, which is a
registered investment adviser, manages, in addition to the Funds, The Virtus
Funds, three equity common trust funds with $39 million in assets and three
fixed income common trust funds with $221 million in assets. As part of their
regular banking operations, Signet Bank may make loans to public companies.
PORTFOLIO ADVISORY SERVICES
The Portfolio Adviser.
The Portfolio Adviser, a wholly owned subsidiary of The Chase Manhattan
Corporation, a registered bank holding company, is a commercial bank offering a
wide range of banking and investment services to customers throughout the United
States and around the world. Its headquarters is at One Chase Manhattan
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Plaza, New York, NY 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others.
David Klassen and Greg Adams, Vice Presidents of the Portfolio Adviser, are
responsible for the day-to-day management of the Portfolios. Each is a member of
the Chase Private Bank's in-house investment management research team,
specializing in technology and financial issues and uses a model which scans
over 1,600 equity securities in their quest for attractive value. Mr. Klassen,
Head of U.S. Equity Funds Management and Research for Chase has been with the
Portfolio Adviser since March, 1992 and Mr. Adams, Director of U.S. Equity
Research for Chase has been with the Portfolio Adviser since 1987. Messrs.
Klassen and Adams have co-managed each Portfolio since March, 1995. According to
Morningstar, Inc. for the one year, three year and five year periods ended March
31, 1995, the Growth & Income Portfolio was ranked #284 out of 356 growth and
income funds for one year; #136 out of 227 growth and income funds for three
years and #2 out of 184 growth and income funds for five years, respectively.
For the one year, three year and five year periods ended March 31, 1995, the
Capital Growth Portfolio was ranked #446 out of 664 capital growth funds for one
year; #73 out of 366 capital growth funds for three years and #7 out of 290
growth and income funds for five years, respectively. The Growth & Income
Portfolio was rated four stars, and the Capital Growth Portfolio was rated four
stars, by Morningstar, Inc. for the period ending March 31, 1995.
The Portfolio Adviser and its affiliates may have deposit, loan and other
commercial banking relationships with the issuers of securities purchased on
behalf of the Portfolios, including outstanding loans to such issuers which may
be repaid in whole or in part with the proceeds of securities so purchased. The
Portfolio Adviser has informed the Portfolios that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of the Portfolio Adviser.
Glass-Steagall Act. The Portfolio Adviser has received the opinion of its
legal counsel that it may provide services described in its Investment Advisory
Agreements and Custodian Agreements with the Portfolios, without violating the
federal banking law commonly known as the Glass-Steagall Act. The Act generally
bars banks from publicly underwriting or distributing certain securities.
Decisions of the U.S. Supreme Court and banking regulators support the
position that a bank may act as investment adviser to a registered, open-ended
investment company. Based on the advice of its counsel, the Portfolio Adviser
believes that it may serve as investment adviser to a registered, open-end
investment company.
Regarding the performance of custodial activities, the staff of the Office
of the Comptroller of the Currency, which supervises national banks, has issued
opinion letters stating that national banks may engage in custodial activities.
Therefore, the Portfolio Adviser believes, based on advice of counsel, that it
may serve as Custodian to the Portfolios as an appropriate, incidental national
banking function and as a proper adjunct to its serving as Portfolio Adviser to
the Portfolios.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent the Portfolio
Adviser from continuing to perform investment advisory or custodial services for
the Portfolios. If that occurred, the Funds' trustees would then consider what
action would be in the best interest of the Funds' shareholders. In addition,
state securities laws on this issue may differ from the interpretation of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
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HOW TO INVEST
You may purchase shares of any Fund from Federated Securities Corp., the
Funds' principal Distributor. You may also purchase shares from broker-dealers
who have entered into a dealer agreement with the Distributor at net asset value
which is computed once daily for BAEF and BTMMF as of the close of the New York
Stock Exchange (currently 4:00 p.m., New York time) and for the other Funds as
of the close of the options exchanges (normally 4:15 P.M. New York time). If
your order is received after the above times, your shares will be purchased at
the net asset value on the next business day. Each Fund's net asset value per
share is determined by dividing the value of that Fund's net assets by the total
number of its shares outstanding. Each Fund determines the net asset value of
its shares on each day that the New York Stock Exchange is open for business and
on such other days as there is sufficient trading in its securities to affect
materially its net asset value per share.
For your initial investment, there is a $3,000 minimum requirement. The
minimum initial investment requirement for qualified pension plans (IRAs,
Keoghs, etc.) is $2,000. The minimum investment requirement for additional
investments in a Fund is at least $200 per investment. (The foregoing minimum
investment requirements may be modified or waived at any time at our
discretion.) We charge no redemption fee when you redeem your shares and there
is no fee on reinvestment of any dividends or distributions.
Purchases By Mail
To purchase shares of a Fund by mail, simply send a completed Application
(included with this Prospectus or obtainable from the Fund), to the Blanchard
Group of Funds, c/o Mutual Funds Service Company, P.O. Box 2798, Boston,
Massachusetts 02208-2798, together with a check payable to the Blanchard Group
of Funds in payment for the shares. Mutual Funds Service Company is an affiliate
of United States Trust Company of New York. If you need assistance in completing
the application, call us at 1-800-829-3863. Our investor services
representatives are here to help you.
All purchases must be made in U.S. dollars and checks must be drawn on a
United States bank. Payment for shares may be not be made by third party checks,
however, second party checks are acceptable when properly endorsed. We reserve
the right to limit the number of checks for one account processed at one time.
If your check does not clear, your purchase will be cancelled and you could be
liable for any losses or fees incurred. Payments transmitted by check are
accepted subject to collection at full face amount.
Your purchase order becomes effective when it is received in proper form by
the Fund's Transfer Agent. Purchase orders must be received by the Funds'
Transfer Agent before 4:15 P.M., New York time, or your purchase will occur the
following business day. A purchase order will not become effective until it is
received in proper form by the Transfer Agent.
Purchases By Wire. You may also purchase shares by bank wire. For opening
new accounts in this manner, please call us toll free at 1-800-829-3863 before
wiring your funds, and furnish the following information: the account
registration and address, and your taxpayer identification number (for
individuals, a Social Security number). When making additional investments by
wire to your existing accounts, please provide your account numbers. You must
include your name and telephone number, the amount being wired and the name of
the wiring bank with both new and existing account purchases. Initial purchases
by wire must be followed by a completed Application within seven days.
You should instruct your bank to wire Federal funds: United States Trust
Company of New York, 114 West 47th Street, New York, New York 10036 ABA
#021001318 Credit Account #20-7324-2, indicating the name of the Fund, your
account number and the account registration.
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Automatic Investment Plans. Regular monthly purchases of shares may be made
by direct deposit of Social Security and certain other government checks into
your account. Fund shares may be purchased at regular intervals selected by you
by automatic transferral of funds from a bank checking account that you may
designate. All such purchases require a minimum of $100 per transaction. Call or
write our investor services department for information and forms required to
establish these Plans.
Electronic Funds Transfers (EFT)--Subsequent investments may be made by
electronic transfer of funds from an account maintained in a bank or other
domestic financial institution that is an Automated Clearing House member (ACH).
To enroll in this program, you must file an application with Blanchard Group of
Funds by calling 1-800-829-3863. You may begin transferring funds under the
program only after 15 days from the date your EFT Application is received by the
transfer agent, Mutual Funds Service Co. You must direct the institution to
transmit immediately available funds through the Automated Clearing House to
U.S. Trust Co. of New York ABA #021001318 CR A/C #20-7324-2 with instructions to
credit your Fund account. The instructions must specify your Fund account
registration and your Fund account number. Redemption proceeds will be on
deposit in your designated account at an Automated Clearing House member bank
ordinarily two days after receipt of the redemption request.
Direct deposit of dividends or systematic disbursements from your account
will be on deposit in your designated account at an Automated Clearing House
member bank ordinarily two days after a dividend payment or disbursement is
effected.
General Information
All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares unless we
receive written notice from you, at least 30 days prior to the record date of
such distribution, requesting that your dividends and distributions be
distributed to you in cash. See "Tax Matters".
We reserve the right to suspend the offering of any Fund shares for a period
of time. We also reserve the right to reject any purchase order.
No share certificates will be issued for shares unless requested in writing.
In order to facilitate redemptions and transfers, most shareholders elect not to
receive certificates. Shares are held in unissued form by the Transfer Agent.
Shares for which certificates have been issued cannot be redeemed, unless the
certificates are received together with the redemption request in proper form.
Share certificates are not issued for fractional shares.
INVESTOR SERVICES
Automatic Withdrawal Plan
If you purchase $10,000 or more of Fund shares, you may establish an
Automatic Withdrawal Plan to authorize a specified dollar amount to be paid
periodically to a designated payee. Under this Plan, all income dividends and
capital gains distributions will be reinvested in shares in your account at the
applicable payment dates' closing net asset value.
Your specified withdrawal payments are made monthly or quarterly (on or
about the 10th day) in any amount you choose, but not less than $100 per month
or $300 quarterly. Please note that any redemptions of your shares, which may
result in a gain or loss for tax purposes, may involve the use of principal,
and may eventually use up all of the shares in your account. Such payments do
not provide a guaranteed annuity and may be terminated for any shareholder if
the value of the account drops below $10,000 due to transfer or
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redemption of shares. In such a case, the shareholder will be notified that
the withdrawal payments will be terminated.
The cost of administering the Automatic Withdrawal Plan for the benefit of
shareholders is a Fund expense.
Retirement Plans
We offer a Prototype Pension and Profit Sharing Plan, including Keogh Plans,
IRAs, SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan support
services are available by calling us at 1-800-829-3863.
Exchange Privilege
You may exchange your Fund shares for shares of another Fund in the
Blanchard Group of Funds on the basis of relative net asset values per share at
the time of exchange. No fees are charged when you exchange from one Fund to
another within the Blanchard Group of Funds. Before making an exchange, you
should read the Prospectus concerning the Fund into which your exchange is being
made. The other funds currently offered in the Blanchard Group of Funds are
Blanchard Global Growth Fund, Blanchard Precious Metals Fund, Inc., Blanchard
100% Treasury Money Market Fund, Blanchard Short-Term Global Income Fund,
Blanchard American Equity Fund, Blanchard Flexible Income Fund, Blanchard
Short-Term Bond Fund, Blanchard Flexible Tax-Free Bond Fund and Blanchard
Emerging Markets & Income Fund.
To request an exchange by telephone, simply call 1-800-462-9102, prior to
4:00 P.M., New York time. Exchanges can be made in this manner only after you
have completed and sent to the Transfer Agent the telephone exchange
authorization form that is included on the New Account Application accompanying
this Prospectus and only if your account registration has not changed within the
last 30 days.
It is the Funds' policy to mail to you at your address of record, within
five business days after any telephone call transaction, a written confirmation
statement of the transaction. In order to protect itself and shareholders from
liability for unauthorized or fradulent telephone transactions, the Funds will
use reasonable procedures such as recording calls in an attempt to verify the
identity of a person making a telephone redemption request. As a result of the
Funds' policy, neither the Funds nor the Transfer Agent will be responsible for
any claims, losses or expenses for acting on telephone instructions that they
reasonably believe to be genuine. Since you may bear the risk of loss in the
event of an unauthorized telephone transaction, you should verify the accuracy
of telephone transactions immediately upon receipt of your confirmation
statement.
Exchanges can only be made between accounts with identical account
registration and in states where shares of the other fund are qualified for
sale. We do not place any limit on the number of exchanges that may be made and
charge no fee for effecting an exchange. The dollar amount of an exchange must
meet the initial investment requirement of the fund into which the exchange is
being made. All subsequent exchanges into that fund must be at least $1,000. We
may modify or suspend the Exchange Privilege at any time upon 60 days' written
notice.
Any exchange of shares is, in effect, a redemption of shares in one Fund and
a purchase of the other fund. You should consider the possible tax effects of an
exchange. To prevent excessive trading between Funds to the disadvantage of
other shareholders, we reserve the right to modify or terminate this Privilege
with respect to any shareholder.
A completed Purchase Application must be received by the Transfer Agent
before the Automatic Withdrawal Plan or Exchange Privilege may be used.
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HOW TO REDEEM
You may redeem your shares on any business day at the next determined net
asset value calculated after your redemption request has been accepted by the
Transfer Agent as described below.
By Telephone. You may redeem your shares by telephone if you call the
Transfer Agent at 1-800-462-9102, prior to 4:15 P.M., New York time. All calls
will be recorded. Redemptions of Fund shares can be made in this manner only
after you have executed and filed with the Transfer Agent the telephone
redemption authorization form which may be obtained from the Funds or the
Transfer Agent.
You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate. Should
you wish to revise these instructions, simply complete and file a new telephone
redemption authorization form. There is no charge for this service. As long as
the identification procedures described above are followed, neither the Funds
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that they reasonably believe to be genuine.
See "Investor Services--Exchange Privilege," for additional information with
respect to losses resulting from unauthorized telephone transactions.
You may also request, by placing a call to the applicable telephone number
set forth above, redemption proceeds to be wired directly to the bank account
that you have designated on the authorization form. The minimum amount that may
be redeemed in this manner is $1,000. A check for proceeds of less than $1,000
will be mailed to your address of record. The Funds do not impose a charge for
this service. However, the proceeds of a wire redemption may be subject to the
usual and customary charges imposed by United States Trust Company of New York
for the wiring of funds.
Under extraordinary market conditions, it may be difficult for you to redeem
your shares by telephone. Under these circumstances, you should consider
redeeming your shares by mail, as described below.
By Mail. All other redemption requests should be made in writing to the
Blanchard Group of Funds, c/o Mutual Funds Service Company (an affiliate of
United States Trust Company of New York), P.O. Box 2798, Boston, Massachusetts
02208-2798, the Funds' Transfer Agent. Where share certificates have been
issued, the certificates must be endorsed and must accompany the redemption
request. Signatures on redemption request for amounts in excess of $25,000 and
endorsed share certificates submitted for redemption must be accompanied by
signature guarantees from any eligible guarantor institution approved by the
Transfer Agent in accordance with its Standards, Procedures and Guidelines for
the Acceptance of Signature Guarantees ("Signature Guarantee Guidelines").
Eligible guarantor institutions generally include banks, broker-dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. All eligible guarantor institutions
must participate in the Securities Transfer Agents Medallion Program ("STAMP")
in order to be approved by the Transfer Agent pursuant to the Signature
Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from the Transfer Agent at 1-800-462-9102.
Signatures on redemption requests for any amount must be guaranteed (as
described above) if the proceeds are not to be paid to the registered owner at
the registered address, or the registered address has changed within the
previous 60 days. The letter of instruction or a stock assignment must specify
the account number and the exact number of shares or dollar amount to be
redeemed. It must be signed by all registered shareholders in precisely the same
way as originally registered. The letter of instruction must also include any
other supporting legal documents, if required, in the case of estates, trusts,
guardianships, custodianships, corporations, partnerships, pension or profit
sharing plans, or other organizations.
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General Information.
Your redemption request becomes effective when it is received in proper form
by the Transfer Agent prior to 4:15 P.M. New York time, or your redemption will
occur on the following business day. We will make payment for redeemed shares
within seven days after receipt by the Transfer Agent. However, we may delay the
forwarding of redemption proceeds on shares which were recently purchased until
the purchase check has cleared, which may take up to 15 days or more. We may
suspend the right of redemption when the New York Stock Exchange is closed or
when trading on the Exchange is restricted, and under certain extraordinary
circumstances in accordance with the rules of the SEC. Due to the relatively
high cost of handling small investments, we reserve the right upon 60 days'
written notice to involuntarily redeem, at net asset value, the shares of any
shareholder whose account has a value of less than $1,000, other than as a
result of a decline in the net asset value per share. We do not presently
contemplate making such involuntary redemptions and will not redeem any shares
held in tax-sheltered retirement plans in this category. We also reserve the
right upon notice to shareholders to charge a fee for any services provided
herein that are currently free of charge.
DISTRIBUTION OF SHARES OF THE FUNDS
Federated Securities Corp. is the principal distributor for shares of the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
Distribution Plan. According to the provisions of a distribution plan
adopted pursuant to Investment Company Act Rule 12b-1, the distributor may
select brokers and dealers to provide distribution and administrative services
as to shares of the Funds. The distributor may also select administrators
(including financial institutions, fiduciaries, custodians for public funds and
investment advisers) to provide administrative services. Administrative services
may include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as each Fund reasonably requests for its shares.
Brokers, dealers, and administrators will receive fees based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Board of Trustees, provided that for any period the total amount of fees
representing an expense to the Trust shall not exceed an annual rate of .50 of
1% of the average daily net assets of shares of each Fund held in the accounts
during the period for which the brokers, dealers, and administrators provide
services. Any fees paid by the distributor with respect to shares of a Fund
pursuant to the distribution plan will be reimbursed by the Trust from the
assets of the shares of that Fund.
The distributor will, periodically, uniformly offer to pay cash or
promotional incentives in the form of trips to sales seminars at luxury resorts,
tickets or other items to all dealers selling shares of the Funds. Such payments
will be predicated upon the amount of shares of the Funds that are sold by the
dealer. Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of a Fund.
Administrative Arrangements. The distributor may pay financial institutions
a fee based upon the average net asset value of shares of their customers
invested in the Trust for providing administrative services. This fee, if paid,
will be reimbursed by VCM and not the Trust.
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Glass-Steagall Act. The Glass-Steagall Act prohibits a depository
institution (such as a commercial bank or a savings and loan association) from
being an underwriter or distributor of most securities. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions from acting in
the administrative capacities described above or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
appropriate changes in the administrative services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to state
law.
Administrative Services. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate each Fund and the separate classes. Such
services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
Maximum Average Aggregate Daily Net
Administrative Fee Assets of the Trust
- ------------------ ---------------------------
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$75,000 per Fund. Federated Administrative Services may voluntarily waive a
portion of its fee.
Transfer Agent and Dividend Disbursing Agent. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the Shares of the Funds and
dividend disbursing agent for the Funds.
Expenses of the Funds
Each Fund pays all of its own expenses and its allocable share of the
Trust's expenses.
The Trust's expenses for which holders of shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust; Trustees fees; auditors' fees; the cost of
meetings of Board members; legal fees of the Trust; association membership dues
and such nonrecurring and extraordinary items as may arise.
Each Fund's expenses for which holders of shares may pay their allocable
portion include, but are not limited to: registering each Fund and shares of the
Fund; investment advisory services; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; and such nonrecurring and extraordinary
items as may arise.
TAX MATTERS
The Funds intend to qualify each year and elect to be treated as separate
"regulated investment companies" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). A regulated investment company that
distributes all of its taxable income to its shareholders in accordance with the
timing requirements imposed by the Code, which the Funds intend to do, is not
subject to Federal income tax on the amounts so distributed. If for any taxable
year a Fund does not qualify for the treatment as a
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regulated investment company, all its taxable income will be subject to tax at
regular corporate rates without any deduction for distributions to its
shareholders, and such distributions, in turn, will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Because the Funds invest all their assets in
Portfolios which are classified as partnerships for federal income tax purposes,
each will be deemed to own a proportionate share of the income of the Portfolio
in which it invests, for purposes of determining whether it qualifies as a
regulated investment company.
The Trust is organized as a Massachusetts business trust and, under current
law, is not liable for any income or franchise tax in the Commonwealth of
Massachusetts as long as each Fund (and each other series of the Trust)
qualifies as a regulated investment company under the Code.
Distributions by a Fund of its ordinary income (net of expenses) and the
excess, if any, of its net short-term capital gain over its net long-term
capital loss are generally taxable to shareholders as ordinary income. Such
distributions are treated as dividends for Federal income tax purposes. A
portion of the ordinary income dividends paid by a Fund with respect to a given
year (essentially, the portion attributable to qualifying dividends received by
the underlying Portfolio from domestic corporations during the year) may qualify
for the 70% dividends-received deductions for corporate shareholders.
Distributions by a Fund of the excess, if any, of its net long-term capital gain
over its net short-term capital loss are designated as capital gain dividends
and are taxable to shareholders as long-term capital gains, regardless of their
holding periods in their shares. Ordinary income and capital gain dividends from
a Fund may also be subject to state and local taxes.
Investors should carefully consider the tax implications of purchasing
shares just prior to a dividend record date. Investors purchasing shares just
prior to an ordinary income or capital gain dividend record date will be taxed
on the entire dividend received, even though their cost for shares already
reflected the amount of such dividend.
Distributions to shareholders will be treated in the same manner for Federal
income tax purposes whether received in cash or reinvested in additional Fund
shares. In general, distributions by a Fund are taken into account by
shareholders in the year in which they are made. However, certain distributions
made during January will be treated as having been paid by a Fund and received
by its shareholders on December 31 of the preceding year. A statement setting
forth the federal income tax status of all distributions made (or deemed made)
during the year, including the allocation to ordinary income dividends (and any
portion thereof which qualifies for the dividends-received deduction for
corporations) and capital gain dividends, will be sent to each Fund's
shareholders promptly after the end of each year.
A shareholder will recognize gains or losses upon the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss realized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received on such shares. All or a portion
of any loss realized upon a taxable disposition of shares of a Fund may be
disallowed if other shares of the Fund are purchased within 30 days before or
after such disposition.
Under the back-up withholding rules of the Code, a shareholder may be
subject to 31% withholding of Federal income tax on dividends and redemption
payments made by a Fund. To avoid this back-up withholding, you must provide
your Fund with a correct taxpayer identification number (which for an individual
is usually one's Social Security number) or certify that you are a corporation
or otherwise exempt from or not subject to back-up withholding.
The foregoing discussion of Federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus and is subject to
change by legislative or administrative action. You
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should also review the more detailed discussion of Federal income tax
considerations in the Statement of Additional Information for your Fund. In
addition, you should consult with your own tax advisor as to the tax
consequences of investing in the Funds, including the application of state and
local taxes to you, which may differ from the Federal income tax consequences
described above.
PERFORMANCE COMPUTATION INFORMATION
Advertisements and communications to investors regarding the Funds may cite
certain performance, ranking and rating information of the Funds and the
Portfolios and may make performance comparisons to other funds or to relevant
indices, as described below.
Total Return. Cumulative total return data is computed by considering all
elements of return, including reinvestment of dividends and capital gains
distribution, over a stated period of time. Cumulative total return figures are
not annualized and represent the aggregate percentage or dollar value change
over the period in question.
Average annual return will be quoted for at least the one, five and ten year
periods ending on a recent calendar quarter (or if such periods have not yet
elapsed, at the end of a shorter period corresponding to the life of the Fund
for performance purposes). Average annual total return figures are annualized
and, therefore, represent the average annual percentage change over the period
in question.
Comparative Results. From time to time in advertisements or sales material,
a Fund may discuss its performance rating and may be compared to the performance
of other mutual funds or mutual fund indexes as published by widely recognized
independent mutual fund reporting services. In addition, because the Funds
invest 100% of their assets in the Portfolios which have identical investment
objectives, each Fund may cite the performance and ranking information of its
Portfolio (which includes the performance of predecessor mutual funds prior to
their conversion to the Portfolios) and may make certain performance, ranking
and rating comparisons. The Funds may also discuss the past performance, ranking
and rating of the Portfolio Adviser, and compare its performance to various
investment indexes. The Funds may use performance information as reported in
publications of general interest, national financial and industry publications.
In addition, a Fund may compare its total return, or the total return of indexes
of U.S. markets, world markets, individual countries undergoing privatization,
or of world indexes of countries undergoing privatization, to that of other
mutual funds, individual country indexes, or other recognized indexes.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications. The Funds may also compare the historical returns on various
investments, performance indexes of those investments or economic indicators. In
addition, a Fund may reprint articles about the Fund and provide them to
prospective shareholders. The Distributor may also make available economic,
financial and investment reports to shareholders and prospective shareholders.
In order to describe these reports, the Funds may include descriptive
information on the reports in advertising literature sent to the public prior to
the mailing of a prospectus. Performance information may be quoted numerically
or may be presented in a table, graph, chart or other illustration.
ADDITIONAL INFORMATION ABOUT THE FUNDS
AND THE PORTFOLIOS
The Funds
The Funds are non-diversified series of Blanchard Funds, a Massachusetts
business trust organized on January 24, 1986 (the "Trust"), which currently
consists of ten series of shares. The other series of the
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Trust's shares of beneficial interest, which are offered pursuant to a separate
prospectus, are Blanchard Global Growth, Blanchard 100% Treasury Money Market,
Blanchard Short-Term Global Income, Blanchard American Equity, Blanchard
Flexible Income, Blanchard Short-Term Bond, Blanchard Flexible Tax-Free Bond
Fund and Blanchard Worldwide Emerging Markets Fund.
The Funds are classified as "non-diversified" investment companies under the
1940 Act, which means that each Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. The Funds intend, however, to comply with the diversification
requirements imposed by the U.S. Internal Revenue Code of 1986, as amended, for
qualification as a regulated investment company. See "Tax Matters" in the
Prospectus and in the Statements of Additional Information.
Investor Meetings and Voting
Under Massachusetts law, the Trust and its series are generally not required
to hold annual or special shareholder meetings. However, special meetings of
shareholders may be held for such purposes as electing trustees, changing
fundamental policies, approving an investment management/advisory agreement or
approving a distribution and marketing plan, if any, and, at the request of the
shareholders, to replace trustees. Shareholders holding 10% or more of the
Trust's outstanding shares may call a special meeting of shareholders.
Shareholders may remove trustees from office whenever not less than two-thirds
of the outstanding shares either present a written declaration to the Transfer
Agent or vote at a meeting called for this purpose. Shareholders shall be given
access to a list of the names and addresses of all other shareholders, the
number of shareholders and the cost of mailing a request to them.
Whenever a vote is requested on matters pertaining to a Portfolio, the Trust
will hold a meeting of that Fund's shareholders and will cast its vote as
instructed by such Fund's shareholders. Shares of a Fund for which no voting
instructions have been received will be voted in the same proportion as those
shares for which voting instructions are received. As with any mutual fund,
other investors in that Portfolio could control the results of voting at the
Portfolio level.
Each Fund's shares represent shares of beneficial interest. Each share has
equal rights with respect to voting matters of that Fund. In the event of
dissolution or liquidation of a Fund, holders of Fund shares will receive pro
rata, subject to the rights of creditors, the proceeds of the sale of the Fund's
assets less its liabilities. There are no preemptive or conversion rights
applicable to the shares of the Funds. Shares of the Funds, when issued, will be
fully paid, non-assessable and transferable. The trustees may create additional
series or classes of shares without shareholder approval. Each series of the
Trust is responsible only for its own expenses and operating costs and incurs no
liability with respect to the expenses and costs of any other series, other than
those which affect the series as a group and are allocated among the series
based upon their relative average net assets during the year.
The Portfolios
Each Portfolio is organized as a trust under the laws of the State of New
York. Each Portfolio's Declaration of Trust provides that the Funds and other
entities investing in the Portfolios (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Portfolio. However, the risk of a
Fund's incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the trustees believe
that neither the Funds nor their shareholders will be adversely affected by
reason of the Funds' investing in the Portfolios.
Unique Characteristics of the Fund and Portfolio Structure
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, each Fund is an open-end investment management company
which seeks to achieve its investment objectives by
22
<PAGE>
investing 100% of its assets in a Portfolio, which is a separate registered
investment company with identical investment objectives as the Fund. The
investment objectives of the Funds and the Portfolios may not be changed without
shareholder approval. Shareholders will be provided with written notice 30 days
prior to any such changes in investment objectives. Therefore, an investor's
interest in a Portfolio's securities is indirect. In addition to selling a
beneficial interest to a Fund, a Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in
that Portfolio on the same terms and conditions and will pay a proportionate
share of the Portfolio's expenses. However, other investors investing in a
Portfolio are not required to buy their shares at the same public offering
prices as the Funds. Investors in the Funds should be aware that these
differences may result in differences in returns experienced by investors in the
different funds that invest in the Portfolios. Such differences in returns are
also present in other mutual fund structures.
Small funds investing in the Portfolios may be materially affected by the
actions of larger funds investing in the Portfolios. For example, if a large
fund withdraws from a Portfolio, the remaining funds may experience higher pro
rata operating expenses, thereby producing lower returns. Additionally, a
Portfolio may become less diverse, resulting in increased portfolio risk.
(However, this possibility also exists for traditionally structured funds which
have large or institutional investors.) Also, funds with a greater pro rata
ownership in a Portfolio could have effective voting control of the operations
of that Portfolio. Certain changes in a Portfolio's investment objectives,
policies or restrictions may require a Fund to redeem its investment in that
Portfolio. Any such withdrawal could result in a distribution in kind of
portfolio securities (as opposed to a cash distribution from the Portfolio). A
Fund could incur brokerage fees or other transaction costs in converting such
securities to cash. The distribution in kind may also result in a less
diversified portfolio of investments or adversely affect the liquidity of a
Fund. In addition, the investment of a Fund may be withdrawn from a Portfolio at
any time if the Board of Trustees determines that it is in the best interest of
that Fund to do so. Upon any such withdrawal, the Board of Trustees would
consider what action might be taken, including the investment of all of the
assets of such Fund in another pooled investment entity having the same
investment objectives as the Fund or retaining an investment adviser to manage
that Fund's assets in accordance with the investment policies of the Portfolio.
In addition to the Funds, other mutual funds invest in the Portfolios.
Information on these other feeder funds may be obtained by calling
1-800-348-4782. See "Investment Objectives and Polices", "Additional Information
on Investment Policies, Techniques and Risk Factors" and "Management of the
Trust" for more information.
OTHER INFORMATION
This Prospectus omits certain information contained in the registration
statement of the Funds filed with the SEC. Copies of the registration statement,
including items omitted herein, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations. The Statements of Additional
Information included in the registration statement may be obtained without
charge from the Funds.
For information about the trustees and officers of the Funds and the
Portfolios see the Statements of Additional Information.
The Code of Ethics of the Portfolio Adviser and the Funds prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Code of Ethics of both the Funds and
Portfolio Adviser is that their operations be carried out for the exclusive
benefit of the Funds' shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.
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<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statements of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by the Funds. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.
Counsel and Independent Accountants. The firm of Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel, 919 Third Avenue, New York, New York 10022, is legal
counsel for the Funds. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, has been appointed the independent accountants for the
Funds.
24
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APPENDIX A
Description of Futures Contracts and Options Thereon
Futures Contracts. A futures contract is a bilateral agreement providing
for the purchase and sale of a specified type and amount of a financial
instrument, or, in the case of futures contracts on indexes of securities, for
the making and acceptance of a cash settlement, at a stated time in the future
for a fixed price. By its terms, a futures contract provides for a specified
settlement date on which, in the case of the majority of interest rate futures
contracts, the fixed income securities underlying a contract are delivered by
the seller and paid for by the purchaser, or on which, in the case of a stock
index futures contract, an amount equal to a dollar amount multiplied by the
difference between the value of a stock index at the close of the last trading
day of the contract and the value of such index at the time the futures contract
was originally entered into is settled between the purchaser and seller in cash.
The purchase or sale of a futures contract differs from the purchase or sale of
a security in that no purchase price is paid or received at the time the
contract is entered into. Instead, an amount of cash or cash equivalents, the
value of which may vary but is generally equal to 2% or less of the value of the
contract, must be deposited with the broker as initial deposit or "margin".
Subsequent payments to and from the broker, referred to as "variation margin",
are made on a daily basis as the value of the index underlying the futures
contract fluctuates, making positions in the futures contract more or less
valuable, a process known as "marking to the market".
At any time prior to the expiration of a futures contract, a trader may
elect to close out its position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is made and
any loss experienced by a party is required to be paid to the exchange clearing
corporation, while any profit due to a party must be delivered to it.
Futures contracts differ from options (which are described below) in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures contracts call for settlement
only on the expiration date, and cannot be "exercised" at any other time during
their term.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to enter into a
"long" position in the underlying futures contract (i.e., a purchase of such
futures contract) in the case of an option to purchase (a "call" option), or a
"short" position in the underlying futures contract (i.e., a sale of such
futures contract) in the case of an option to sell (a "put" option), at a fixed
price (the "strike price") up to a stated expiration date. The holder pays a
non-refundable purchase price for the option, known as the "premium". The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
Upon exercise of the option by the holder, the exchange clearing corporation
establishes a corresponding short position for the seller (the "writer") of the
option in the case of a call option, or a corresponding long position in the
case of a put option. In the event that an option is exercised, the parties will
be subject to all the risks associated with the trading of futures contracts,
such as payment of variation margin deposits. In addition, the writer of an
option on a futures contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
An option, whether based on a futures contract, a stock index or an equity
security, becomes worthless to the holder when it expires. A position in an
option may be terminated by the purchaser or seller prior to expiration by
effecting a closing purchase or sale transaction subject to the availability of
a secondary market, which is the purchase or sale of an option of the same
series (i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid and
received represents the party's profit or loss on the transaction.
A-1
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STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GLOBAL GROWTH FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
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This Statement is not a prospectus but should be read in conjunction
with the current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to
which Blanchard Global Growth Fund (the "FUND") is offered. Please retain this
document for future reference.
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To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
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Investment Objective and Policies............................................ 2
Investment Restrictions...................................................... 14
Portfolio Transactions....................................................... 16
Computation of Net Asset Value............................................... 17
Performance Information...................................................... 18
Additional Purchase and Redemption Information............................... 19
Tax Matters.................................................................. 19
The Management of the FUND................................................... 26
Management Services.......................................................... 30
Sector Management Services................................................... 31
Administrative Services...................................................... 32
Distribution Plan............................................................ 32
Description of the FUND...................................................... 33
Shareholder Reports.......................................................... 34
Appendix A...................................................................A-1
Financial Statements.........................................................B-1
Manager
Virtus Capital Management, Inc.
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the FUND are set forth in the FUND's
Prospectus which refers to the following investment strategies and additional
information:
Options and Futures Strategies
Through the writing and purchase of options and the purchase and sale
of stock index futures contracts, interest rate futures contracts, foreign
currency futures contracts and related options on such futures contracts, Virtus
Capital Management, Inc. ("VCM") may at times seek to hedge against a decline in
the value of securities included in the FUND's portfolio or an increase in the
price of securities which it plans to purchase for the FUND or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce the FUND's current
return.
The ability of the FUND to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices, U.S.
Government securities and foreign currencies are relatively new and still
developing. Although a FUND will not enter into an option or futures position
unless a liquid secondary market exists for such option or futures contract is
believed by FUND management to exist. There is no assurance that the FUND will
be able to effect closing transactions at any particular time or at an
acceptable price. Reasons for the absence of a liquid secondary market on an
Exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; (v) the facilities
of an Exchange or the Options Clearing Corporation ("OCC") may not at all times
be adequate to handle current trading volume; or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market thereon would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC as
a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Low initial margin deposits made upon the opening of a futures position
and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent the FUND
purchases or sells futures contracts and options on futures contracts and
purchases and writes options on securities and securities indexes for hedging
purposes, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in the
value of securities held by the FUND or decreases in the prices of securities
the FUND intends to acquire. It is impossible to predict the amount of trading
interest that may exist in various types of options or futures. Therefore, no
assurance can be given that the FUND will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, the FUND's ability to
engage in options and futures transactions may be limited by tax considerations.
Although the FUND will only engage in options and futures transactions for
limited purposes, it will involve certain risks which are described in the
Prospectus. The FUND will not engage in options and futures transactions for
leveraging purposes.
Writing Covered Options on Securities
The FUND may write covered call options and covered put options on
optionable securities (stocks, bonds, foreign exchange, related futures, options
and options on futures) of the types in which it is permitted to invest in
seeking to attain its objective. Call options written by the FUND give the
holder the right to buy the underlying securities from the FUND at a stated
exercise price; put options give the holder the right to sell the underlying
security to the FUND at a stated price.
The FUND may write only covered options, which means that, so long as
the FUND is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable
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<PAGE>
securities satisfying the cover requirements of securities exchanges). In the
case of put options, the FUND will maintain, in a segregated account, cash or
short-term U.S. Government securities with a value equal to or greater than the
exercise price of the underlying securities or will hold a purchased put option
with a higher strike price than the put written. The FUND may also write
combinations of covered puts and calls on the same underlying security.
The FUND will receive a premium from writing a put or call option,
which increases the FUND's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the FUND
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the FUND assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its market value at the
time it is exercised resulting in a potential capital loss if the purchase price
is greater than the underlying securities current market value minus the amount
of the premium received, unless the security subsequently appreciates in value.
The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The FUND will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option. In
the case of a put option, any loss so incurred may be partially or entirely
offset by the premium received from a simultaneous or subsequent sale of a
different put option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by unrealized appreciation of the underlying security owned
by the FUND.
Options written by the FUND will normally have expiration dates not
more than one year from the date written. The exercise price of the options may
be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. The FUND may engage in buy-and-write
transactions in which the FUND simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, the FUND's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
FUND for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, the FUND's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and the FUND may or may not realize a loss.
To the extent that a secondary market is available on the Exchanges,
the covered call option writer may liquidate his position prior to the
assignment of an exercise notice by entering a closing purchase transaction for
an option of the same series as the option previously written. The cost of such
a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
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<PAGE>
Purchasing Put and Call Options on Securities
The FUND may purchase put options to protect its portfolio holdings in
an underlying security against a decline in market value. Such hedge protection
is provided during the life of the put option since the FUND, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the FUND will reduce any
profit it might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
The FUND may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the FUND, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the FUND will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Purchase and Sale of Options and Futures on Stock Indices
The FUND may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices. Options are also traded in certain industry or market segment indices
such as the Oil Index, the Computer Technology Index and the Transportation
Index.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Sector Portfolio Managers (the "Sector Managers") expect general
stock market prices to rise, they might purchase a call option on a stock index
or a futures contract on that index as a hedge against an increase in prices of
particular equity securities they want ultimately to buy. If in fact the stock
index does rise, the price of the particular equity securities intended to be
purchased may also increase, but that increase would be offset in part by the
increase in the value of the FUND's index option or futures contract resulting
from the increase in the index. If, on the other hand, the Sector Managers
expect general stock market prices to decline, they might purchase a put option
or sell a futures contract on the index. If that index does in fact decline, the
value of some or all of the equity securities in the FUND's portfolio may also
be expected to decline, but that decrease would be offset in part by the
increase in the value of the FUND's position in such put option or futures
contract.
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Purchase and Sale of Interest Rate Futures
The FUND may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
The FUND may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The FUND
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
FUND will purchase securities upon termination of the futures contract.
The FUND may sell U.S. dollar and non-U.S. dollar interest rate futures
contracts in anticipation of an increase in the general level of interest rates.
Generally, as interest rates rise, the market value of the fixed income
securities held by the FUND will fall, thus reducing the net asset value of the
FUND. This interest rate risk can be reduced without employing futures as a
hedge by selling long-term fixed income securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the FUND in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of the FUND's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the FUND's investments which are being
hedged. While the FUND will incur commission expenses in entering and closing
out futures positions (which is done by taking an opposite position from the one
originally entered into, which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures Contracts
The FUND may purchase and write call and put options on stock index and
interest rate futures contracts. The FUND may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing and selling the underlying futures. For example, the FUND may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the FUND intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, the FUND may buy or sell foreign currencies or may deal in forward
currency contracts. The FUND may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, the FUND may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, the FUND may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the FUND intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the FUND
will be covered.
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A currency futures contract sale creates an obligation by the FUND, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the FUND, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The FUND will write (sell) only covered put and call options on
currency futures. This means that the FUND will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The FUND will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the FUND in cash, Treasury
bills, or other high-grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high-grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times the
number of options written by the FUND. In the case of put options on currency
futures written by the FUND, the FUND will hold the aggregate exercise price in
cash, Treasury bills, or other high-grade short-term obligations in a segregated
account with its custodian, or own put options on currency futures or short
currency futures, with the difference, if any, between the market value of the
put written and the market value of the puts purchased or the currency futures
sold maintained by the FUND in cash, Treasury bills or other high-grade
short-term obligations in a segregated account with its custodian. If at the
close of business on any day the market value of the put options purchased or
the currency futures sold by the FUND falls below 100% of the market value of
the put options written by the FUND, the FUND will so segregate an amount of
cash, Treasury bills or other high-grade short-term obligations equal in value
to the difference.
If other methods of providing appropriate cover are developed, the FUND
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the FUND will be required to deposit as "initial margin" an amount
of cash and short-term U.S. Government securities generally equal to from 5% to
10% of the contract amount. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
enhance investment performance and for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward contracts,
will be utilized as described above. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the FUND may purchase put options on the foreign currency.
If the value of the currency does decline, the FUND will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
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Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the FUND may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the FUND deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the FUND could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Also, where the FUND anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the FUND
could write a put option on the relevant currency which, if the currency moves
in the manner projected, will expire unexercised and allow the FUND to hedge
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the FUND would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the FUND also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian, which acts as the FUND's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the FUND has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
or the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the FUND in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated account
with its custodian or with a designated sub-custodian.
Mortgage and Asset-Backed Securities
Subject to the approval of the Board of Trustees of the FUND, the FUND
may invest in foreign mortgage-backed and asset-backed securities. The FUND will
only purchase mortgage-backed and asset-backed securities which, in its opinion,
equate generally to U.S. standards of "investment grade" obligations.
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including pass-through securities and collateralized mortgage
obligations. The yield and credit characteristics of mortgage-backed securities
differ in a number of respects from traditional debt securities.
Asset-backed securities have similar structural characteristics to
mortgage-backed securities. However, the underlying assets are not mortgage
loans or interests in mortgage loans but include assets such as motor vehicle
installment sales or installment loan contracts, leases of various types of real
and personal property, and receivables from revolving credit (credit card)
agreement.
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Repurchase Agreements
Repurchase agreements are transactions by which the FUND purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven days) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed upon resale price and marked-to-market daily) of the underlying
security. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the FUND in
connection with bankruptcy proceedings) it is the policy of the FUND to limit
repurchase agreements to those member banks of the Federal Reserve System and
primary dealers in U.S. Government securities who are believed by the FUND's
Trustees to present minimum credit risk. Repurchase agreements maturing in more
than seven days are considered, for the purposes of the FUND's investment
restrictions, to be illiquid securities. No more than 10% of the FUND's net
assets may be held in illiquid securities (see "Investment Restrictions").
Forward Foreign Currency Exchange Contracts
The value of the assets of the Foreign Securities, Precious Metals
Securities and Bullion, Emerging Markets and Foreign Fixed Income Securities
investment sectors of the FUND as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the FUND may incur costs in connection with
conversions between various currencies.
The FUND may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the FUND from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The FUND may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when the FUND believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the FUND's securities denominated in such foreign
currency, or when the FUND believes that the U.S. dollar may suffer a
substantial decline against foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation, the FUND may, in the alternative, enter
into a forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where it believes that the U.S. dollar value of the currency to be
sold pursuant to the forward contract will fall whenever there is a decline in
the U.S. dollar value of the currency in which portfolio securities of the
sector are denominated ("cross-hedge"). If the FUND enters into a position
hedging transaction, cash not available for investment or U.S. Government
Securities or other high quality debt securities will be placed in a segregated
account in an amount sufficient to cover the FUND's net liability under such
hedging transactions. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the FUND's commitment
with respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, the FUND may purchase a call
option permitting it to purchase the amount of foreign currency being hedged by
a forward sale contract at a price no higher than the forward contract price or
the FUND may purchase a put option permitting it to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices would
result in lower overall performance for the FUND than if it had not entered into
such contracts.
While the pursuit of foreign currency gain is not a primary objective
of the FUND, the FUND may, from time to time, hold foreign currency to realize
such gains. (These gains constitute non-qualifying income that is subject to the
10% limitation with respect to the "Income Requirements" of Subchapter M of the
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Internal Revenue Code of 1986, as amended, which is discussed herein under
"Dividends, Capital Gains Distributions and Tax Matters".)
The FUND will enter into forward foreign currency exchange contracts as
described hereafter. When the FUND enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to establish
the U.S. dollar cost or proceeds. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the FUND will be able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships.
When one of the Sector Managers believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of foreign
currency approximating the value of some or all of the FUND's portfolio
securities denominated in such foreign currency. The forecasting of short-term
currency market movement is extremely difficult and the successful execution of
a short-term hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall strategies.
However, the Trustees of the FUND believe that it is important to have the
flexibility to enter into such forward contracts when the Sector Managers
determine that the best interests of the FUND will be served.
Generally, the FUND will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, the FUND may either sell the portfolio security and make delivery of
the foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the FUND to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the FUND to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the FUND is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the FUND is obligated to
deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the FUND
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the FUND enters into an offsetting contract for
the purchase of the foreign currency, the FUND will realize a gain to the extent
the price of the currency the FUND has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the FUND
will suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.
The FUND's dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the FUND is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sector Managers. It also should be realized that this method of protecting
the value of the FUND's portfolio securities against the decline in the value of
a currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase.
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Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the FUND may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent the
FUND from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the FUND to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in
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the FUND's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States and the United Kingdom, (d) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (e) lesser trading volume.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
During the coming year, the FUND may invest up to 10% of its total
assets in restricted securities issued under Section 4(2) of the Securities Act,
which exempts from registration "transactions by an issuer not involving any
public offering". Section 4(2) instruments are restricted in the sense that they
can only be resold through the issuing dealer and only to institutional
investors; they cannot be resold to the general public without registration.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. FUND management anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the
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marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Regulatory Matters
In connection with its proposed futures and options transactions, the
FUND has filed with the Commodity Futures Trading commission ("CFTC") a notice
of eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
FUND has represented in its notice of eligibility that:
(i) it will not purchase or sell futures or
options on futures contracts or stock
indices if as a result the sum of the
initial margin deposits on its existing
futures contracts and related options
positions and premiums paid for options on
futures contracts or stock indices would
exceed 5% of the FUND's assets; and
(ii) with respect to each futures contract
purchased or long position in an option
contract, the FUND will set aside in a
segregated account cash or cash equivalents
in an amount equal to the market value of
such contracts less the initial margin
deposit.
The Staff of Securities and Exchange Commission ("Commission") has
taken the position that the purchase and sale of futures contracts and the
writing of related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section 18
if an investment company:
(i) sells futures contracts to offset expected
declines in the value of the investment
company's portfolio securities, provided the
value of such futures contracts does not
exceed the total market value of those
securities (plus such additional amount as
may be necessary because of differences in
the volatility factor of the portfolio
securities vis a vis the futures contracts);
(ii) writes call options on futures contracts,
stock indexes or other securities, provided
that such options are covered by the
investment company's holding of a
corresponding long futures position, by its
ownership of portfolio securities which
correlate with the underlying stock index,
or otherwise;
(iii) purchases futures contracts, provided the
investment company establishes a segregated
account ("cash segregated account")
consisting of cash or cash equivalents in an
amount equal to the total market value of
such futures contracts less the initial
margin deposited therefor; and
(iv) writes put options on futures contracts,
stock indices or other securities, provided
that such options are covered by the
investment company's holding of a
corresponding short futures position, by
establishing a cash segregated account in an
amount equal to the value of its obligation
under the option, or otherwise.
The FUND will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the foregoing.
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Additional Information Regarding Precious Metals and Precious Metals Securities
The production and marketing of gold and precious metals may be
affected by the action of certain governments and changes in existing
governments. For example, the mining of gold is highly concentrated in a few
countries. In current order of magnitude of production of gold bullion, the five
largest producers of gold are the Republic of South Africa, certain republics of
the former Soviet Union, Canada, Brazil and the United States. Economic and
political conditions prevailing in these countries may have a direct effect on
the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the FUND will invest will be located within the United States and Canada.
Prices of Precious Metals Securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals. This
is due to the fact that the costs of mining precious metals remain relatively
fixed, so that an increase or decrease in the price of precious metals has a
direct and greater than proportional effect on the profitability of precious
metals mining companies. Investments tied to precious metals characteristically
involve high risk because of precious metals' price volatility. The price of
precious metals is affected by factors such as cyclical economic conditions,
political events and monetary policies of various countries. During periods of
rising precious metals prices, the Fund will tend to emphasize investments in
Precious Metals Securities.
Under South African law, the only authorized sales agent for gold
produced in South Africa is the Reserve Bank of South Africa, which through its
retention policies controls the time and place of any sale of South African
bullion. The South African Ministry of Mines determines gold mining policy.
South Africa depends predominantly on gold sales for the foreign exchange
necessary to finance its imports, and its sales policy is necessarily subject to
national economic and political developments.
Investments in Emerging Countries
The Emerging Markets sector of the FUND may invest indirectly in
securities of emerging country issuers through sponsored or unsponsored American
Depository Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other
types of Depository Receipts (which, together with ADRs and GDRs, are
hereinafter referred to as "Depository Receipts"). Depository Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depository Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depository Receipts.
Investing in emerging country securities involves certain
considerations not typically associated with investing in securities of U.S.
companies, including (1) restrictions on foreign investment and on repatriation
of capital invested in emerging countries, (2) currency fluctuations, (3) the
cost of converting
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foreign currency into U.S. dollars, (4) potential price volatility and lesser
liquidity of shares traded on emerging country securities markets and (5)
political and economic risks, including the risk of nationalization or
expropriation of assets and the risk of war. In addition, accounting, auditing,
financial and other reporting standards in emerging countries are not equivalent
to U.S. standards and, therefore, disclosure of certain material information may
not be made and less information may be available to investors investing in
emerging countries than in the United States. There is also generally less
governmental regulation of the securities industry in emerging countries than in
the United States. Moreover, it may be more difficult to obtain a judgment in a
court outside the United States. Interest and dividends paid on securities held
by the FUND and gains from the disposition of such securities may be subject to
withholding taxes imposed by emerging market countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries; however, securities traded in such markets
often have provided higher rates of return to investors. VCM believes that these
characteristics may be expected to continue in the future.
Portfolio Turnover
Generally, the FUND's portfolio turnover rate is not expected to exceed
100%. A 100% portfolio turnover rate would occur if 100% of the securities owned
by the FUND were sold and either repurchased or replaced by it within one year.
However, the Fund may experience a temporary increase in portfolio turnover and
incur some additional transaction costs as a result of the restructuring
approved by the Fund's shareholders on January 15, 1992 as the new portfolio
managers invest Fund assets transferred to their management. The FUND's
portfolio turnover rate is, generally, the percentage computed by dividing the
lesser of FUND's purchases or sales exclusive of short-term securities and
bullion, by the average value of the FUND's total investments exclusive of
short-term securities and bullion. The portfolio turnover rates for the fiscal
years ended April 30, 1995 and 1994 were 221% and 166%, respectively. The Fund's
portfolio's turnover rate for the fiscal years ended April 30, 1995 and 1994 was
higher than normal due to volatile foreign markets. High portfolio turnover
involves correspondingly greater brokerage commissions, other transaction costs,
and a possible increase in short-term capital gains or losses. Shareholders are
taxed on any such net gains at ordinary income rates. Because any capital gains
realized would be distributed to shareholders at year-end, shareholders should
consider the impact of such distributions on their own tax position.
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the Investment
Company Act of 1940, as amended) of the outstanding shares of the FUND. As used
in the Prospectus and the Statement of Additional Information, the term
"majority of the outstanding shares" of the FUND means, respectively, the vote
of the lesser of (i) 67% or more of the shares of the FUND present at a meeting,
if the holders of more than 50% of the outstanding shares of the FUND are
present or represented by proxy, or (ii) more than 50% of the outstanding shares
of the FUND. The following are the FUND's investment restrictions set forth in
their entirety.
1. As a non-diversified management investment company, the FUND has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND may not invest more than 25% of the market value
of its total assets in a single issuer (except the securities of the U.S.
Government, its agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within
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any one industry as such industries are defined in the SIC/SEC Industries Code;
or (d) more than 5% of total assets would be invested in warrants or rights.
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 10% of the market
value of its total assets). The FUND will not purchase additional securities
while borrowing is in excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities other than (a)
through the purchase of publicly distributed debt securities in accordance with
its investment objective and (b) through repurchase agreements.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities.
6. The FUND may not knowingly purchase or otherwise acquire securities
which are subject to legal or contractual restrictions on resale or for which
there is no readily available market if, as a result thereof, more than 10% of
the net assets of the FUND (taken at market value) would be invested in such
securities, including repurchase agreements in excess of 7 days.
7. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
8. The FUND may not purchase or sell commodity contracts, except to the
extent that forward foreign currency exchange contracts are deemed to be
commodity contracts. (See "Investment Objective and Policies - Forward Foreign
Currency Exchange Contracts").
9. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales.
10. The FUND may not invest in companies for the purpose of exercising
control or management.
11. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
12. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities.
13. The FUND may not purchase or sell real estate (although it may
purchase securities secured by real estate interests or interests therein, or
issued by companies or investment trusts which invest in real estate or
interests therein).
14. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs; provided, however, that if consistent with
the objective of the FUND, the FUND may purchase securities of issuers whose
principal business activities fall within such areas.
15. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment
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<PAGE>
by terminating sales of its shares in the state(s) involved. Pursuant to one
such commitment, the Trust has agreed that the FUND will not: (1) invest in
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the FUND's net assets, and no more than 2% of such value may be warrants which
are not listed on the New York or American Stock Exchanges; and (2) make direct
investments in oil, gas or other mineral leases.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by each of the Sector Portfolio Managers subject to the
supervision of VCM and the Trustees and pursuant to authority contained in the
Investment Advisory Contract and Sub-Advisory Agreement between the FUND and VCM
and VCM and the Sector Managers. In selecting such brokers or dealers, the
Sector Managers will consider various relevant factors, including, but not
limited to the best net price available, the size and type of the transaction,
the nature and character of the markets for the security to be purchased or
sold, the execution efficiency, settlement capability, financial condition of
the broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Sector Managers for the FUND's
use. Those services may include economic studies, industry studies, security
analysis or reports, sales literature and statistical services furnished either
directly to the FUND or to the Sector Managers. Such allocation shall be in such
amounts as VCM shall determine and the Sector Managers shall report regularly to
VCM who will in turn report to the Trustees on the allocation of brokerage for
such services. The Trustees must determine that such services are reasonable and
necessary to the FUND's normal operations.
The receipt of research from broker-dealers may be useful to the Sector
Managers in rendering investment management services to their other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of the Sector Managers' other clients may be useful to the
Sector Managers in carrying out their obligations to the FUND. The receipt of
such research may not reduce the Sector Managers' normal independent research
activities.
The Sector Managers are authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. (the "Distributor"), and the Sector Managers
or their affiliated broker-dealers on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from brokerage commissions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the advisory fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreements between VCM and the Sector Managers do not
provide for any reduction in the advisory fees as a result of profits resulting
from brokerage commissions effected through the Sector Managers or their
affiliated brokerage firms.
The Trustees had adopted certain procedures incorporating the standards
of Rule 17e-1 issued under the Investment Company Act of 1940 (the "1940 Act")
which requires that the commissions paid the Distributor or to the Sector
Managers or their affiliated broker-dealers must be "reasonable and fair
compared to
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the commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." The Rule and the procedures also contain
review requirements and require VCM to furnish reports to the Trustees and to
maintain records in connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND. For the years ended
April 30, 1995, 1994 and 1993, the FUND incurred brokerage commission expenses
of $488,175, $583,706 and $394,285, respectively, from the purchase and sale of
portfolio securities, of which $173,599, $121,292 and $164,340, respectively, or
approximately 36%, 21% and 42%, respectively, was paid to Shufro, Rose & Ehrman,
a Sector Manager of the FUND, for effecting 46%, 27% and 24%, respectively, of
the FUND's aggregate dollar amount of transactions involving the payment of
commissions. Shufro, Rose & Ehrman operates under standards which would allow it
to receive no more than the remuneration which would be expected to be received
by an unaffiliated broker in a commensurate arms-length transaction which is
executed on the New York or American Stock Exchanges. Moreover, in effecting
portfolio transactions through Shufro, Rose & Ehrman, the cost of the brokerage
commissions to the FUND in some cases is less than that available from
unaffiliated brokers. The reliability of Shufro, Rose & Ehrman and the value of
its expected contribution to the FUND, viewed either in terms of a particular
transaction or the portfolio manager's overall responsibilities to the FUND, is
also taken into consideration in selecting Shufro, Rose & Ehrman to serve as the
FUND's broker. In addition, of the aggregate brokerage commissions incurred for
the year ended April 30, 1993) (which represents approximately 5% of total
commissions paid in 1993 was also paid to Morgan Stanley Asset Management
Limited, a former Sector Manager of the FUND.
It may happen that the same security will be held by other clients of
VCM or of the portfolio managers. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per share is
computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding. Each determination of the
FUND's net asset value is made (i) by valuing portfolio securities which are
traded on the New York Stock Exchange or the American Stock Exchange at the last
sale price, or, if no sale, at the closing bid price, (ii) by valuing other
securities as nearly as possible in the manner described in clause (i) if traded
on any other U.S. or foreign exchange, and, if not so traded, on the basis of
the latest available bid prices. A security which is listed or traded on more
than one exchange, is valued at the quotation on the exchange determined to be
the primary market for such security by the Trustees or VCM. High-quality
short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less, or by amortizing
their value on the 61st day prior to maturity if their original term to maturity
exceeded 60 days. Amortized cost will be used unless the Board of Trustees
determines that such method does not represent fair value.
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Generally, trading in foreign securities, as well as trading in
corporate bonds, U.S. government securities, money market instruments and
repurchase agreements, is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing the net asset value of the FUND are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
4:15 p.m. Bullion investments are valued at the closing spot price based on
dealer or exchange quotations. Occasionally, events affecting the value of metal
securities may occur between such times and 4:15 p.m. which will not be
reflected in the computation of the FUND's net asset value. If events occur
which materially affect the value of metal securities, the securities will be
valued at fair value as determined in good faith by the Trustees.
Puts and calls held by the FUND are valued at the last sales price or,
if there are no transactions, at the mean between the closing bid and asked
prices. When the FUND writes a call, an amount equal to the premium received is
included in the FUND's statement of assets and liabilities as an asset, and an
equivalent credit is included in the liability section. The credit is
"marked-to-market" to reflect the current market value of the call. If a call
expires, the FUND has a gain in the amount of the premium received; if the FUND
enters into a closing purchase transaction, it will have a gain or loss
depending on whether the premium received was more or less than the cost of the
closing transaction. All other securities and other assets of the FUND are
valued at fair value as determined in good faith by the Trustees.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return basis
combines principal and dividend income changes for the periods shown. Principal
changes are based on the difference between the beginning and closing net asset
values for the period and assume reinvestment of dividends and distributions
paid by the FUND. Dividends and distributions are comprised of net investment
income and net realized capital gains. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according to
the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
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The FUND's average annual total rate of return figures, reflecting the
initial investment of $1,000 and reinvestment of all dividends and
distributions, net of the pro rata share of the account opening fee, for the one
and five year periods ended April 30, 1995 and for the period from June 1, 1986
(commencement of operations) to April 30, 1995, were -1.04%, 5.67% and 7.59%,
respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, the FUND calculates its aggregate
total return for the specified periods of time by assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial net asset value
of the investment from the ending net asset value and by dividing the remainder
by the beginning net asset value. The FUND does not, for these purposes, deduct
the pro rata share of the account opening fee, which was in effect until
December, 1994, from the initial value invested. The FUND will, however,
disclose the pro rata share of the account opening fee and will disclose that
the performance data does not reflect such non-recurring charge and that
inclusion of such charge would reduce the performance quoted. Such alternative
total return information will be given no greater prominence in such advertising
than the information prescribed under SEC rules and all advertisements
containing performance data will include a legend disclosing that such
performance data represent past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as a shareholder of the FUND, however, the FUND does
not presently contemplate making such redemptions and the FUND will not redeem
any shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends
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and other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the FUND elects otherwise), will
generally be treated as ordinary income or loss.
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In general, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The FUND, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the FUND that are
not Section 1256 contracts. The Internal Revenue Service (the "IRS") has held in
several private rulings (and Treasury Regulations now provide) that gains
arising from Section 1256 contracts will be treated for purposes of the
Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under Code
Section 1256.
The FUND may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the FUND invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the FUND
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
FUND receives distributions of any such ordinary earning or capital gain from
the PFIC. If the FUND does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (i) any gain
recognized by the FUND upon sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the FUND from the
PFIC will be allocated ratably over the FUND's holding period of its interest in
the PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is received
shall be included in the FUND's gross income for such year as ordinary income
(and the distribution of such portion by the FUND to shareholders will be
taxable as an ordinary income dividend, but such portion will not be subject to
tax at the FUND level), (iii) the FUND shall be liable for tax on the portions
of such gain or excess distribution so allocated to prior years in an amount
equal to, for each such prior year, (A) the amount of gain or excess
distribution allocated to such prior year multiplied by the highest corporate
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<PAGE>
tax rate in effect for such prior year plus (B) interest on the amount
determined under clause (A) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (iv) the
distribution by the FUND to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the FUND
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Under recently proposed Treasury Regulations the FUND can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the FUND's adjusted tax basis
in that share ("mark to market gain"). Such mark to market gain will be included
by the FUND as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and the FUND's holding period with respect to such PFIC stock
commences on the first day of the next taxable year. If the FUND makes such
election in the first taxable year it holds PFIC stock, the FUND will include
ordinary income from any mark to market gain, if any, and will not incur the tax
described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year. As
of April 30, 1995, the FUND elected to defer such foreign currency losses of
approximately $409,601 to the succeeding year. At April 30, 1995 the Fund had a
net capital loss carryover of $293,056, which is available through April 30,
2003 to offset future capital gains.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year;
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and (2) exclude foreign currency gains and losses incurred after October 31 of
any year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the current
calendar year (and, instead, include such gains and losses in determining
ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain is distributed and designated as a capital gain
dividend, will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
of the capital gain recognized upon the FUND's disposition of "small business"
stock will be subject to tax.
Ordinary income dividends paid by the FUND with respect to a taxable
year will qualify for the 70% dividends-received deduction generally available
to corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the FUND from domestic corporations for the taxable year.
A dividend received by the FUND will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the FUND has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c) (3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the FUND has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the FUND is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (i) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the FUND or (ii) by application of Code Section 246(b) which in
general limits the dividends-received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends-received deduction
and certain other items).
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<PAGE>
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning after
1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and the
AMT net operating loss deduction) over $2 million. For purposes of the corporate
AMT and the environmental super fund tax (which are discussed above), the
corporate dividends-received deduction is not itself an item of tax preference
that must be added back to taxable income or is otherwise disallowed in
determining a corporation's AMTI. However, corporate shareholders will generally
be required to take the full amount of any dividend received from the FUND into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rate share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any
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<PAGE>
shareholder (1) who has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the FUND that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate, if any) upon the gross amount of the dividend. Furthermore, such a
foreign shareholder may be subject to U.S. withholding tax at the rate of 30%
(or lower applicable treaty rate, if any) on the gross income resulting from the
FUND's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against this gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having been paid. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the FUND and capital gain dividends .
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
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Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc., Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Corporation; Senior Vice-President, John R.
Wood and Asociates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh
Medical Center-Downtown, Member Board of
Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
President, Treasurer and Director of Blanchard
Precious Metals Fund, Inc. and The Virtus Funds;
Vice President, Treasurer, and Trustee,
Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated
Research Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and
Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of Trustees handles
the responsibilities of the Board of Trustees between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
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<PAGE>
Fund Ownership
As of July 30, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 30, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
Officers and Trustees Compensation
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Truste $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trust $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
-30-
<PAGE>
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal years ended April 30, 1995, 1994 and 1993,
aggregate amount paid or accrued by the FUND to the prior manager was $983,753,
$943,678 and $1,038,443, respectively.
SECTOR MANAGEMENT SERVICES
Pursuant to sub-advisory agreements (the "Sub-Advisory Agreements")
between VCM and the Sector Managers, VCM has delegated to the Sector Managers
the authority and responsibility to make and execute decisions for the FUND
within the framework of the FUND's investment policies, subject to review by VCM
and the Board of Trustees of the FUND. Under the terms of the Sub-Advisory
Agreements, the Sector Managers have discretion to purchase and sell securities,
except as limited by the FUND's investment objective, policies and restrictions.
The Sub-Advisory Agreements provide for the payment to the Sector
Managers, by VCM, of monthly compensation based on each Sector's average daily
net assets for providing investment advice to the FUND and managing the
investment of the assets of the FUND. For the services provided by the Sector
Managers pursuant to the Sub-Advisory Agreements, VCM (not the FUND) will pay
each Sector Manager an annual sub-advisory fee equal to the greater of $25,000
per annum, or the following percentages of the Sector's average daily net
assets:
-31-
<PAGE>
Net Assets
Exceeding
Net Assets $150 million Net Assets
Up to $150 but less than Exceeding
million $300 million $300 million
---------- ------------- ------------
Shufro, Rose & Ehrman
(U.S. Equities) .30% .2625% .225%
Fiduciary International,
Inc. (Foreign Equities) .45 .39375 .3375
Cavelti Capital Management,
Ltd. (Precious Metals
Securities and Bullion) .30 .2625 .225
>
Investment Advisers, Inc.
(American Fixed Income) .20 .175 .15
Martin Currie, Inc.
(Emerging Markets) .50 .4375 .375
Fiduciary International,
Inc. (Foreign Fixed
Income) .375 .32825 .28125
For the fiscal years ended April 30, 1995, 1994 and 1993, the aggregate
amounts paid by the prior manager to each Sector Manager (former Sector Manager)
under the Sub-Advisory Agreements were as follows: Shufro Rose & Ehrman -
$90,508, $104,023 and $108,149; Investment Advisers, Inc. - $22,423, $5,641 and
$64,581, respectively; Cavelti Capital Management, Inc. - $23,596, $10,558 and
$1,484, respectively; Morgan Stanley Asset Management Limited (replaced by
Fiduciary International, Inc.) - $63,586 and $165,781, respectively; Fiduciary
International, Inc. - $108,636, $91,814 and $18,831, and Morgan Stanley Asset
Management Inc. (replaced by Martin Currie Inc.) - $55,912 and $3,636 (for the
fiscal periods ended April 30, 1993 and 1992). Each Sub-Advisory Agreement
provides that the Sector Manager's fee shall be reduced proportionately based on
the ratio of the Sector Manager's fee to VCM's fee in the event VCM's fee is
reduced as a result of a state expense limitation.
The Sub-Advisory Agreements, dated July 11, 1995, were approved by the
FUND's then Trustees on March 24, 1995 and the FUND's shareholders on July 11,
1995. Each Sub-Advisory Agreement provides that it may be terminated without
penalty by either the FUND or the Sector Manager at any time by the giving of 60
days' written notice to the other and terminates automatically in the event of
"assignment", as defined in the Investment Company Act. Each Sub-Advisory
Agreement provides that, unless sooner terminated, it shall continue in effect
for an initial two year period and from year to year thereafter only so long as
such continuance is specifically approved at least annually by either the Board
of Trustees of the FUND or by a vote of the majority of the outstanding voting
securities of the FUND, provided, that in either event, such continuance is also
approved by the vote of the majority of the Trustees who are not parties to the
Sub-Advisory Agreement or "interested persons" of such parties cast in person at
a meeting called for the purpose of voting on such approval.
-32-
<PAGE>
Global Allocation Strategist
Pursuant to the terms of the Global Allocation Agreement between it and
the FUND dated July 11, 1995, the Global Allocation Strategist reviews,
evaluates and allocates the percentages in which the total assets of the FUND
will be divided among its investment sectors, subject at all times to the
direction of VCM and the policies and control of the FUND's Board of Trustees.
In discharging its responsibilities under the agreement, the Global Allocation
Strategist (i) obtains and evaluates pertinent information about significant
developments and economics, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the FUND's portfolio; (ii)
formulates and implements continuing programs for the review, evaluation and
allocation of the FUND's assets and regularly reports thereon to the FUND's
Board of Trustees; and (iii) takes, on behalf of the FUND, all actions which
appear to the Trust and VCM necessary to carry into effect such programs and
supervisory functions. As compensation for its services, the Global Allocation
Strategist is paid a monthly fee by VCM (not the FUND) at the annual rate of
.08% of the FUND"s first $150 million of average daily net assets; plus .07% of
the FUND's average daily net assets in excess of $150 million but less than $300
million; plus .06% of the FUND's average daily net assets in excess of $300
million. The Global Allocation Agreement provides that, unless sooner
terminated, it shall continue in effect for an initial two year period and from
year to year thereafter only so long as such continuance is specifically
approved at least annually by either the Board of Trustees of the FUND or by a
vote of the majority of the outstanding voting securities of the FUND, provided,
that in either event, such continuance is also approved by the vote of the
majority of the Trustees who are not parties to the Sub-Advisory Agreement or
"interested persons" of such parties cast in person at a meeting called for the
purpose of voting on such approval.
For the fiscal years ended April 30, 1995, 1994 and 1993, the prior
manager paid the FUND's Global Allocation Strategist $78,701, $75,352 and
$83,114 respectively.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended April 30, 1995, the Fund accrued payments under the
Plan amounting to $704,436.
-33-
<PAGE>
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
-34-
<PAGE>
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the fiscal year ended
April 30, 1995 are attached hereto.
-35-
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
*A: Bond which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
*Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
A-1
<PAGE>
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated Prime-1 or P-1 (or related
supporting institutions) have a superior capacity for repayment of short-term
promissory obligations. Prime-1 or P-1 repayment capacity will normally be
evidenced by the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Corporation's
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. capacity to pay interest and repay principal is extremely strong.
*AA: Debt rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
*A: Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
*BBB: Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
A-2
<PAGE>
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" Rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "C" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1: The rating "C1" is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3
<PAGE>
A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
A-4
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Global Growth Fund
for the fiscal year ending April 30, 1995.
As a global asset allocation manager, we can almost always find some market
in the world that is acting well. In 1994, as a result of an increasingly
globalized economy, this was not the case, as almost all worldwide markets were
in a state of flux.
As the fiscal year progressed, we made a defensive allocation to cash, so
that in the third quarter of 1994 we held 30% of the Fund's portfolio in cash
while waiting for markets to calm and for opportunities to appear.
We saw such an opportunity materialize early in 1995 and, in February and
March, redeployed much of our cash into the U.S. stock market. This brought the
U.S. equity position up to 50%, which is close to the maximum that we can hold.
With the rally we have had so far this year in U.S. equities, this has worked
out well for us.
Our second largest position has been in foreign equity markets, though we
(over, please)
The following information was represented as a line graph
The Value of a $10,000 Investment in the
Blanchard Global Growth Fund
inception 6/1/86 through 4/30/95 as compared to
the Standard & Poor's 500 for the same period
-----------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Global Growth Fund*
-----------------------------------
1 year -1.04%
-----------------------------------
5 year 5.67%
-----------------------------------
since inception 7.59%
-----------------------------------
<TABLE>
<CAPTION>
FYE 4/30/87 FYE 4/30/88 FYE 4/30/89 FYE 4/30/90 FYE 4/30/91 FYE 4/30/92 FYE 4/30/93
<S> <C> <C> <C> <C> <C> <C> <C>
GGF 31.38% -0.57% 7.54% 3.74% 4.61% 6.24% 6.08%
S&P 500 18.10% -6.40% 22.80% 10.50% 17.60% 14.00% 6.60%
$9,925 $13,039 $12,965 $13,943 $14,464 $15,131 $16.075 $17,053
$10,000 $11,810 $11,054 $13,575 $15,000 $17,640 $20,109 $21,437
</TABLE>
Reflects deduction of $75 acct opening fee
Blanchard Standard
Global & Poor's
Growth Fund 500(D)
*The average annual returns quoted above do not reflect the deduction of the
account opening fee and assume reinvestment of distributions. If fee was
reflected, the returns would be lower. Total return includes changes in
principal value. Average annual return is total return annualized and
compounded. Past performance is no guarantee of future results.
(D)Source: Standard & Poor's 500 is an unmanaged composite index of the U.S.
Stock Market performance.
^Reflects deduction of the one-time $75 account opening fee.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the BGGF or the index.
<PAGE>
are still a bit early on these investments, as the weak dollar has hurt overseas
markets by suppressing exports in Europe and Japan. Even so, we are maintaining
our exposure to foreign markets as we expect they will outperform the U.S. stock
market in the second half of the year.
During 1994, our allocation to the precious metals sector was minimal. We
have only recently begun moving into these markets to any degree. Again, while
we may be a bit early on this allocation, we are comfortable taking a position
at this level due to the extremely favorable supply and demand equation in gold
markets.
In 1994, in light of the Fed's aggressive series of interest rate increases,
we made substantial reductions in our bond holdings, both in the U.S. and
abroad. While we are not planning to move heavily back into bonds at any time
soon, if we were to do so, it would most likely be in foreign bonds as we
believe they currently present a greater opportunity than U.S. issues.
To sum up, we believe that the global economy is currently in a sustained
growth phase. As a result of this view, we have used the Fund's diversification
and flexibility to move out of cash and back into equities, positioning the
portfolio to seek a higher level of growth. With approximately 80% of the
portfolio in a combination of U.S. and foreign stocks, we are well positioned to
take advantage of such a growth scenario.
Sincerely,
JB:ml Jeremy Biggs
Chief Investment Officer
Fiduciary Trust International
Chief Asset Allocation Strategist of the Blanchard Global Growth Fund
Distributed by Sheffield Investments, Inc. (1551) 00ARSL0695
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Shares Value
------ -----
U.S. EQUITY SECURITIES SECTOR (49.58%)
Aerospace (0.84%)
*Coltec Industries ............................. 40,000 $ 730,000
-----------
Automotive & Related (3.24%)
Chevron Corp. ................................. 12,000 568,500
Chrysler Corp. ................................ 20,000 862,500
Cummins Engine Company
Inc. ........................................ 15,000 671,250
Harley Davidson, Inc. ......................... 30,000 716,250
-----------
2,818,500
-----------
Banking (4.03%)
Citicorp ...................................... 25,000 1,159,375
First Tennessee National Corp. ................ 10,000 425,000
Nationsbank Corp. ............................. 20,000 1,000,000
Provident Bancorp ............................. 15,000 506,250
UJB Financial Corp. ........................... 15,000 410,625
-----------
3,501,250
-----------
Broadcast, Radio & TV (0.36%)
Comcast Corp. Class A
Special ..................................... 20,000 315,000
-----------
Chemicals & Related (4.91%)
EI duPont de Nemours & Co. .................... 17,000 1,119,875
Mallinckrodt Group Inc. ....................... 30,000 1,080,000
Monsanto Co. .................................. 10,000 832,500
Morton International .......................... 40,000 1,240,000
-----------
4,272,375
-----------
Consumer & Related (7.03%)
Craftmade International ....................... 10,000 82,500
Eastman Kodak Co. ............................. 30,000 1,725,000
Edison Brothers Stores Inc. ................... 70,000 1,050,000
Home Depot .................................... 25,000 1,043,750
Lancaster Colony Corp. ........................ 20,000 695,000
Mattel, Inc. .................................. 35,000 831,250
Sara Lee Corp. ................................ 25,000 696,875
-----------
6,124,375
-----------
Electronics & Electrical (5.38%)
Avnet, Inc. ................................... 25,000 1,112,500
Baker Hughes Inc. ............................. 30,000 675,000
General Electric Co. .......................... 20,000 1,120,000
Intel, Inc. ................................... 10,000 1,023,750
Mark IV Industries, Inc. ...................... 42,000 756,000
-----------
4,687,250
-----------
Energy Related (4.44%)
Brush Wellman Inc. ............................ 20,000 395,000
Burlington Resources Inc. ..................... 30,000 1,173,750
Cooper Industries, Inc. ....................... 13,000 507,000
El Paso Natural Gas ........................... 30,000 877,500
Tenneco, Inc. ................................. 20,000 917,500
-----------
3,870,750
-----------
<PAGE>
(Right Column)
Shares Value
------ -----
Entertainment & Leisure (2.40%)
Carnival Cruise Lines Class A ................. 40,000 $ 995,000
Time Warner, Inc. ............................. 30,000 1,098,750
-----------
2,093,750
-----------
Financial Services (2.47%)
American Express Co. .......................... 40,000 1,390,000
Cash America Investment,
Inc. ........................................ 100,000 762,500
-----------
2,152,500
-----------
Food, Beverage, & Tobacco (1.56%)
Philip Morris Co., Inc. ....................... 20,000 1,355,000
-----------
Health Care (0.69%)
*National Health Labs .......................... 40,000 600,000
-----------
Industrial & Related (2.02%)
Minnesota Mining &
Manufacturing ............................... 20,000 1,192,500
Motorola, Inc. ................................ 10,000 568,750
-----------
1,761,250
-----------
Insurance (0.63%)
Washington National Corp. ..................... 30,100 553,088
-----------
Oil & Related (0.47%)
*Reading & Bates Corp. ......................... 50,000 412,500
-----------
Pharmaceuticals (2.80%)
Pfizer, Inc. .................................. 18,000 1,559,250
Warner Lambert Co. ............................ 11,000 877,250
-----------
2,436,500
-----------
Recreation & Related (0.40%)
*Leslie's Poolmart ............................. 20,000 345,000
-----------
Retail (1.99%)
J.C. Penney, Inc. ............................. 20,000 875,000
The Limited ................................... 40,000 855,000
-----------
1,730,000
-----------
Telecommunications (3.92%)
*Airtouch Communications ....................... 40,000 1,075,000
AT&T Corp. .................................... 15,000 761,250
SBC Communications ............................ 25,000 1,103,125
*TeleCommunications
A Shares .................................... 25,000 478,125
-----------
3,417,500
-----------
TOTAL U.S. EQUITY
SECURITIES SECTOR
(IDENTIFIED COST
$40,542,572) ................................ 43,176,588
-----------
3
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
FOREIGN SECURITIES SECTOR (18.88%)
AUSTRALIA (0.63%)
Machinery (0.17%)
Broken Hill Proprietary ....................... 10,479 $ 152,543
-----------
Metals & Mining (0.13%)
Western Mining Corp. .......................... 20,000 113,253
-----------
Paper Products (0.17%)
Amcor Ltd. (ORD) .............................. 20,000 147,026
-----------
Publishing/Printing (0.16%)
News Corporation Ltd. ......................... 31,320 138,371
-----------
TOTAL AUSTRALIA .......................... 551,193
-----------
CANADA (0.10%)
Metals & Mining (0.10%)
*Cominco Ltd. .................................. 5,000 83,655
-----------
FRANCE (2.32%)
Consumer Goods & Related (0.30%)
L'Oreal ....................................... 990 260,272
-----------
Electronics & Electrical (0.27%)
Legrand ....................................... 160 231,451
-----------
Financial Services (0.52%)
AXA ........................................... 4,600 242,243
Credit Local de France ........................ 2,500 212,820
-----------
455,063
-----------
Food, Beverage, & Household (0.31%)
LVMH Moet Hennessy ............................ 1,410 267,848
-----------
Housing & Construction (0.47%)
Colas ......................................... 600 107,883
Compagnie de Saint Gobain ..................... 2,310 298,488
-----------
406,371
-----------
Machinery (0.26%)
Valeo (ORD) ................................... 4,050 230,394
-----------
Multi-Industry (0.05%)
Primagaz cie Gaz .............................. 250 46,831
-----------
Textile & Apparel (0.14%)
Castorama Dubois .............................. 720 119,074
-----------
TOTAL FRANCE ............................................ 2,017,304
-----------
GERMANY (1.47%)
Chemicals & Related (0.27%)
Linde AG ...................................... 402 230,915
-----------
Machinery (0.36%)
Mannesmann .................................... 1,155 314,243
-----------
Medical Products & Related (0.58%)
Fresenius (PFD) ............................... 445 282,234
Wella (PFD) ................................... 300 223,784
-----------
506,018
-----------
Utilities & Related (0.26%)
Veba AG ....................................... 615 228,935
-----------
TOTAL GERMANY ........................................... 1,280,111
-----------
<PAGE>
(Right Column)
Shares Value
------ -----
HONG KONG (0.60%)
Airlines (0.15%)
Swire Pacific Ltd., Class A ................... 20,000 $ 133,704
-----------
Banking (0.07%)
Hong Kong & Shanghai Bank ..................... 5,431 62,968
-----------
Financial Services (0.14%)
First Pacific ................................. 150,000 123,046
-----------
Real Estate (0.08%)
Cheung Kong Hldgs. Ltd. ....................... 15,000 63,170
-----------
Utilities (0.16%)
China Light & Power ........................... 12,000 56,582
Citic Pacific Ltd. ............................ 35,000 85,680
-----------
142,262
-----------
TOTAL HONG KONG ......................................... 525,150
-----------
IRELAND (0.14%)
Housing & Construction (0.14%)
CRH PLC ....................................... 20,000 123,656
-----------
JAPAN (5.51%)
Automotive (0.30%)
Mabuchi Motor Co. Ltd. ........................ 4,000 264,160
-----------
Banking (0.60%)
Mitsubishi Bank Ltd. ......................... 7,000 171,585
Mitsubishi Trust and Banking ................. 20,000 345,074
-----------
516,659
-----------
Chemicals & Related (0.46%)
Daicel Chemical Industry ..................... 35,000 204,902
Sekisui Chemical ............................. 16,000 199,905
-----------
404,807
-----------
Electronics & Electrical Equipment (1.15%)
Canon Sales Co. ............................... 10,000 264,160
Hitachi Zosen ................................. 50,000 239,767
Minebea Co., Ltd. ............................. 35,000 259,460
*Yaskawa Electric Corp. ........................ 50,000 239,766
-----------
1,003,153
-----------
Financial Services (0.43%)
Daiwa Securities Co. .......................... 15,000 189,196
Japan Securities Finance Co.,
Ltd ......................................... 12,000 188,482
-----------
377,678
-----------
Housing & Construction (0.49%)
Taisei Corp. Ltd. ............................. 25,000 172,834
Tostem Corp. .................................. 7,000 254,045
-----------
426,879
-----------
Industrial & Related (0.55%)
Asahi Glass Co. ............................... 20,000 261,780
Nippon Steel Corp. ............................ 55,000 218,586
-----------
480,366
-----------
4
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
Machinery (0.60%)
Autobacs Seven ................................ 3,200 $ 333,936
Mori Spiki .................................... 10,000 186,817
-----------
520,753
-----------
Real Estate (0.25%)
Mitsubishi Estate Co. ......................... 18,000 216,326
-----------
Retail (0.44%)
Ito Yokado Company, Ltd. ...................... 4,000 215,611
Jusco Ltd. .................................... 8,000 163,732
-----------
379,343
-----------
Telecommunications (0.24%)
DDI Corp. ..................................... 24 211,328
-----------
TOTAL JAPAN ............................................. 4,801,452
-----------
MEXICO (0.06%)
Retail (0.06%)
*Fotoluz Corp. ................................. 115,000 53,711
-----------
NETHERLANDS (1.64%)
Electronics & Electrical (0.27%)
Philips Electronics ........................... 6,200 236,403
-----------
Insurance (0.27%)
Aegon NV ...................................... 3,030 235,164
-----------
Publishing/Printing (0.49%)
Verenigde Ned. Uitg. .......................... 1,950 218,034
Wolters Kluwer ................................ 2,600 211,503
-----------
429,537
-----------
Transportation (0.61%)
Koninklijke Ahold NV .......................... 7,350 252,795
Koninklijke PTT Nederland NV .................. 7,950 277,016
-----------
529,811
-----------
TOTAL NETHERLANDS ....................................... 1,430,915
-----------
NORWAY (0.23%)
Multi-Industry (0.23%)
Orkla AS ...................................... 4,600 197,278
-----------
SWEDEN (0.67%)
Automotive (0.23%)
Volvo Class B Free Shares ..................... 10,500 197,089
-----------
Consumer Related (0.21%)
Autoliv AB .................................... 4,000 180,966
-----------
Industrial (0.23%)
Saab Swedish Steel Class A .................... 4,600 202,734
-----------
TOTAL SWEDEN ............................................ 580,789
-----------
SWITZERLAND (1.53%)
Consumer Related (0.20%)
Merkur Hldgs. ................................. 670 181,776
-----------
Electronics & Electrical (.20%)
Sulzer Gebrueder AG ........................... 300 171,421
-----------
Insurance (0.21%)
Winterthur Schweiz ............................ 320 180,616
-----------
<PAGE>
(Right Column)
Shares Value
------ -----
Machinery (0.31%)
BBC Brown Boveri Ltd. ......................... 275 $ 271,329
-----------
Medical Products & Related (0.31%)
PSC Roche Hldgs. .............................. 45 270,283
-----------
Metals & Mining (0.30%)
Alusuisse Lonza Hldgs ......................... 470 261,179
-----------
TOTAL SWITZERLAND ..................................... 1,336,604
-----------
UNITED KINGDOM (3.98%)
Banking (0.19%)
Bank of Ireland ............................... 30,000 162,193
-----------
Beverages (0.19%)
Guinness PLC .................................. 22,500 169,977
-----------
Consumer Related (0.82%)
Cadbury Schweppes PLC ......................... 35,000 252,019
Compass Group PLC ............................. 40,000 214,971
Greencore Group PLC ........................... 17,000 120,084
WM Morrison ................................... 55,000 128,323
-----------
715,397
-----------
Electrical Equipment (0.40%)
Powergen PLC .................................. 22,000 68,675
Siebe PLC ..................................... 30,452 275,865
-----------
344,540
-----------
Entertainment & Leisure (0.17%)
Granada Group ................................. 17,000 155,781
-----------
Health Care (0.44%)
Smithkline Beecham Class A .................... 32,000 253,073
Takare (ORD) .................................. 40,000 128,081
-----------
381,154
-----------
Housing & Construction (0.14%)
CRH PLC ....................................... 20,000 121,806
-----------
Machinery (0.16%)
Chubb Security PLC ............................ 29,000 140,455
-----------
Multi-Industry (0.29%)
BTR PLC ....................................... 48,000 254,103
-----------
Oil Related (0.31%)
British Petroleum PLC ......................... 37,223 268,026
-----------
Retail (0.33%)
Thorne-Emi PLC 15,538 284,268
Telecommunications (0.28%)
Carlton Communications PLC..................... 16,000 243,033
-----------
Transportation (0.26%) Principal
---------
British Airways Conv. Bond
9.75%, 6/15/05 ..............................L 79,000 224,677
-----------
TOTAL UNITED KINGDOM .................................. 3,465,410
-----------
TOTAL FOREIGN
SECURITIES SECTOR
(IDENTIFIED COST $15,019,502) ....................... 16,447,228
-----------
5
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
EMERGING MARKETS SECTOR (12.69%)
ARGENTINA (0.58%)
Consumer Goods & Related (0.33%)
BAESA (ADR) ................................... 5,900 $ 162,250
Quilmes Industrial S.A. ....................... 6,500 123,500
-----------
285,750
-----------
Utilities & Related (0.25%)
Compania Naviera Perez
Companc "B" Shares .......................... 26,970 110,032
YPF Sociedad Anonima .......................... 5,400 109,350
-----------
219,382
-----------
TOTAL ARGENTINA ....................................... 505,132
-----------
BRAZIL (1.72%)
Basic Industries (0.94%)
Acesita PN (ADR) .............................. 12,864 197,635
Compania Vale Do Rio Doce
(ADR) ....................................... 4,600 192,400
Usiminas (ADR) ................................ 34,600 417,546
-----------
807,581
-----------
Capital Goods (0.20%)
*Rhodia Ster (GDR) ............................. 12,781 173,869
-----------
Energy Related (0.16%)
*Electrobras "B" Shares ........................ 165,000 44,434
*Electrobas Common ............................. 345,500 95,310
-----------
139,744
-----------
Industrial & Related (0.20%)
*Cemig (ADR) ................................... 7,307 170,748
-----------
Telecommunications (0.22%)
Telebras (ADR) ................................ 5,450 194,917
-----------
TOTAL BRAZIL .......................................... 1,486,859
-----------
CHILE (0.54%)
Basic Industries (0.19%)
Antofagasta Holdings .......................... 28,000 130,656
*Sociedad Quimica Y Minera
(ADR) ....................................... 1,000 34,875
-----------
165,531
-----------
Capital Goods (0.28%)
Madeco S.A. (ADR) ............................. 5,300 154,363
Maderas Y Sinteticos
Sociedad (ADS) ................................ 5,000 87,500
-----------
241,863
-----------
Financial Services (0.07%)
Banco O'Higgins (ADR) ......................... 3,500 63,875
-----------
TOTAL CHILE ........................................... 471,269
-----------
(Right Column)
Shares Value
------ -----
CHINA (0.15%)
Financial Services
*China North Industries
Investment Ltd. Class A ..................... 135,000 $ 135,000
-----------
COLOMBIA (0.44%)
Banking (0.12%)
(D)Banco Ganadero S.A. (ADS) ..................... 3,400 63,742
Banco Ganadero (GDR) .......................... 2,300 43,590
-----------
107,332
-----------
Basic Industries (0.32%)
Cementos Diamante (GDS) ....................... 12,700 277,749
-----------
TOTAL COLOMBIA ........................................ 385,081
-----------
ECUADOR (0.23%)
Construction (0.23%)
Cemento Nacional de Ecuador
(GDR) ....................................... 864 203,040
-----------
HONG KONG (0.39%)
Banking (0.16%)
Dao Heng Group Ltd. ........................... 56,000 143,237
-----------
Multi Industry (0.04%)
Champion Technology
Holdings .................................... 399,000 30,411
*Star Paging Int'l. Wts.
12/31/96 .................................... 60,000 372
-----------
30,783
-----------
Real Estate (0.04%)
*Jardine Strategic Holdings,
Inc. (PFD) .................................. 10,965 37,281
-----------
Shipping (.15%)
*Shanghai Hai Xing Shipping
Co. Ltd. Class "H" .......................... 700,000 130,216
-----------
TOTAL HONG KONG ..................................... 341,517
-----------
HUNGARY (0.11%)
Capital Goods (0.09%)
*Matav Rt. ...................................... 450 79,646
-----------
Consumer Goods & Related (0.02%)
*Kekkut Asvanyiz Rt. (GDR) ...................... 2,100 18,213
-----------
TOTAL HUNGARY ......................................... 97,859
-----------
INDIA (1.08%)
Basic Industries (0.34%) Principal
Gujarat Ambuja Cements Ltd. Conv. Bond ---------
3.5%, 6/30/99 .............................. $70,000 90,125
Shares
------
*Hindalco Industries
Ltd. (GDR) .................................. 3,700 96,200
United Phosphorus (GDR) ....................... 4,500 109,125
-----------
295,450
-----------
6
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
Consumer Goods & Related (0.20%)
*DCW Limited (GDR) ............................. 3,500 $ 45,500
*Dr. Reddy's Laboratories Ltd.
(GDR) ....................................... 12,200 128,100
-----------
173,600
-----------
Investment Companies (0.54%)
*Himalayan Fund ................................. 8,149 111,641
*Himalayan Fund Bonus
Wts. 12/31/96 ................................ 1,130 706
*Indian Opportunities Fund Ltd. ................. 27,282 360,673
-----------
473,020
-----------
TOTAL INDIA ........................................... 942,070
-----------
INDONESIA (0.40%)
Chemicals (0.03%)
*PT Keramika Indonesia Assoc. .................. 34,000 28,930
-----------
Capital Goods (0.09%)
*PT Argha Karya Prima .......................... 32,000 22,929
*PT Indonesia Satellite (ADR) .................. 1,600 57,800
-----------
80,729
-----------
Consumer Goods & Related (0.15%)
PT Concord Benefit
Textile Co. ................................. 35,000 69,749
*PT Kalbe Farma ................................ 7,500 26,702
PT Texmaco Jaya ............................... 57,600 30,954
-----------
127,405
-----------
Financial Services (0.13%)
Bank International Indonesia .................. 35,400 82,436
*PT Andyani Megah .............................. 30,000 26,870
-----------
109,306
-----------
TOTAL INDONESIA 346,370
-----------
ISRAEL (0.28%)
Financial Services (0.13%)
*Ampal American Israel
Wts. 1/31/99 ................................ 8,600 4,842
*Ampal American Israel Class A ................. 6,400 40,800
*PEC Israel Economic Corp. ..................... 2,500 69,063
-----------
114,705
-----------
Investment Companies (0.09%)
First Israel Fund ............................. 6,700 80,400
-----------
Multi-Industry (0.06%)
Scitex Ltd. ................................... 2,241 51,263
-----------
TOTAL ISRAEL 246,368
-----------
(Right Column)
Shares Value
------ -----
KOREA (1.37%)
Capital Goods (0.13%)
*Anam Industrial Co., Ltd.
(PFD) ....................................... 5,000 $ 62,898
*Dae Woo Heavy (PFD) ........................... 6,000 50,764
-----------
113,662
-----------
Consumer Goods & Related (0.01%)
*Kia Motors Corp. .............................. 281 4,349
-----------
Construction & Housing (0.07%)
*Kumho Construction & Energy
Co. Ltd. Pfd. ............................... 9,000 63,160
-----------
Electrical & Electronics (0.16%)
*Samsung Electronics ........................... 1,694 138,644
-----------
Financial Services (0.24%)
*Commercial Bank of Korea ...................... 12,000 124,352
*Hanshin Securities Co., Ltd.
(PFD) ....................................... 3,000 37,975
*Jin Heung Mutual Svgs. &
Finance ..................................... 1,500 42,697
-----------
205,024
-----------
Industrial & Related (0.14%)
Hyundai Motor Service Co.
(PFD) ....................................... 4,066 106,670
*Sammi Steel Co., Ltd. (PFD) ................... 2,000 12,068
-----------
118,738
-----------
Oil & Related (0.02%) Principal
Ssangyong Oil Refining ---------
3.0%, 12/31/04 .............................. $20,000 14,050
-----------
Retail & Related (0.10%) Shares
------
*Midopa Co. .................................... 7,000 87,230
-----------
Transportation (0.08%)
*Dong Bang Forwarding Co. ...................... 1,700 69,351
-----------
Utilities & Related (0.42%)
*Korea Electric Power Corp.
(GDR) ....................................... 7,700 281,800
*Yukong Ltd. ................................... 2,000 88,673
-----------
370,473
-----------
TOTAL KOREA ........................................... 1,184,681
-----------
MALAYSIA (0.42%)
Consumer Goods & Related (0.06%)
Edaran Otomobile Nasional
(BHD) ....................................... 7,000 49,858
-----------
Financial Services (0.10%)
Westmont Berhad ............................... 20,000 86,605
-----------
Industrial & Related (0.26%)
Aokam Perdana Berhad .......................... 51,400 230,894
-----------
TOTAL MALAYSIA ....................................... 367,357
-----------
7
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
MEXICO (0.61%)
Basic Industries (0.01%)
*Cemex "B" Wts. 7/29/96 ........................ 35,200 $ 282
-----------
Consumer Goods & Related (0.01%)
*Cifra S.A. Wts 8/03/96 ........................ 83,000 2,490
-----------
Financial Services (0.41%)
*Ceteco (ADS) .................................. 7,400 174,862
*Grupo Carso S.A. (ADR)......................... 10,000 108,526
*Grupo Carso Wts. 5/3/96 ....................... 16,200 17,172
*Grupo Financiero Banamex
Wts. 6/29/95 ................................ 35,300 4,413
Kimberly Clark de Mexico
(ADR) ....................................... 3,000 61,976
-----------
366,949
-----------
Telecommunications (0.18%)
*Millicom International Cellular ............... 6,400 159,200
*Telefonos de Mexico
BZW Wts. July 1995 .......................... 10,700 1,070
-----------
160,270
-----------
TOTAL MEXICO .......................................... 529,991
-----------
PAKISTAN (0.01%)
Basic Industries (0.01%)
*D.G. Khan Cement Ltd. ......................... 4,043 5,573
-----------
PERU (1.18%)
Capital Goods (0.31%)
Cementos Lima "C" Shares ...................... 7,000 155,174
Cementos Norte Pacasmayo ...................... 9,966 34,672
*Southern Peru Copper,
Class "T" Shares ............................ 17,374 77,881
-----------
267,727
-----------
Financial Services (0.27%)
Banco Wiese (ADR) ............................. 7,712 69,410
*Banco Wiese "C" Shares ........................ 1 2
Banco de Credito del Peru ..................... 78,805 165,202
-----------
234,614
-----------
Telecommunications (0.27%)
*Compania Peruana de
Telephonos .................................. 128,275 215,127
*La Neuva Com de Telefonos ..................... 30,014 24,365
-----------
239,492
-----------
Real Estate (0.33%)
*Peru Real Estate S.A. "B"
Shares ...................................... 350,000 290,500
-----------
TOTAL PERU ......................................... 1,032,333
-----------
PHILIPPINES (0.06%)
Financial Services (0.06%)
*Filinvest Land Inc. ........................... 195,500 54,785
-----------
<PAGE>
(Right Column)
Shares Value
------ -----
POLAND (0.53%)
Banking (0.14%)
Bank Rozwoju Exsportu
S.A. (PDR) .................................. 8,310 $ 122,451
-----------
Basic Industries (0.09%)
*Mostostal Exports (PDR) ....................... 13,412 75,315
-----------
Capital Goods (0.15%)
*Debica S.A. (PDR) ............................. 5,000 63,333
*Polifarb Ciezyn (PDR) ......................... 13,000 71,904
-----------
135,237
-----------
Consumer Goods & Related (0.07%)
Zwyeic Brewing Company
(PDR) ....................................... 785 59,659
-----------
Financial Services (0.08%)
Elektrim Trading Company
(PDR) ....................................... 18,000 68,779
-----------
TOTAL POLAND 461,441
-----------
RUSSIA (0.06%)
Telecommunications (0.06%)
*Petersburg Long Distance Inc. ................. 10,060 51,558
-----------
SINGAPORE (0.33%)
Basic Industries (0.13%)
Clipsal Industries Hldgs., Ltd. ............... 53,000 114,480
-----------
Capital Goods (0.20%)
GP Batteries Intl. Ltd. ....................... 25,000 60,000
*Sembawang Maritime Ltd. ....................... 27,000 113,307
-----------
173,307
-----------
TOTAL SINGAPORE 287,787
-----------
SLOVENIA (0.07%)
Banking (0.07%)
*Slovenia Kredit Bank (IDR) .................... 200 58,454
-----------
SOUTH AFRICA (0.72%)
Basic Industries (0.20%)
*Iscor Ltd. .................................... 73,602 91,322
Sasol Ltd. .................................... 9,000 87,047
-----------
178,369
-----------
Consumer Goods & Related (0.19%)
*JD Group ...................................... 15,000 54,922
South African Breweries Ltd. .................. 4,000 110,535
-----------
165,457
-----------
Financial Services (0.09%)
Barlow Rand Ltd. .............................. 4,000 40,345
*Nedcor Ltd. ................................... 3,200 39,130
-----------
79,475
-----------
Metals & Mining (0.10%)
Samancor Ltd. ................................. 6,500 90,259
-----------
Real Estate (0.14%)
Safmarine & Rennie Hldgs.
Ltd. ........................................ 38,000 118,135
-----------
TOTAL SOUTH AFRICA .................................... 631,695
-----------
8
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
(Left Column)
Shares Value
------ -----
SRI LANKA (0.05%)
Financial Services (0.05%)
*Sri Lankan Growth ............................. 6,800 $ 43,350
*Sri Lankan Growth
Wts. 3/1/98 ................................. 1,360 2,040
-----------
45,390
-----------
TOTAL SRI LANKA ....................................... 45,390
-----------
TAIWAN (0.74%)
Basic Industries (0.13%)
*Tuntex Distinct (GDS) ......................... 9,524 111,907
-----------
Construction (0.16%) Principal
Pacific Construction Conv. ---------
Bond 2.13% 10/1/98 .......................... $150,000 140,993
-----------
Industrial & Related (0.01%) Shares
------
Asia Cement Corp. ............................. 190 3,800
-----------
Investment Companies (0.44%)
*Taiwan Opportunities
Fund Ltd. ................................... 37,500 387,000
-----------
TOTAL TAIWAN .......................................... 643,700
-----------
THAILAND (0.51%)
Consumer Goods & Related (0.08%)
*Hana Microelectronics ......................... 19,000 71,458
-----------
Financial Services (0.32%)
General Finance & Securities .................. 36,000 143,444
MDX Co. Ltd. .................................. 40,000 82,944
Siam City Credit Finance
& Securities ................................ 16,000 48,790
-----------
275,178
-----------
Transportation (0.11%)
Precious Shipping Corp. ....................... 10,000 107,339
-----------
TOTAL THAILAND 453,975
-----------
TURKEY (0.01%)
Consumer Goods & Related (0.01%)
Koc Yatirim ................................... 172 55
-----------
URUGUAY (0.10%)
Financial Services (0.10%)
Banco Commercial S.A. ......................... 6,600 85,800
-----------
TOTAL EMERGING MARKETS
SECTOR (IDENTIFIED COST
$12,742,396) .............................. 11,055,140
-----------
PRECIOUS METALS SECTOR (6.63%)
METAL MINING SECURITIES (6.63%)
CANADA (2.06%)
*Dayton Mining Corp. ........................... 125,000 386,100
Franco Nevada Mining Ltd. ..................... 8,500 425,078
*Prime Resources Group, Inc. ................... 90,000 620,518
TVX Gold, Inc. ................................ 50,000 363,119
-----------
TOTAL CANADA .......................................... 1,794,815
-----------
<PAGE>
(Right Column)
Shares Value
------ -----
UNITED STATES (4.57%)
Ashanti Gold Fields
(GDR) ....................................... 28,000 $ 672,000
*Canyon Resources
Corp. ....................................... 172,000 354,750
Homestake Mining .............................. 40,000 675,000
*Kinross Gold Corp. ............................ 100,000 600,000
Newmont Mining Corp. .......................... 16,000 670,000
Placer Dome, Inc. ............................. 13,000 308,750
Santa Fe Pacific Gold
Corp. ....................................... 55,000 694,375
-----------
TOTAL UNITED STATES ................................ 3,974,875
-----------
TOTAL PRECIOUS
METALS SECTOR
(IDENTIFIED COST
$5,846,039) ...................................... 5,769,690
-----------
U.S. FIXED INCOME SECURITIES SECTOR (8.66%)
U.S. GOVERNMENT AND
AGENCY ISSUES (8.66%) Principal
(c)Government National ---------
Mortgage Association TBA
9.0%, 6/01/09 ............................... $670,000 695,125
(c)Government National
Mortgage Association TBA
10.0%, 5/01/19 .............................. 450,000 483,047
Government National
Mortgage Association
6.5%, 2024 ................................ 1,861,337 1,701,034
U.S. Treasury Bond
7.50%, 11/15/24 ............................. 1,300,000 1,319,093
(b)U.S. Treasury Note
7.625%, 4/30/96 ............................. 1,680,000 1,700,474
U.S. Treasury Note
6.125%, 7/31/96 ............................. 840,000 837,112
U.S. Treasury Note
11.125%, 8/15/03 ............................ 650,000 813,109
-----------
TOTAL U.S. FIXED
INCOME SECURITIES
SECTOR
(IDENTIFIED COST
$7,467,790) ......................................... 7,548,994
-----------
OPTIONS (0.01%) Contracts
*Nikkei 225 Call, ---------
Expires 9/8/95
Strike @ 19.83
(IDENTIFIED COST
$89,480) .................................... 60 853
-----------
9
<PAGE>
BLANCHARD GLOBAL GROWTH FUND-PORTFOLIO OF INVESTMENTS (continued)
April 30, 1995
Princial Value
-------- -----
SHORT-TERM SECURITIES (3.82%)
Associates Corp. of N.A.
5.80%, 5/1/95 ...............................$2,000,000 $ 2,000,000
U.S. Treasury Bill
6.08%, 11/16/95 ............................. 630,000 609,767
U.S. Treasury Bill
6.21%, 1/11/96 .............................. 750,000 718,816
-----------
TOTAL SHORT-TERM
SECURITIES
(AMORTIZED COST
$3,322,569) ......................................... 3,328,583
-----------
TOTAL INVESTMENTS
(IDENTIFIED COST
$85,030,348) (a)(100.27%) ........................... 87,327,076
LIABILITIES IN
EXCESS OF
CASH AND OTHER
ASSETS (-0.27%) ..................................... (239,199)
-----------
NET ASSETS (100%) ..................................... $87,087,877
===========
(Right Column)
(a) The aggregate cost for federal income tax purposes is $85,120,015; the gross
unrealized appreciation is $6,289,481 and the gross unrealized depreciation
is $4,082,420; resulting in net unrealized appreciation of $2,207,061.
(b) Security partially segregated to collateralize forward currency contracts
and when issued securities. Total market value segregated is $1,690,352.
(c) When-issued security (TBA is defined as "to be announced")
* Non-income producing.
(D) Registered under SEC rule 144-A, resale restricted as to qualified
institutional buyers; represents 0.20% of net assets.
SCHEDULE OF OPEN FORWARD CURRENCY CONTRACTS AS OF APRIL 30, 1995
<TABLE>
<CAPTION>
Currency Unrealized
Currency Sold Amount Purchased Amount Delivery Date Appreciation
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
British Pounds 18,217 USD 29,365 May 1, 1995 $ 54
Swiss Francs 44,105 USD 39,100 May 2, 1995 624
----
Total Unrealized Appreciation $678
====
</TABLE>
See notes to financial statements.
10
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
Statement of Assets and Liabilities
April 30, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(Identified Cost $85,030,348) ....................................... $87,327,076
Cash .................................................................. 1,516,999
Receivables for:
Investments sold .................................................... 2,109,290
Shares of beneficial interest sold .................................. 4,353
Interest ............................................................ 156,305
Dividends ........................................................... 131,655
Forward currency contracts .......................................... 678
Foreign withholding tax reclaimable ................................. 4,985
-----------
Total assets 91,251,341
-----------
Liabilities:
Payables for:
Shares of beneficial interest repurchased ........................... 195,072
Investments purchased ............................................... 3,746,085
Foreign currency due to custodian (identified cost $72,424) ......... 71,957
Accrued expenses and other liabilities ................................ 150,350
-----------
Total liabilities ............................................... 4,163,464
-----------
Net assets ...................................................... $87,087,877
-----------
Net assets are comprised of:
Paid in capital (unlimited authorized shares of beneficial interest,
$.01 par value, 8,972,356 shares outstanding) ....................... $87,241,249
Undistributed net investment income ................................... 1,644,700
Accumulated realized loss-net ......................................... (4,098,048)
Unrealized net appreciation of investments and net currency
translation adjustments ............................................. 2,299,976
-----------
Net assets ...................................................... $87,087,877
===========
Net asset value per share ....................................... $9.71
=====
</TABLE>
See notes to financial statements.
11
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
Statement of Operations
For the Year Ended April 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest .................................................................................... $ 2,203,012
Dividends (net of $42,820 foreign withholding tax) .......................................... 1,011,758
-----------
Total income .......................................................................... 3,214,770
-----------
Expenses
Investment management fee (note 2) .......................................................... 983,753
Plan of distribution fees (note 3) .......................................................... 704,436
Transfer agent fees ......................................................................... 252,300
Custodian fees .............................................................................. 141,871
Trustees' fees, retirement plan curtailment and other expenses (note 5) ..................... 118,674
Professional fees ........................................................................... 100,393
Accounting fees ............................................................................. 76,975
Shareholder reports and notices ............................................................. 44,976
Registration fees ........................................................................... 31,165
Other ....................................................................................... 14,834
-----------
Total expenses ........................................................................ 2,469,377
-----------
Net investment income ....................................................................... 745,393
-----------
Realized and unrealized gain (loss)-net (note 1):
Realized gain (loss) on:
Investments in securities-net (net of $42,557 capital gains tax) ............. $ (722,130)
Forward currency contracts and foreign exchange
transactions-net ........................................................... (2,370,796)
Options (70,451) (3,163,377)
-----------
Change in unrealized appreciation or depreciation on:
Investments-net .............................................................. 352,187
Forward currency contract and translation
of other assets and liabilities denominated
in foreign currency-net .................................................... 434,719 786,906
----------- -----------
Net realized and unrealized losses .......................................................... (2,376,471)
-----------
Net decrease in net assets resulting from operations ........................................ $(1,631,078)
===========
</TABLE>
See notes to financial statements.
12
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
Statement of Changes in Net Assets
April 30, 1995
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income-net............................................ $ 745,393 $ 634,410
Realized gain (loss)-net......................................... (3,163,377) 10,101,136
Change in unrealized appreciation or depreciation-net............ 786,906 (1,424,538)
----------- ------------
Net increase (decrease) in net assets resulting from operations.. (1,631,078) 9,311,008
----------- ------------
Dividends and distributions to shareholders from:
Realized gains (losses)-net...................................... - (10,259,170)
Distribution in excess of net realized gains .................... (2,156,307) -
----------- ------------
(2,156,307) (10,259,170)
----------- ------------
Transactions in shares of beneficial interest-
net increase (decrease) (note 6)................................. (18,930,180) 25,973,929
----------- ------------
Net increase (decrease) in net assets.............................. (22,717,565) 25,025,767
Net assets:
Beginning of period................................................ 109,805,442 84,779,675
----------- ------------
End of year (including undistributed and overdistributed net
investment income of $1,644,700 and $334,578, respectivel........ $87,087,877 $109,805,442
=========== ============
</TABLE>
See notes to financial statements.
13
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1-Organization and Accounting Policies:
Blanchard Global Growth Fund (the "Fund") is a series of Blanchard Funds
which was organized as a Massachusetts business trust on January 24, 1986. The
Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940 (the "Act"). The Fund had no operations
before June 1, 1986 other than the sale of 12,589 shares of beneficial interest
for $100,714 to eight parties who are also shareholders or affiliates of
shareholders of Sheffield Management Company (the "Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sale
is made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. Bullion
investments are valued at the closing spot price based on dealer or exchange
quotations. All other securities and other assets of the Fund are valued at fair
value as determined in good faith by the Trustees. Foreign currency exchange
rates are determined when such rates are made available to the Fund at times
prior to the close of the New York Stock Exchange.
The abilities of the issuers of debt securities held by the Fund to meet
their obligations may be affected by economic or political developments in a
particular country, industry or region.
B. Accounting for Investments and Investment Income Transactions-Security
transactions are accounted for on the trade date (date the order to buy or sell
is executed). Realized gains and losses on security transactions are determined
on the identified cost method. Dividend income and other distributions are
recorded on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the Fund is informed after the ex-dividend
date. Interest income is accrued daily. Premiums or discounts on debt securities
are amortized or accreted as adjustments to interest income over the lives of
such securities.
C. Foreign Currency Translation-The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rates at the end of the period; and (2) purchases, sales, income and expenses
are translated at the rates of exchange prevailing on the respective dates of
such transactions. The Fund does not separately identify that portion of the
results of operations of the Fund that arise as a result of changes in the
exchange rates from the fluctuations that arise from
14
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (continued)
changes in market prices of equity investments during the year. However, in
accordance with the requirements of the Internal Revenue Code, the Fund isolates
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in market prices of foreign debt obligations sold, and such foreign
exchange losses, which amounted to $425,760, in fiscal 1995, are included in
ordinary income for federal income tax purposes and in realized gain (loss) on
forward currency contracts and foreign exchange transactions-net in the
Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future foreign rates. Forward currency contracts are valued based upon the
current forward rates. Fluctuations in the value of such contracts are recorded
as unrealized gains or losses; realized gains or losses include net gains or
losses on contracts which have settled. The Fund generally enters into a forward
currency contract as a hedge against foreign exchange rate fluctuation upon the
purchase or sale of a security denominated in a foreign currency. The Fund
maintains, as collateral, U.S. Government or other highly liquid debt
obligations in an amount equal to or greater than its net obligation for forward
currency contracts. Risks may arise as a result of the potential inability of
the counterparties to meet the terms of their contracts.
Any capital or foreign currency loss incurred after October 31 through the
end of the Fund's taxable year is deemed to arise on the first day of the Fund's
next taxable year, if so elected. The Fund elected to defer a net capital loss
of [ ] and net currency loss of [ ] incurred during the year in fiscal 1995.
Future distributions may be impacted by the deferred net capital and currency
losses, as well as other differences between book and taxable income.
E. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains is determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income or net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
distributions or dividends in excess of net investment income or net realized
capital gains. To the extent they exceed net realized capital gains or net
investment income for tax purposes, they are reported as distributions of
paid-in capital.
F. Other-Certain expenses of the Blanchard Group of Funds are allocated
among the Funds based upon their relative average net assets during the year.
NOTE 2-Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Mangers and the Allocation Strategist described below.
The Manager receives from the Fund an advisory fee payable monthly at an annual
rate of 1% of the first $150 million of the Fund's average daily net assets,
.875% of the Fund's average daily net assets in excess of $150 million but not
exceeding $300 million and .75% of the Fund's average daily net assets in excess
of $300 million.
15
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (continued)
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses
for which a waiver has been obtained, are subject to the expenses limitation
imposed by one state in which shares of the Fund are offered for sale. For the
year ended April 30, 1995, the Fund's expenses did not exceed the above
limitation.
Certain officers and/or Trustees of the Fund are officers/directors of the
Manager.
The Manager has sub-advisory agreements with Shufro, Rose and Ehrman (U.S.
Equity Securities Sector), Fiduciary Trust International, Inc. (Foreign
Securities Sector), Cavelti Capital Management, Ltd. (Precious Metals Sector),
Investment Advisers, Inc. (U.S. Fixed Income Securities Sector), Fiduciary Trust
International, Inc. (Foreign Fixed Income Sector), and Martin Currie Inc.
(Emerging Markets Sector) (formerly managed by Morgan Stanley Asset Management,
Inc.) (collectively, the "Portfolio Managers") to serve as the Portfolio
Managers for their respective sectors of the Fund. The Manager has an agreement
with Fiduciary Trust International, Inc. to be the Allocation Strategist of the
Fund. All fees for such services are paid by the Manager. The Manager has
advised the Fund that the aggregate amount of fees paid to the Portfolio
Managers and Allocation Strategist was $373,411 for the year ended April 30,
1995.
NOTE 3-Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor"), an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .75%
per annum of the Fund's average daily net assets. Payments under the Plan will
be made for expenses actually incurred by the Distributor. Provided that the
Plan continues in effect, any cumulative expenses incurred by the Distributor on
or after May 1, 1988, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$39,441. If the Plan is terminated or discontinued in accordance with its terms,
the obligation of the Fund to make payments to the Distributor pursuant to the
Plan will cease and the Fund will not be required to make any payments past the
date the Plan is terminated.
NOTE 4-Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Global Growth Fund
(collectively, the "Funds"). The transactions contemplated by the Acquisition
Agreement which have been approved by the Board of Trustees of the Funds are
conditioned upon the approval of the shareholders of each
16
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (continued)
Fund, of (1) a new investment management agreement with Signet, (2) a new
distribution agreement with Federated Securities Corp., and (3)certain other
conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5-Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments, aggregated $192,426,251 and
$207,676,868, respectively, including purchases and sales of U.S. Government
obligations of $45,646,200 and $51,504,331, respectively. For the year ended
April 30, 1995, the Fund paid brokerage commissions of $186,095 to Shufro, Rose
and Ehrman. The Distributor has advised the Fund that it received $75 from
shareholders as account opening fees for the year ended April 30, 1995. The
Manager has advised the Fund that, for the year ended April 30, 1995, it
incurred costs, which were reimbursed by the Fund, amounting to $108,373 for
performing internal accounting and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the retainer fee at the time of retirement, plus 5% for each year of service
in excess of five years of service but not in excess of ten years of service.
Net periodic pension expense included in Trustees' fees, retirement plan
curtailment and other expenses in the Statement of Operations for the year ended
April 30, 1995 was $25,539. As indicated in Note 4, the Manager has entered into
an agreement which provides for the acquisition of the Manager by Signet.
Following the acquisition, the independent directors/trustees of the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $77,069 was recorded to reflect the previously unrecognized
prior service costs of independent directors/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $102,608 of accrued pension
expense.
NOTE 6-Shares of Beneficial Interest:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
April 30, 1995 April 30, 1994
------------------ ------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold ............................. 1,720,51 $ 17,005,687 4,135,745 $ 43,740,249
Reinvestment of dividends and
distributions .................. 219,892 2,049,709 949,799 9,754,435
---------- ------------ --------- ------------
1,940,403 19,055,396 5,085,544 53,494,684
Repurchased ...................... (3,905,396) (37,985,576) (2,622,307) (27,520,755)
---------- ------------ --------- ------------
Net increase (decrease) .......... (1,964,993) $(18,930,180) 2,463,237 $ 25,973,929
========== ============ ========= ============
</TABLE>
NOTE 7-Federal Income Tax:
Any capital loss incurred after October 31 through the end of the Fund's
taxable year is deemed to arise on the first day of the Fund's next taxable
year, if so elected. The Fund elected to defer a net capital loss of $1,793,511
and a currency loss of $136,506 incurred during such period in fiscal 1995.
17
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (continued)
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to wash sales and post-October capital less deferrals. To reflect
reclassifications arising from permanent book/tax differences for the year ended
April 30, 1995, paid-in-capital was charged $452,281, accumulated net investment
income was credited $1,233,886 and accumulated realized loss-net was debited
$781,605.
At April 30, 1995, the Fund had a net capital loss carryover of $293,056,
which is available through April 30, 2003 to offset future capital gains. To the
extent that these carryover losses are used to offset future capital gains, it
is probable that the gains so offset will not be distributed to shareholders.
NOTE 8-Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the Year Ended April 30,
-----------------------------------------------
Per Share Operating Performance: 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................. $10.04 $10.00 $ 9.92 $ 9.64 $ 9.62
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ............................. .08 .03 .25 .33 .30
Net gains or losses on investments (both
realized and unrealized) ........................ (.19) 1.29 .32 .26 .14
------ ------ ------ ------ ------
Net income (loss)
from investment operations .................. (.11) 1.32 .57 .59 .44
------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from investment income-net .............. - (.00) (.30) (.31) (.21)
Distributions from realized gains-net ............. - (1.28) (.19) - (.21)
Distributions in excess of net realized gains ..... (.22) - - - -
------ ------ ------ ------ ------
Change in net asset value ..................... (.33) .04 .08 .28 .02
Net asset value, end of year ........................ $ 9.71 $10.04 $10.00 $ 9.92 $ 9.64
====== ====== ====== ====== ======
Total return ........................................ (1.04%) 12.91% 6.08% 6.24% 4.61%
Ratios/Supplemental Data:
Net assets, end of year ($ Million) ............... $ 87 $110 $85 $128 $194
Ratio of expenses to average net assets ........... 2.51% 2.61% 2.40% 2.31% 2.36%
Ratio of net investment income of
average net assets .............................. .76% .67% 1.72% .31% 2.84%
Portfolio turnover ................................ 221% 166% 138% 109% 78%
</TABLE>
18
<PAGE>
BLANCHARD GLOBAL GROWTH FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Global Growth Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Global Growth Fund (the
"Fund") at April 30, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 1995 by correspondence with the custodian and brokers and the application of
alternative procedures where confirmations were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
19
<PAGE>
(Left Column)
Portfolio Advisers
Lombard Order International
Portfolio Mot., Ltd.
WLO Global Management
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Short-Term
Global Income Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Short-Term
Global Income
Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD 100% TREASURY MONEY MARKET FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with
the current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to
which Blanchard 100% Treasury Money Market Fund (the "FUND") is offered.^
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS PAGE
- ----------------- ----
Investment Objective and Policies .......................................... 2
Investment Restrictions .................................................... 2
Yield Calculation .......................................................... 3
Management of the FUND ..................................................... 4
Management Services ........................................................ 9
Portfolio Advisory Services ................................................ 9
Administrative Services .................................................... 10
Determination of Net Asset Value ........................................... 10
Portfolio Transactions ..................................................... 11
Dividends, Distributions and Tax Matters ................................... 13
Description of the FUND .................................................... 15
Shareholder Reports ........................................................ 16
Financial Statements ....................................................... A-1
Manager
Virtus Capital Management, Inc.
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the FUND is to seek the highest level of
current income as is consistent with the preservation of capital and maintenance
of liquidity. The FUND invests exclusively in short-term direct obligations of
the U.S. Treasury.
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of the outstanding shares of
the FUND. As used in the Prospectus and the Statement of Additional Information,
the term "majority of the outstanding shares" of the FUND means the vote of the
lesser of (i) 67% or more of the shares of the FUND present at a meeting, if the
holders of more than 50% of the outstanding shares of the FUND are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
FUND. The following are the FUND's investment restrictions set forth in their
entirety.
1. The FUND will not purchase a security if, as a result: (a) it would
own more than 5% of any class or of the outstanding voting securities of any
single company other than obligations of the U.S. Government or its agencies or
instrumentalities; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets (other
than obligations of the U.S. Government or its agencies or instrumentalities)
would be concentrated in companies within any one industry as such industries
are defined in the SIC/SEC Industries Code; or (d) more than 5% of total assets
would be invested in warrants or rights.
2. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 10% of the market
value of its total assets). The FUND will not purchase additional securities
while borrowing is in excess of 5% of the market value of its total assets.
3. The FUND will not make loans of money or securities other than (a)
through the purchase of U.S. Government obligations in accordance with its
investment objective and (b) through repurchase agreements.
4. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities.
5. The FUND may not knowingly purchase or otherwise acquire securities
which are subject to legal or contractual restrictions on resale or for which
there is no readily available market and will not engage in repurchase
transactions maturing in more than seven days if, as a result, more than 10% of
the FUND's total assets would be invested in repurchase transactions maturing in
excess of seven days.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
7. The FUND may not purchase or sell commodity contracts.
8. The FUND may not write, purchase or sell puts, calls, straddles,
spreads or any combination thereof.
-2-
<PAGE>
9. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales.
10. The FUND may not invest in companies for the purpose of exercising
control or management.
11. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
12. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and Trustees of the Manager, who
individually own beneficially more than 1/2 of 1% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities.
13. The FUND may not purchase or sell real estate.
14. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs; provided, however, that if consistent with
the objective of the FUND, the FUND may purchase securities of issuers whose
principal business activities fall within such areas.
15. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
YIELD CALCULATION
The FUND provides current yield and effective yield quotations, which
are calculated in accordance with the regulations of the Securities and Exchange
Commission, based upon changes in account value during a recent specified
period.
Current yield quotations are computed by annualizing (on a 365-day
basis) the "base period return". The "base period return" is computed by
determining the net change exclusive of capital changes in the value of the
account, divided by the value of the account at the beginning of the base
period. Effective yield is computed by compounding the "base period return".
The current and effective yield figures are not a representation of
future yield as the FUND's net income and expenses will vary based on many
factors, including changes in the types of instruments in the FUND's portfolio.
The stated yield of the FUND may be useful in reviewing the FUND's performance
and in providing a basis for comparison with other investment alternatives.
However, unlike bank deposits and other investments which pay fixed yields for
stated periods of time, the yield of the FUND fluctuates. In addition, other
investment companies may calculate yield on a different basis and may purchase
securities for their portfolios which have different qualities and maturities
than those of the FUND's portfolio securities.
-3-
<PAGE>
The FUND's current yield and effective yield for the seven day period
ended April 30, 1995, were 3.89% and 3.97%, respectively.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The Virtus
Funds; Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Professor of
Medicine and Member, Board of Trustees, University
of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center-Downtown, Member, Board
of Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Director of the Fund;
President, and Treasurer and Trustee of Blanchard
Precious Metals Fund, Inc.; President, Treasurer
and Trustee of The Virtus Funds; Vice President,
Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers,
Federated Management, Federated Research,
Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and
Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
<FN>
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of Trustees handles
the responsibilities of the Board of Trustees between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</FN>
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
-7-
<PAGE>
Fund Ownership
As of July 30, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 30, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C> <C>
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
<FN>
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
</FN>
</TABLE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the fiscal years ended April 30, 1995, 1994 and 1993, the
aggregate amounts paid or accrued by the FUND to the prior manager under the
management agreement then in effect were $1,005,077, $851,522, and $588,587,
respectively, after voluntary waivers of $220,924, $759,018 and $588,587,
respectively.
PORTFOLIO ADVISORY SERVICES
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement")
between the prior manager and HSBC Asset Management Americas Inc. (the
"Portfolio Adviser"), the prior manager had delegated to the Portfolio Adviser
the authority and responsibility to make and execute decisions for the Fund
within the framework of the Fund's investment policies, subject to review by the
prior manager and the Board of Trustees of the Fund for the fiscal year ended
April 30, 1995.
The Sub-Advisory Agreement provides for the payment to the Portfolio
Adviser by VCM, of monthly compensation for providing investment advice to the
Fund and managing the investment of the assets of the Fund. VCM pays to the
Portfolio Adviser an annual fee equal to the greater of .10% of the Fund's
-9-
<PAGE>
average daily net assets or $50,000, annually. The Sub-Advisory Agreement
provides that the Portfolio Adviser's fee shall be reduced proportionately based
on the ratio of the Portfolio Adviser's fee to VCM's fee in the event VCM's fee
is reduced as a result of a state expense limitation. For the fiscal years ended
April 30, 1995, 1994 and 1993 the prior manager paid the Portfolio Adviser an
aggregate of $200,998, $165,290 and $119,129, respectively, for services
provided. Currently, VCM serves as manager to the FUND.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DETERMINATION OF NET ASSET VALUE
The net asset value of the FUND is determined as of the close of
trading (presently 4:00 p.m. New York time) on the New York Stock Exchange each
day the Exchange is open for business excluding New Years Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Substantially all of the FUND's net income calculated from the
immediately preceding determination of net income, is declared daily as
dividends.
For the purpose of determining the price at which shares are issued and
redeemed, the net asset value per share is calculated immediately after the
daily dividend declaration by: (a) valuing all securities and instruments as set
forth below; (b) deducting the FUND's liabilities; and (c) dividing the
resulting amount by the number of shares outstanding. As discussed below, it is
the intention of the FUND to maintain a net asset value per share of $1.00. The
FUND's portfolio instruments are valued on the basis of amortized cost. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
FUND would receive if it sold its portfolio. During periods of declining
interest rates, the daily yield on shares of the FUND computed as described
above may be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the FUND results in a lower aggregate portfolio value
on a particular day, a prospective investor in the FUND would be able to obtain
a somewhat higher yield than would result from an investment in
-10-
<PAGE>
a fund utilizing solely market values, and existing investors in the FUND would
receive less investment income. The converse would apply in a period of rising
interest rates.
The FUND's use of amortized cost and the maintenance of the FUND's net
value per share of $1.00 is based on its election to operate under the
provisions of Rule 2a-7 under the 1940 Act. As a condition of operating under
that rule, the FUND must maintain a dollar-weighted average portfolio maturity
of 90 days or less, purchase only U.S. dollar denominated instruments having
remaining maturities of 13 months or less, and invest only in securities which
are determined by the Trustees to present minimal credit risks and which are
rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations ("NRSROs") (or
one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Trustees. Furthermore, investments in rated
instruments not rated in the highest category by at least two NRSROs (or one
NRSRO if the instrument was rated by only one such organization), and unrated
instruments not determined by the Board of Trustees to be comparable to those
rated in the highest category, will be limited to 5% of MMC's total assets, with
the investment in any such issuer being limited to not more than the greater of
1% of MMF's total assets or $1 million.
The Trustees have also agreed, as a particular responsibility within
the overall duty of care owed to its shareholders, to establish procedures
reasonably designed, taking into account current market conditions and the
FUND's investment objective, to stabilize the net asset value per share as
computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Trustees deem appropriate and at such intervals
as are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by the Trustees.
PORTFOLIO TRANSACTIONS
Subject to the supervision of the Trustees and VCM, the Portfolio
Adviser is responsible for decisions to buy and sell securities for the FUND.
Since purchases and sales of portfolio securities by the FUND are usually
principal transactions, the FUND will incur little or no brokerage commissions.
Portfolio securities are normally purchased directly from the issuer or from a
market maker for the securities. The purchase price paid to dealers serving as
market makers may include a spread between the bid and asked prices. The FUND
may also purchase securities from underwriters at prices which include a
concession paid by the issuer to the underwriter.
The Portfolio Adviser's primary consideration in effecting a security
transaction is to obtain the best net price and the most favorable execution of
the order. To the extent that the executions and prices offered by more than one
dealer are comparable, the Portfolio Adviser may, in its discretion, effect
transactions with dealers that furnish statistical, research or other
information or services, which are deemed by the Portfolio Adviser to be
beneficial to the FUND's investment programs. Certain research services
furnished by dealers may be useful to the Portfolio Adviser with clients other
than the FUND. Similarly, any research services received by the Portfolio
Adviser through placement of portfolio transactions of other clients may be of
value to the Portfolio Adviser in fulfilling its obligations to the FUND.
-11-
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus is not intended as a substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of
-12-
<PAGE>
other issuers (as to which the FUND has not invested more than 5% of the value
of the FUND's total assets in securities of such issuer and as to which the FUND
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the FUND controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporate shareholders.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital
gain dividend, will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his or her shares or
whether such gain was recognized by the FUND prior to the date on which the
shareholder acquired his shares.
-13-
<PAGE>
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U. S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
-14-
<PAGE>
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate, if any) upon the gross amount of the dividend. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the FUND and capital gain dividends..
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to
-15-
<PAGE>
circumstances in which the FUND itself would be unable to meet its obligations.
VCM believes that, in view of the above, the risk of personal liability to
shareholders is remote. The Declaration of Trust further provides that the
Trustees will not be liable for errors of judgment or mistakes of fact or law,
but nothing in the Declaration of Trust protects a Trustee against any liability
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND. ^
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the fiscal year ended
April 30, 1995 are attached hereto.
-16-
<PAGE>
Dear Shareholders,
I'm pleased to report on the positive performance of your Blanchard 100%
Treasury Money Market Fund for the fiscal year ended April 30, 1995.
Although past performance is no guarantee of future results, I believe the
past fiscal year's results demonstrate the Fund's ability to seek solid monthly
income while placing special emphasis on capital preservation.
The Year In Review
During 1994 and into the first quarter of 1995, the Federal Reserve
aggressively raised interest rates seven times. The final tightening was on
February 1, 1995, when the Federal Reserve raised the Fed Funds level by 50
basis points (.50%) to 6.00%. The period represented a well-balanced economic
expansion that reflected few imminent signs of substantial weakening, and the
Federal Reserve was acting to forestall potential inflation.
The domestic bond market suffered negative consequences this past year, as
the increase in interest rates caused the prices of fixed income securities to
decline. Consequently, in an interest rate environment reflecting higher rates,
the Blanchard 100% Treasury Money Market Fund generated an increase in yields
paid, while preserving your principal investment.
Looking ahead to the upcoming year, we feel that the substantial slowdown in
economic growth will cause the Federal Reserve to hold interest rates stable
until the fourth quarter. Furthermore, we believe that the economy is heading
toward a "soft landing," which is defined as a gradual slowdown in economic
growth without incurring a recession.
Because your Fund invests strictly in U.S. Treasury securities, it will
continue to offer you a potentially "safe harbor" from any market volatility,
while generating monthly income that is exempt from state and local taxes
(except in Pennsylvania) _ so you'll keep more of what you earn. Additionally,
the Fund's convenient free check writing privilege offers you immediate access
at all times to the cash in your account.
We look forward to being of continued service to you throughout this new
fiscal year 1995. Rest assured that our highest priorities remain quality,
safety, and performance for your investment with the Fund.
Thank you for your continued confidence and support.
Sincerely,
EM:ml Edward J. Merkle
Managing Director
HSBC Asset Management Americas, Inc
Portfolio Managers of the Blanchard 100% Treasury Money Market Fund
The Fund is not guaranteed by the U.S. government. Yield is historic and
will fluctuate, and there is no absolute guarantee that the Fund will be able to
maintain a constant $1.00 share price.
Distributed by Sheffield Investments, Inc. (1551) 02ARSL0695
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
April 30, 1995
<TABLE>
<CAPTION>
Principal Value
--------- -----
<S> <C> <C>
U.S. Government Obligations (97.1%)
U.S. Treasury Bill 5.548% 5/04/95................ $48,000,000 $ 47,977,820
U.S. Treasury Bill 5.724% 5/11/95................ 2,210,000 2,206,492
U.S. Treasury Bill 5.923% 5/25/95................ 1,600,000 1,593,706
U.S. Treasury Bill 5.680% 6/01/95................ 87,170,000 86,745,708
U.S. Treasury Bill 5.773% 6/22/95................ 3,300,000 3,272,705
U.S. Treasury Bill 5.343% 8/24/95................ 18,950,000 18,632,462
------------
Total Investments
(Amortized Cost $160,428,893)(a)(97.1%)........ 160,428,893
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES (2.9%)................... 4,725,666
------------
NET ASSETS (100%)................................ $165,154,559
============
<FN>
(a) The amortized cost for book purposes and cost for federal income tax
purposes are the same.
</FN>
</TABLE>
See notes to financial statements.
2
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(Amortized Cost $160,428,893) (note 1)...................... $160,428,893
Cash.......................................................... 223,138
Receivables for:
Investments sold............................................ 3,375,000
Shares of beneficial interest sold.......................... 1,719,677
Interest.................................................... 65,390
------------
Total assets.............................................. 165,812,098
------------
Liabilities:
Payables for:
Shares of beneficial interest repurchased................... 366,426
Dividends to shareholders................................... 33,415
Accrued expenses and other liabilities........................ 257,698
------------
Total liabilities......................................... 657,539
------------
Net assets (unlimited authorized shares of beneficial interest,
$.01 par value, 165,260,846 shares outstanding)............... $165,154,559
============
Net asset value per share....................................... $1.00
=====
</TABLE>
See notes to financial statements.
3
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
<TABLE>
<S> <C> <C>
Investment income:
Interest......................................................... $9,612,788
Expenses
Investment management fee (note 2)................... $1,005,077
Transfer agent fees.................................. 497,100
Trustees' fees, retirement plan curtailment and
other expenses (note 4)............................ 237,009
Accounting fees...................................... 160,800
Professional fees.................................... 90,383
Shareholder reports and notices...................... 60,499
Registration fees.................................... 47,500
Custodian fees....................................... 35,499
Other................................................ 6,067
----------
Total expenses................................... 2,139,934
Less: Fund expenses voluntarily waived
by Manager (note 2)............................ (166,695)
----------
Net expenses..................................................... 1,973,239
----------
Investment income--net increase in net assets
resulting from operations...................................... $7,639,549
==========
</TABLE>
See notes to financial statements.
4
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income-net increase resulting from
operations................................. $ 7,639,549 $ 4,716,947
Dividends to shareholders from:
Investment income-net........................ (7,639,549) (4,716,947)
------------ ------------
--- ---
Transactions in shares of beneficial
interest-net increase (decrease) (note 5).... (65,636,404) 65,816,563
------------ ------------
Net increase (decrease) in net assets...... (65,636,404) 65,816,563
Net assets:
Beginning of year............................ 230,790,963 164,974,400
------------ ------------
End of year.................................. $165,154,559 $230,790,963
============ ============
</TABLE>
See notes to financial statements.
5
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1-Organization and Accounting Policies:
Blanchard 100% Treasury Money Market Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified
open-end management investment company. It is a series of Blanchard Funds which
was organized as a Massachusetts business trust on January 24, 1986. The Fund
commenced operations on February 24, 1989.
A. Valuation of Investments-Portfolio securities are valued at amortized
cost, which approximates market value.
B. Accounting for Investments-Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). In computing net
investment income, the Fund amortizes any premiums or accretes any discounts on
securities owned. Realized gains and losses on security transactions are
determined on the identified cost method.
C. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
E. Other-Certain expenses for the Blanchard Funds are allocated among the
Funds based upon their relative average net assets.
NOTE 2-Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), Sheffield Management
Company, the Manager manages the Fund and the investment of the Fund's assets
subject at all times to the supervision of the Fund's Trustees. In addition to
providing overall business management and administrative services, the Manager
selects, monitors and evaluates the portfolio adviser, HSBC Asset Management
Americas, Inc. (formerly named Marinvest, Inc.), (the "Portfolio Adviser"). The
Manager receives from the Fund an advisory fee payable monthly at an annual rate
of .5% of the first $500 million of the Fund's average daily net assets, .475%
of the Fund's average daily net assets in excess of $500 million but not
exceeding $1 billion, plus .45% of the Fund's average daily net assets in excess
of $1 billion. The Manager pays all fees of the Portfolio Adviser for its
services. The Manager advised the Fund that it paid $200,998 to the Portfolio
Adviser during the year ended April 30, 1995.
6
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
The Manager voluntarily waived a portion of its advisory fee, which amounted
to $166,695, for the year ended April 30, 1995.
Pursuant to the Agreement, the Manager provides continuous supervision of
the investment portfolio, furnishes office space and facilities, maintains
certain of the Fund's books and records, and pays the salaries and expenses of
all personnel, including officers of the Fund, who are employees of the Manager
and its affiliates. The Manager has advised the Fund that for the year ended
April 30, 1995 it incurred costs, which were reimbursed by the Fund, amounting
to $220,924 for performing internal accounting and transfer agency functions for
the Fund.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
and extraordinary expenses, are subject to the expense limitations imposed by
one of the states in which shares of the Fund are offered for sale. For the year
ended April 30, 1995 the Fund's expenses did not exceed such limitation.
Certain officers and/or Trustees of the Fund are officers and/or directors
of the Manager.
NOTE 3-Acquisition Agreement:
Sheffield Management Company ("the Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard 100% Treasury Money
Market Fund (collectively, the "Funds"). The transactions contemplated by the
Acquisition Agreement which have been approved by the Board of Trustees of the
Funds are conditioned upon the approval of the shareholders of each Fund, of (1)
a new investment management agreement with Signet, (2) a new distribution
agreement with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 4-Transaction with Affiliates:
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustee fees, retirement plan
curtailment and other expenses in the Statement of Operations for the year ended
April 30, 1995 was $52,296. As indicated in Note 3, the Manager has entered into
an agreement which provides for the acquisition of the Manager by Signet.
Following the acquisition, the independent directors/trustees for the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $154,090 was recorded to reflect previously unrecognized
prior service costs of the independent director/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $206,386 of accrued pension
expense.
7
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 5-Shares of Beneficial Interest:
Transactions in shares of beneficial interest, all at $1 per share, were as
follows:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Sold........................................ 212,621,088 340,832,974
Reinvestment of dividends................... 7,175,266 4,285,831
----------- -----------
219,796,354 345,118,805
Repurchased................................ (285,432,758) (279,302,242)
----------- -----------
Net increase (decrease).................... (65,636,404) 65,816,563
=========== ===========
</TABLE>
NOTE 6-Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the Year Ended April 30,
-----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................ $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment income........................... .04 .03 .03 .04 .07
Net gains or losses on securities
(both realized and unrealized)................ .00 .00 .00 .00 .00
----- ----- ----- ----- -----
Net income from investment operations......... .04 .03 .03 .04 .07
----- ----- ----- ----- -----
Less Dividends to Shareholders:
Dividends from investment income-net............ (.04) (.03) (.03) (.04) (.07)
----- ----- ----- ----- -----
Change in net asset value..................... .00 .00 .00 .00 .00
----- ----- ----- ----- -----
Net asset value, end of year...................... $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total return...................................... 4.02% 2.76% 3.42% 4.60% 6.80%
Ratios/Supplemental Data:
Net assets, end of year ($ Million)............. $165 $231 $165 $58 $38
Ratios of expenses to average net assets*(1).... .99% .41% .08% .86% 1.11%
Ratios of net investment income
to average net assets*(1)..................... 3.83% 2.80% 3.27% 4.52% 6.62%
<FN>
* The ratios of expenses to average net assets and net investment income to
average net assets would have been 1.07% and 3.75%, respectively, for the year
ended April 30, 1995, .93% and 2.29%, respectively, for the year ended April
30, 1994, .92% and 2.43%, respectively, for the year ended April 30, 1993,
1.46% and 3.92%, respectively, for the year ended April 30, 1992, 1.23% and
6.50%, respectively, and for the year ended April 30, 1991, if a portion of
the Fund's expenses had not been voluntarily waived by the Manager.
(1)Net of expenses waived and absorbed by Manager.
</FN>
</TABLE>
8
<PAGE>
BLANCHARD 100% TREASURY MONEY MARKET FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard 100% Treasury Money Market Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard 100% Treasury Money
Market Fund (the "Fund") at April 30, 1995, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these finanical
statements based on our audits. We conducted our audits of these finanical
statements in accordance with generally acepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, asssessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at April 30, 1995 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
9
<PAGE>
(Left Column)
Portfolio Advisers
Calveti Capital Management, Ltd.
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel
Blanchard Precious
Metals Fund, Inc.
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Precious Metals
Fund, Inc.
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
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STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
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This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Short-Term Global Income Fund (the "FUND") is offered. Please
retain this document for future reference.
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To obtain the Prospectus please call the FUND at 1-800-829-3863
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TABLE OF CONTENTS Page
General Information and History ............................................ 2
Investment Objective and Policies .......................................... 2
Investment Restrictions .................................................... 12
Portfolio Transactions ..................................................... 13
Computation of Net Asset Value ............................................. 15
Performance Information .................................................... 16
Additional Purchase and Redemption Information ............................. 17
Tax Matters ................................................................ 18
The Management of the FUND ................................................. 23
Management Services ........................................................ 28
Portfolio Management Services .............................................. 29
Administrative Services .................................................... 30
Distribution Plan ..........................................................
Description of the FUND .................................................... 30
Shareholder Reports ........................................................ 30
Appendix A ................................................................. A-1
Financial Statements ....................................................... B-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
Lombard Odier International Portfolio Management Limited
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
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GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide high current income with minimum risk
of principal and relative stability of net asset value. This objective is a
fundamental policy and may not be changed except by a majority vote of
shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with^ the sections in the FUND's Prospectus entitled "Investment
Objective and Policies" and "Certain Investment Techniques and Policies."
To achieve its objective, the FUND will invest in a portfolio
consisting of debt obligations rated in the four highest rating categories of
nationally recognized rating services denominated in various currencies, which
have average remaining maturities not exceeding three years. The FUND may also
invest in repurchase agreements, cash or cash equivalents or other such high
quality debt instruments as is consistent with its objective. In addition, the
FUND is authorized, for the purpose of increasing its yield or hedging its
currency exposure, to engage in one or more of the specialized investment
techniques and strategies described in the Prospectus under the caption "Certain
Investment Techniques and Policies".
The Fund will seek investment opportunities in foreign, as well as
domestic, securities markets. While the FUND normally will maintain a
substantial portion of its assets in debt securities denominated in foreign
currencies, it is anticipated that, under normal circumstances, the FUND's
assets will include securities in at least three countries, including the United
States. The FUND currently does not intend to invest in securities issued by
Eastern European countries. The FUND is designed for the investor who seeks a
higher yield than a money market fund and less fluctuation in net asset value
than a longer-term bond fund.
In pursuing its investment objective, the FUND seeks to minimize credit
risk and fluctuations in net asset value by investing only in shorter-term debt
obligations. Although the FUND may invest in debt obligations having average
remaining maturities of up to three years, it reserves the right to invest
without limitation in debt obligations having substantially shorter remaining
maturities during times of rapidly changing currency exchange rates or other
uncertain market or economic conditions, or in anticipation of such times. The
FUND invests in debt obligations denominated in the currencies of countries
whose governments the Manager considers stable. In addition to the U.S. Dollar,
such currencies include, among others, the Australian Dollar, Austrian
Schilling, British Pound Sterling, Canadian Dollar, Danish Kroner, Dutch
Guilder, European Currency Unit ("ECU"), Finnish Markka, French Franc, German
Mark, Italian Lira, Japanese Yen, New Zealand Dollar, Norwegian Kroner,
Portuguese Escudo, Spanish Peseta, Swedish Krona and Swiss Franc. An issuer of
debt securities purchased by the FUND may be domiciled in a country other than
the country in whose currency the instrument is denominated.
The FUND seeks to minimize investment risk by generally limiting its
portfolio investments to debt securities rated no lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poors Corporation
("S&P"). Accordingly, with respect to the debt securities and other investments
described above, the FUND's portfolio consists only of: (i) debt securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government Securities"); (ii) obligations issued or guaranteed by a
foreign government or any of its political subdivisions, authorities, agencies,
or instrumentalities, or by supranational entities (which are described below)
(collectively referred to as "Foreign Government Obligations"), which are rated
no lower than Baa by Moody's or BBB by S&P or, if unrated, determined by FUND
management to be of equivalent quality; (iii) corporate debt securities rated no
lower than Baa by
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Moody's or BBB by S&P or, if unrated, determined by FUND management to be of
equivalent quality; (iv) certificates of deposit and banker's acceptances issued
or guaranteed by, or time deposits maintained at banks, including foreign
branches or subsidiaries of U.S. depository institutions ("Eurodollar"
obligations) or U.S. branches or subsidiaries of foreign depository institutions
("Yankeedollar" obligations) or foreign branches or subsidiaries of foreign
depository institutions, having total assets of more than $500 million and
determined by FUND management to be of high quality; (v) commercial paper rated
A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch
Investors Service, Inc., Duff 1 or Duff 2 by Duff & Phelps Inc. or, if not
rated, issued by U.S. or foreign companies having outstanding debt securities
rated AAA, AA or A by S&P, or Aaa, Aa or A by Moody's and determined by Fund
management to be of high quality, and loan participation interests having a
remaining term not exceeding one year in loans extended to such companies by
commercial banks or other commercial lending institutions whose long-term debt
and commercial paper is rated AAA or AA by S&P or Aaa or Aa by Moody's ("a High
Quality Rating"); (vi) repurchase agreements with respect to the foregoing debt
securities; and (viii) futures contracts, options on futures contracts, options
on foreign currencies, options on portfolio securities, and forward foreign
currency exchange contracts. To further minimize investment risk, the FUND may
only invest (a) up to 25% of its assets in securities rated no lower than A by
Moody's or S&P (or, if unrated, determined by the Portfolio Manager to be of
equivalent quality); (b) up to 10% of its assets in securities rated no lower
than Baa by Moody's or BBB by S&P (or, if unrated, determined by the Portfolio
Manager to be of equivalent quality; and (c) up to 10% of its assets in any such
Foreign Government Obligations issued in any one country. The medium to
lower-rated and unrated Foreign Government Obligations in which the FUND invests
tend to offer higher yields than higher-rated securities with the same
maturities. Debt obligations rated lower than A by S&P or Moody's tend to have
speculative characteristics and generally involve more risk of loss of principal
and income than higher-rated securities. For a description of the various
ratings used by the ratings agencies, see Appendix A to this Statement of
Additional Information.
The FUND may invest in debt securities issued by supranational
organizations such as: the World Bank, which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations in the
Asian and Pacific regions. The World Bank, Asian Development Bank and other such
supranational organizations are not considered by the FUND or its management to
be "banks" for purposes of computing investment restrictions regarding
non-diversification or concentration policies and, as a result, the debt
securities issued by such supranational organizations will not be included as
banks for determination of compliance with the percentage limitations of such
investment policies.
The FUND may invest in debt securities denominated in the ECU, which is
a "basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Manager does not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranationals, in particular, issue ECU-denominated
obligations.
The FUND also may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
one year, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit the FUND to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between
the FUND, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation
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is based on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments will generally be traded, and there generally is no
established secondary market for these obligations, although they are redeemable
at face value. Accordingly, where these obligations are not secured by letters
of credit or other credit support arrangements, the FUND's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
the FUND may invest in obligations which are not so rated only if FUND
management determines that, at the time of investment, the obligations are of
comparable quality to the other obligations in which the FUND may invest. In
making this determination, FUND management will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations in the FUND's portfolio. The FUND will not invest more than 10% of
the value of its total assets in floating or variable rate demand obligations as
to which it cannot exercise the demand feature on not more than seven days'
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable. See "Investment Restriction
No. 6" in this Statement of Additional Information.
The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. However, the FUND intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which
will relieve the FUND of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Distributions and Taxes." To so
qualify, among other requirements, the FUND will limit its investments so that,
at the close of each calendar quarter, (i) not more than 25% of the market value
of the FUND's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the FUND will not own more than 10% of the
outstanding voting securities of a single issuer. For purposes of the FUND's
requirements to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where the FUND does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the FUND and the borrower will be deemed
issuers of the loan participation for tax diversification purposes. The FUND's
investments in U.S. Government Securities are not subject to these limitations.
Since the FUND, as a non-diversified investment company may invest in a smaller
number of individual issuers than a diversified investment company, an
investment in the FUND may, under certain circumstances, present greater risk to
an investor than an investment in a diversified company.
Futures contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a
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specified price, date, time and place. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified foreign currency at a specified price, date,
time and place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND'S total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
The purpose of entering into a futures contract is to protect the FUND
from fluctuations in the value of its portfolio securities without necessarily
buying or selling the securities. Of course, because the value of portfolio
securities will far exceed the value of the futures contracts sold by the FUND,
an increase in the value of the futures contracts could only mitigate but not
totally offset the decline in the value of the FUND's assets. No consideration
is paid or received by the FUND upon entering into a futures contract. Upon
entering into a futures contract, the FUND will be required to deposit in a
segregated account with its custodian an amount of cash or cash equivalents,
such as U.S. Government Securities or high grade debt obligations, equal to
approximately 1% to 10% of the contract amount (this amount is subject to change
by the exchange on which the contract is traded and brokers may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
FUND upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in the
margin account if the FUND fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the FUND may elect to close the position by
taking an opposite position, which will operate to terminate the FUND's existing
position in the contract.
There are several risks in connection with the use of futures contracts
as a hedging device. Successful use of futures contracts is subject to the
ability of FUND management to predict correctly movements in the price of the
securities or currencies underlying the particular hedge. These predictions and,
thus, the use of futures contracts involve skills and techniques that are
different from those involved in the management of the portfolio securities
being hedged. In addition, there can be no assurance that there will be a
correlation between movements in the price of the underlying securities or
currencies and movements in the price of the securities which are the subject of
the hedge. A decision concerning whether, when and how to hedge involves the
exercise of skill and judgment and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends in
interest rates or currency values.
Positions in future contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
FUND intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting the FUND to substantial losses. In such event, and in the event
of adverse price movements, the FUND would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the FUND's securities being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities
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being hedged will, in fact, correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
If the FUND has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does not
occur, the FUND will lose part or all of the benefit of the increased value of
securities which it has hedged because it will have offsetting losses in its
futures positions. Losses incurred in hedging transactions and the costs of
these transactions will affect the FUND's performance. In addition, in such
situations, if the FUND had insufficient cash, it might have to sell securities
to meet daily variation margin requirements at a time when it would be
disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in interest rates
or currency values, as the case may be.
Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, as a hedge
against changes in interest rates and market conditions, and may enter into
closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated trends in interest
rates and securities markets and in currency values by VCM, which could prove to
be incorrect. Even if VCM's expectations are correct, there may be an imperfect
correlation between the change in the value of the options and of the portfolio
securities hedged.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income and for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the FUND may purchase put options on the foreign currency. If the value of the
currency does decline, the FUND will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
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Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected thereby increasing the
cost of such securities, the FUND may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the FUND deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the FUND could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The FUND may write options on foreign currencies to increase its gross
income and for the same types of hedging purposes. For example, where the FUND
anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the FUND
could write a put option on the relevant currency which, if the currency moves
in the manner projected, will expire unexercised and allow the FUND to hedge
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the FUND would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the FUND also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with its Custodian or with a designated
sub-custodian. As a writer of a covered put option, the FUND incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and over-the-counter put options written by
the FUND will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the FUND maintains, in a segregated account
maintained on its behalf at the FUND's custodian, cash, U.S. Government
securities or other high grade obligations in an amount equal to at least the
exercise price of the option, at all times during the option period. Similarly,
a short put position could be covered by the FUND by its purchase of a put
option on the same security (currency) as the underlying security of the written
option, where the exercise price of the purchased option is equal to or more
than the exercise price of the put written or less than the exercise price of
the put written if the marked to market difference is maintained by the FUND in
cash, U.S. Government securities or other high grade debt obligations which the
FUND holds in a segregated account maintained at its custodian.
The FUND also intends to write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign currency
is for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. Dollar value of a security which the FUND
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an
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adverse change in the exchange rate. In such circumstances, the FUND
collateralizes the option by maintaining in a segregated account with its
Custodian or with a designated sub-custodian, cash or U.S. Government securities
in an amount not less than the value of the underlying foreign currency in U.S.
Dollars marked-to-market daily.
Forward Currency Contracts
The FUND may engage in currency exchange transactions to hedge against
uncertainty in the level of future exchange rates. The FUND will conduct its
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or through entering into forward
contracts to purchase or sell currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. The FUND's dealings in
forward currency contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward currency with respect to specific receivables or payables of the FUND
generally accruing in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions denominated or quoted in the currency. The FUND may
not position hedge with respect to a particular currency to an extent greater
than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in or currently
convertible into that particular currency. The FUND may, however, enter into a
position hedging transaction with respect to a currency other than that held in
the FUND's portfolio, if such a transaction is deemed to be a hedge by VCM . If
the FUND enters into a position hedging transaction, cash or liquid high grade
debt securities will be placed in a segregated account in an amount equal to the
value of the FUND's total assets committed to the consummation of the forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the FUND's commitment with
respect to the contract. Hedging transactions may be made from any foreign
currency into U.S. Dollars or into other appropriate currencies.
At or before the maturity of a forward currency contract, the FUND may
either sell a portfolio security and make delivery of the currency, or retain
the security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the FUND will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
currency contract prices. Should forward prices decline during the period
between the FUND's entering into a forward contract for the sale of a currency
and the date it enters into an offsetting contract for the purchase of the
currency, the FUND will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the FUND will suffer a loss to the
extent the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The cost to the FUND of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, at the same time, they limit any potential gain that might result
should the value of the currency increase.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year.
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Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, and in certain instances, the FUND may purchase and sell options in
the over-the-counter market ("OTC Options"). A call option gives the purchaser
of the option the right to buy the underlying security from the writer at the
exercise price at any time prior to the expiration of the contract, regardless
of the market price of the security during the option period. The premium paid
to the writer is the consideration for undertaking the obligations under the
option contract. The writer forgoes the opportunity to profit from an increase
in the market price of the underlying security above the exercise price so long
as the option remains open and covered, except insofar as the premium represents
such a profit.
The FUND may purchase options only to close out a position. In order to
close out a position, the FUND will make a "closing purchase transaction", which
involves the purchase of a call option on the same security with the same
exercise price and expiration date as the call option that it has previously
written on any particular security. The FUND will effect a closing purchase
transaction so as to close out any existing call option on a security that it
intends to sell. The FUND will realize a profit or loss from a closing purchase
transaction if the amount paid to execute a closing purchase transaction is less
or more than the amount received from the sale thereof. In determining the term
of any option written, the FUND will consider the Code's limitations on the sale
or disposition of securities held for less than three months in order to
maintain its status as a regulated investment company.
The staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased over-the-counter options and the assets
used as cover for written over-the-counter options are illiquid securities. The
FUND will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may enter
into OTC Option contracts and those standards, as modified from time to time,
will be implemented and monitored by VCM. Under these special arrangements, the
FUND will enter into contracts with primary and non-primary dealers which
provide that the FUND has the absolute right to repurchase an option it writes
at any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary between
contracts with different primary and non-primary dealers, the formula will
generally be based on a multiple of the premium received by the FUND for writing
the option, plus the amount, if any, by which the option is "in-the-money." The
formula will also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written "out-of-the-money". Under such circumstances, and with respect to OTC
Options written with primary dealers only, the FUND will treat as illiquid that
amount of the "cover" assets equal to the amount by which the formula price for
the repurchase of the option is greater than the amount by which the market
value of the security subject to the option exceeds the exercise price of the
option (the amount by which the option is "in-the-money"). Although each
agreement will provide that the FUND's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined pursuant to the
formula) the formula price will not necessarily reflect the market value of the
option written, therefore, the FUND might pay more to repurchase the OTC Option
contract than the FUND would pay to close out a similar exchange traded option.
In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
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Additional Risks of Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the Investment Company Act of 1940, as amended (the "1940
Act"), collateralized by the underlying securities. The return on the collateral
may be more or less than that from the
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repurchase agreement. The securities underlying a repurchase agreement will be
marked to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest earned. In
evaluating whether to enter into a repurchase agreement, VCM will carefully
consider the creditworthiness of the seller. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the FUND may
incur a loss.
Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM. The borrower at all
times during the loan must maintain with the FUND cash or cash equivalent
collateral or provide to the FUND an irrevocable letter of credit equal in value
at all times to at least 100% of the value of the securities loaned. During the
time portfolio securities are on loan, the borrower pays the FUND any dividends
or interest paid on such securities, and the FUND may invest the cash collateral
and earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered equivalent collateral or a letter of
credit. Loans are subject to termination at the option of the FUND or the
borrower at any time. The FUND may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the income
earned on the cash to the borrower or placing broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 5% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering".
Section 4(2) instruments are restricted in the sense that they can only
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be resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The Commission has recently adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. FUND management anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. As a non-diversified management investment company, the FUND has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND may not invest more than 25% of the market value
of its total assets in a single issuer (except the securities of the U.S.
Government, its agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within any one industry other than the banking
industry (except that this restriction does not apply to U.S. Government
Securities); or (d) more than 5% of net assets would be invested in warrants or
rights. (Included within that amount, but not to exceed 2.0% of the value of the
FUND's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the market
value of its total assets). This does not preclude the FUND from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities. The FUND will not purchase additional securities
while the amount of any borrowings is in excess of 5% of the market value of its
total assets.
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4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and (iii)
through the lending of its portfolio securities as described in "Lending of
Portfolio Securities" in the Prospectus and in this Statement.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired as part
of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which invest in
real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and the Portfolio Manager. In selecting such brokers or dealers, the Portfolio
Manager will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution
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efficiency, settlement capability, financial condition of the broker-dealer
firm, the broker-dealer's execution services rendered on a continuing basis and
the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Manager for the
FUND's use, which in the opinion of the Trustees, are reasonable and necessary
to the FUND's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to the FUND or to the Portfolio Manager. Such
allocation shall be in such amounts as VCM shall determine and the Portfolio
Manager shall report regularly to VCM who will in turn report to the Trustees on
the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Manager in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Manager's other clients may be
useful to the Portfolio Manager in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Manager's normal
independent research activities.
The Portfolio Manager is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. (the "Distributor"), and the Portfolio Manager
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from brokerage commissions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Manager does
not provide for any reduction in the advisory fees as a result of profits
resulting from brokerage commissions effected through the Portfolio Manager or
an affiliated brokerage firm.
The Trustees had adopted certain procedures incorporating the standards
of Rule 17e-1 issued under the 1940 Act which requires that the commissions paid
the Distributor or to the Portfolio Manager or an affiliated broker-dealer must
be "reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time".
The Rule and the procedures also contain review requirements and require VCM to
furnish reports to the Trustees and to maintain records in connection with such
reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Manager. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
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COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Years Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The FUND may invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
Portfolio securities of the FUND which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
normally 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the FUND.
Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 P.M. (New York Time) will be
confirmed at the previous offering price computed as of the close of trading on
the options exchanges (normally 4:15 P.M., New York Time), provided the order is
received by the FUND's Transfer Agent prior to 4:15 P.M. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted timely to
the FUND. Orders received by dealers after 4:15 P.M. will be confirmed at the
next computed offering price.
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PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or
10 year periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's average annual total rates of return, reflecting the initial
investment and reinvestment of all dividends and distributions, net of the pro
rata share of the account opening fee, for the one year period ended April 30,
1995, and life of fund (January 8, 1991 to April 30, 1995) were -1.45% and
3.36%, respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December 1994, from the
initial value invested. The FUND will, however, disclose the pro rata share of
the account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would reduce
the performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the
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FUND's Post-Effective Amendment to its Registration Statement, computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD 2[(a-b+1)6-1]
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cd
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
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<PAGE>
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
If the FUND has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward up
to eight years and treated as a short term capital loss which can be used to
offset capital gains in such years. At April 30, 1995, the Fund had a net
capital loss of $7,705,131, which is available through April, 2003 to offset
future gains. Under Section 852(b)(8) of the Code, any capital or foreign
currency loss incurred after October 31 through the end of the Fund's taxable
year is deemed to arise on the first day of the Fund's next taxable year, if so
elected. The Fund elected to defer a net currency loss of $13,924,000 and a net
capital loss of $3,036,000 incurred during such period in fiscal 1995. Future
distributions may be impacted by the deferred net currency loss and net capital
loss, as well as other differences between book and taxable revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed
on interest and realized gains at various rates; such withholding taxes are
reflected as a reduction of the related income.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
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<PAGE>
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a forward foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Section 1256, will generally be
treated as ordinary income or loss.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
if a taxpayer's obligations (or rights) under such contract have not terminated
(by delivery, exercise, entering into a closing transaction or otherwise) as of
such date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is taken into account for the taxable year
together with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. Any capital gain
or loss for the taxable year with respect to Section 1256 contracts (including
any capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss (except for Section 1256 forward foreign
currency contracts, which are subject to Section 988 Rules). The FUND may elect
not to have this special tax treatment apply to Section 1256 contracts that are
part of a "mixed straddle" with other investments of the FUND that are not
Section 1256 contracts. The Internal Revenue Service has held in several private
rulings that gains arising from
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<PAGE>
Section 1256 contracts will be treated for purposes of the Short-Short Gain Test
as being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss and any net foreign currency loss incurred after October 31 as if
they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
year, at least 50% of the value of the FUND's assets must consist of cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the FUND has not
invested more than 5% of the value of the FUND's total assets in securities of
such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) unless it has
made a taxable year election, exclude foreign currency gains and losses incurred
after October 31 of any year in determining the amount of ordinary taxable
income for the current calendar year (and, instead, include such gains and
losses in determining ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
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<PAGE>
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporate shareholders.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital
gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the FUND prior to the date on which the shareholder
acquired his shares.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against Federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax advisor regarding the
potential application of foreign tax credits.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends
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<PAGE>
are actually paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions made
(or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the
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<PAGE>
sale of shares of the FUND will be subject to U.S. Federal income tax at the
rates applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The Virtus
Funds; Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Professor
of Medicine and Member, Board of Trustees,
University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center-Downtown,
Member, Board of Directors, Director of Corporate
Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner
of the Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA
President, Treasurer and Trustee of the Fund;
President, Treasurer and Trustee of Blanchard
Precious Metals Fund, Inc., President, Treasurer
and Trustee of The Virtus Funds; Vice President,
Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers,
Federated Management, Federated Research,
Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and
Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA
Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
</TABLE>
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
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<PAGE>
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
-27-
<PAGE>
Officers and Trustees Compensation
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
-28-
<PAGE>
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual Management fee as described in
the prospectus. For the years ended April 30, 1995, 1994 and 1993, the aggregate
amount paid or accrued by the FUND to the prior manager under the management
agreement then in effect was $2,811,067, $4,845,290 and $8,417,706,
respectively, of which $146,844 was waived by the prior manager during 1995.
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement")
between VCM and the portfolio manager, Lombard Odier International Portfolio
Management Limited (the "Portfolio Manager"), VCM has delegated to the Portfolio
Manager the authority and responsibility to make and execute decisions for the
Fund within the framework of the Fund's investment policies, subject to review
by ^ VCM and the Board of Trustees of the Fund. Under the terms of the
Sub-Advisory Agreement, the Portfolio Manager has discretion to purchase and
sell securities, except as limited by the Fund's investment objective, policies
and restrictions. The Portfolio Manager has retained WLO Global Management, as
sub-adviser, to assist in the investment management of the Fund pursuant to a
Sub-Advisory Agreement, and subject to the direction of the Manager, the
Portfolio Manager and the Board of Trustees of the Fund. Under the Sub-Advisory
agreement, the Sub-Adviser has primary responsibility for providing investment
advice to the Fund and managing the domestic (U.S.) investment of the Fund's
assets, while the Portfolio Manager retains responsibility for international
investments.
The Sub-Advisory Agreement provides for the payment to the Portfolio
Manager, by VCM, of monthly compensation based on the Fund's average daily net
assets for providing investment advice to the Fund and managing the investment
of the assets of the Fund. These fees are determined by applying the following
annual rates to the Fund's average daily net assets: .35% of the Fund's net
assets up to the first $10 million; .30% of the next $10 million of average
daily net assets; .25% of the next $10 million of average daily net assets; .20%
of the next $10 million of average daily net assets; and .15% of average daily
net assets in excess of $40 million. The Agreement provides that the Portfolio
Manager's fee shall be reduced proportionately based on the ratio of the
Portfolio Manager's fee to VCM's fee in the event VCM's fee is reduced as a
result of a state expense limitation. For the fiscal years ended April 30, 1995,
1994 and 1993, the aggregate amounts paid or accrued by the prior manager to the
Portfolio Manager under the Sub-Advisory Agreement were $612,384, $1,039,688 and
$1,752,821, respectively.
The Sub-Advisory Agreement, dated July 11, 1995, was approved by the
Fund's Directors on March 24, 1995 and the Fund's shareholders on July 11, 1995.
The Sub-Advisory Agreement provides that is may be terminated without penalty by
either the Fund or the Portfolio Manager at any time by the giving of 60 days'
written notice to the other and terminates automatically in the event of
"assignment", as defined in the Investment Company Act. The Sub-Advisory
Agreement provides that, unless sooner terminated, it shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Fund or by a vote of the
majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Directors who are parties to the Sub-Advisory Agreement or "interested
persons" of such parties cast in person at a meeting called for the purpose of
voting on such approval.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests
For the fiscal year ended April 30, 1995, the Fund accrued payments under the
Plan amounting to $937,022.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
-29-
<PAGE>
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding share s of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the fiscal year ended
April 30, 1995 are attached hereto.
-30-
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Aaa: Bond which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bond which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B (i.e., two categories below Baa) in its
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated Prime-1 or P-1 (or related
supporting institutions) have a superior capacity for repayment of short-term
promissory obligations. Prime-1 or P-1 repayment capacity will normally be
evidenced by the following characteristics:
<TABLE>
<S> <C>
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and ample asset
protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash
generation.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
- Well-established access to a range of financial markets and assured sources of alternate
liquidity.
</TABLE>
Issuers rated Prime-2 or P-2 (or related
supporting institutions) have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Corporation's
Bond Ratings:
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
Plus (+) or Minus (-): The ratings from AA to CCC (i.e., three
categories below BBB) may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-2
<PAGE>
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
Description of Fitch Investors Service, Inc.
Four Highest Bond Ratings:
AAA: Bonds in this category are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA: Bonds in this category are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated "AAA". As
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
A: Bonds in this category are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds in this category are considered to be investment grade and
of satisfactory quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five categories
below BBB) may be modified by the addition of a plus or minus sign to indicate
the relative position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Description of Fitch's Four Highest
Short-Term Ratings:
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
A-3
<PAGE>
F-2: Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as the "F-1+" and "F-1" categories.
F-3: Fair Credit Quality. Issues carrying this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse change is likely to cause these securities
to be rated below investment grade.
Description of Duff & Phelps Inc.'s
Commercial Paper Ratings:
Duff 1+: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or ready access to alternative sources
of funds, is clearly outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1-: High certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2: Good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing internal
funds needs may enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
Duff 3: Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless timely payment is expected.
Notes with Respect to All Ratings:
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal that are similar to the risks of
lower-rated bonds. The Fund is dependent on Fund management's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-4
<PAGE>
Dear Shareholders,
Enclosed please find the annual report on the performance of your Blanchard
Short-Term Global Income Fund for the fiscal year ending April 30, 1995, as well
as the current outlook for the markets in which it has the flexibility to
invest.
As you know, 1994 was a particularly challenging year for fixed income
investors, primarily because of two key market trends: First, global bond yields
moved sharply higher in response to the re-emergence of economic growth
throughout the developed world; second, the U.S. Federal Reserve returned to a
policy of monetary tightening.
In response to these trends, your Fund took a more cautious stance by
reducing its exposure to short-dated bonds and increasing its exposure to cash
deposits.
Additionally, in an effort to increase overall yield, the Fund also took a
small 5% position in the Mexican peso. However, this particular strategy
suffered when the Mexican government unexpectedly devalued its currency in
December. Exposure to "emerging markets" has since been reduced to zero.
On a more positive note, since the beginning of 1995, there has been a
marked change in investor sentiment for global bonds as investors have begun to
realize that the threat of inflation may be misplaced.
This realization has coincided with some evidence that the pace of economic
expansion in the United States is slowing. While we still believe that there
could be some pick-up in inflationary pressures, we feel that U.S. bond yields
may have
The following information was reprint as a line graph.
The Value of a $10,000 Investment in the
Blanchard Short-Term Global Income Fund
from inception 1/8/91 through 4/30/95 as compared to
the J.P. Morgan Cash Index for the same period
-----------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Short-Term Global Income Fund*
-----------------------------------------
1 year -1.45%
since inception 3.36%
-----------------------------------------
FYE 4/30/91 FYE 4/30/92 FYE 4/30/93 FYE 4/30/94 FYE 4/30/95
STGF 2.15% 5.85% 4.97% 3.12% -1.45%
J.P.M. CASH IDX 3.18% 8.17% 5.76% 2.68% 5.65%
$9,925 $10,138 $10.731 $11.262 $11,613 $11,445
$10,000 $10,318 $11,161 $11,804 $12,120 $12,805
Reflects deduction of $75 acct opening fee
Blanchard J.P. Morgan
Short-Term Global Cash
Income Fund^ Index(D)
*The average annual returns quoted above do not reflect reinvestment of
distributions, but do not reflect the deduction of the one-time account opening
fee. If reflected, the returns would be lower. The total return includes changes
in principal value. The average annual return is total return annualized and
compounded. Past performance is no guarantee of future results.
(D)Source: J.P. Morgan Cash Index is an unmanaged index based on the cash
returns of constant maturity euro-currency deposits.
^Reflects deduction of one-time-only $75 account opening fee.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the index or the BSTGIF.
(over, please)
<PAGE>
further to fall as investors have yet to fully adjust to the fact that inflation
is turning out to be lower than they had feared. Because of this, we, as
managers of the portfolio, have decided to switch a vast majority of the Fund's
assets into U.S. dollar denominated bonds _ while maintaining an exposure to
European bonds (currently 30% of the Fund's total assets) in the core markets of
Germany and Holland.
There are some inflationary signs in Germany, but, as with the United
States, these signs are limited. Any indication that the economy is slowing in
Germany is likely to be well received by the bond markets and may exert a
negative effect on German inflation.
The Fund also has a small exposure to U.K. bonds, where we believe that
investors have underestimated the resolve of the Bank of England and the
government to control inflation.
A Look Ahead
Looking ahead, economic growth seems secure in most countries, although it
is likely to decelerate somewhat in the United States as 1995 progresses. While
past performance is no guarantee of future performance, the evidence so far
suggests that the disinflationary trends of the 1980s have been sufficiently
powerful to prevent a resurgence of inflation.
Assuming any eventual upturn in inflation is modest in scale, the prevailing
nominal bond yields throughout the world currently offer attractive value.
Nevertheless, central banks will need to remain vigilant in order to convince
investors that they will continue to take no risks with inflation.
On our part, we will continue to closely monitor global interest rate and
economic conditions, and, as warranted, make any necessary portfolio adjustments
in pursuit of maximum return at lowest risk.
Sincerely,
RM:ml Robert McHenry
Assistant Director
Lombard Odier International Portfolio Management Ltd.
Portfolio Managers of the Blanchard Short-Term Global Income Fund
Distributed by Sheffield Investments, Inc. (1551) 03ARSL0695
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND-PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
(Left Column)
Principal Value
--------- -----
FOREIGN FIXED INCOME (26.34%)
GERMANY (7.10%)
GOVERNMENT/AGENCY (7.10%)
Allemagne
6.63%, 1/20/98 ..... Dem 17,500,000 $ 12,887,568
Treuhandanat
6.13%, 6/25/98 ..... 5,100,000 3,703,978
------------
TOTAL
GERMANY ........ 16,591,546
------------
NETHERLANDS (8.03%)
GOVERNMENT/AGENCY (8.03%)
Hollande
6.25%, 7/15/98 ..... Nlg 29,000,000 18,790,416
------------
UNITED KINGDOM (11.21%)
FINANCIAL SERVICES (5.99%)
Abbey National
7.75%, 6/23/98 ..... (PS)1,000,000 1,574,870
Abbey National
6.0%, 8/10/99 ...... 2,225,000 3,242,286
Bayerische
Hypotheken
7.0%, 12/21/98 ... 1,000,000 1,530,620
Halifax
7.75%, 12/03/98 .... 2,000,000 3,113,535
Leeds Permanent
7.38%, 5/06/98 ..... 830,000 1,285,440
Lloyds Bank
10.25%, 3/11/98 .... 1,000,000 1,665,379
National Providence
Building
8.25%, 11/04/98 .... 1,000,000 1,586,938
------------
13,999,068
------------
GOVERNMENT/AGENCY (5.22%)
United Kingdom
Treasury
7.0%, 11/06/01 ... (PS)8,140,000 12,217,760
------------
TOTAL
UNITED KINGDOM 26,216,828
------------
TOTAL FOREIGN
FIXED INCOME
(IDENTIFIED COST
$61,998,519) .... 61,598,790
------------
U.S. FIXED INCOME (65.15%)
AIRLINES (1.40%)
*United Airlines Inc.
Series A
10.67%, 5/01/04 ..... $3,000,000 3,268,370
------------
COMPUTERS & RELATED (2.79%)
Comdisco Inc.
7.25%, 4/15/98 ..... 5,000,000 4,998,800
Unisys Corp.
Sr. Note
9.75%, 9/15/96 ..... 1,000,000 1,026,446
Unisys Corp.
9.5%, 7/15/98 ...... 500,000 500,750
------------
6,525,996
------------
(Right Column)
Principal Value
--------- -----
CONSUMER RELATED (1.94%)
RJR Nabisco
8.75%, 8/15/05 ..... $ 2,000,000 $ 1,942,688
Valassis Inserts
9.38%, 3/15/99 ..... 2,500,000 2,592,003
------------
4,534,691
------------
ELECTRICAL UTILITIES (2.24%)
Long Island Lighting
7.3%, 7/15/99 ...... 2,750,000 2,603,736
Niagara Mohawk
Power Corp.
9.95%, 6/01/00 ..... 2,500,000 2,632,675
------------
5,236,411
------------
ENTERTAINMENT (2.27%)
Caesar's World Inc.
Sr. Sub Notes
8.88%, 8/15/02 ..... 2,000,000 2,065,000
Time Warner
Entertainment Co.
9.63%, 5/01/02 ..... 3,000,000 3,245,991
------------
5,310,991
------------
FINANCIAL SERVICES (33.40%)
Advanta MTC
Series 1995
7.82%, 8/25/03 ..... 5,000,000 4,996,875
CMC Securities Corp.
1993 7.5%,
02/25/23 ........... 3,211,457 3,193,376
Chrysler Financial MTN
7.44%, 10/20/97 .... 5,000,000 5,013,220
Contimortage 1995-1
8.75%, 4/15/07 ..... 5,802,456 5,894,933
Dean Witter
Discover & Co.
6.0%, 3/01/98 ...... 5,000,000 4,855,365
Discover Credit
Corp. MTN
7.76%, 5/13/97 ..... 10,275,000 10,394,180
Ford Motor
Credit Corp.
5.32%, 9/15/98 ..... 5,000,000 4,716,200
General Electric
Capital Mtg. 1992
7.5%, 11/25/18 ..... 5,686,741 5,681,406
General Motors
Acceptance Corp.
1993 B A
4.0%, 9/15/98 ...... 4,642,955 4,537,932
Groupe Videotron
10.63%, 2/15/05 .... 2,500,000 2,612,500
International Business
Machines Credit
7.4%, 1/19/96 ...... 6,000,000 6,035,352
Lehman Brothers
Hldg. MTN
8.63%, 2/26/99 ..... 5,000,000 5,104,805
Merrill Lynch Mtge.
Inv. 1990
9.2%, 1/15/11 ...... 2,470,391 2,566,465
3
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND-PORTFOLIO OF INVESTMENTS (continued)
APRIL 30, 1995
(Left Column)
Principal Value
--------- -----
(e)(D)New American Capital
7.69%, 7/12/95 ... $ 7,500,000 $ 7,500,000
Money Store
Series 1995-A
8.0%, 9/15/05 .... 4,962,460 4,999,679
------------
78,102,288
------------
GOVERNMENT/AGENCY (17.51%)
Government National
Mortgage
Association,
9.5%, 12/15/21 ..... 5,000,000 5,262,500
(b)Resolution Trust Corp.
5.33%, 9/25/21 ..... 6,795,834 6,583,465
(b)Resolution Trust Corp.
5.83%, 9/25/19 ..... 3,559,951 3,453,152
Resolution Trust Corp.
5.9%, 7/25/23 ...... 2,728,754 2,701,466
(b)Resolution Trust Corp.
5.97%, 5/25/21 ..... 2,106,119 2,042,936
(b)Resolution Trust Corp.
6.98%, 3/25/22 .. 2,093,821 2,088,586
(b)Resolution Trust Corp.
7.32%, 11/25/25 .... 2,340,164 2,305,062
Resolution Trust Corp.
7.75%, 12/25/18 .... 6,456,497 6,424,214
Resolution Trust Corp.
7.87%, 9/25/29 ..... 3,886,383 3,879,096
(b)Resolution Trust Corp.
8.15%, 1/25/21 ..... 3,931,403 3,975,631
(b)Resolution Trust Corp.
8.77%, 3/25/21 ..... 937,699 937,230
Resolution Trust Corp.
8.8%, 8/25/23 ...... 1,273,000 1,303,234
------------
40,956,572
------------
HOTELS (1.06%)
Embassy Suites
8.75%, 03/15/00 ..... 2,500,000 2,487,500
------------
INDUSTRY RELATED (1.81%)
Oryx Energy Co.
9.75%, 9/15/98 ...... 2,500,000 2,521,875
(c)USX Corp.
Subordinated
Debenture
5.75%, 7/01/01 ..... 2,000,000 1,725,000
------------
4,246,875
------------
(Right Column)
Principal Value
--------- -----
UTILITIES (.73%)
Arkla Inc.
8.88%, 7/15/99 ..... $ 1,650,000 $ 1,699,106
------------
TOTAL U.S.
FIXED INCOME
(IDENTIFIED COST
$151,395,894) ........ 152,368,800
------------
SHORT-TERM
SECURITIES (6.40%)
American Express
Credit Corp.
5.7%, 5/01/95 ........ 1,000,000 1,000,000
Salomon Inc
5.91%, 9/29/95 ....... 5,000,000 4,976,730
U.S. Treasury Bill
4.56%, 5/04/95 ....... 9,000,000 8,995,800
------------
TOTAL SHORT-TERM
SECURITIES
(IDENTIFIED
COST
$14,975,006) ......... 14,972,530
------------
OUTSTANDING OPTIONS
PURCHASED (0.03%)
PUT OPTIONS Contracts
---------
Euro$ Future
expiring 9/18/95
@ $93.50 (d) ......... 150 75,000
------------
TOTAL
OUTSTANDING
OPTIONS
PURCHASED
(IDENTIFIED
COST $72,376) ........ 75,000
------------
TOTAL
INVESTMENTS
(IDENTIFIED
COST
$228,441,795)(a)
(97.92%) ............. 229,015,120
CASH AND OTHER
ASSETS IN
EXCESS OF
LIABILITIES
(2.08%) .............. 4,854,328
------------
NET ASSETS
(100%) ............... $233,869,448
------------
*Securities partially segregated to collateralize forward currency contracts
and options. Total market value segregated is $1,089,457.
(D)Registered under SEC rule 144-A, resale restricted as to qualified
institutional buyers; represents 3.21% of net assets.
(a)The aggregate cost for federal income tax purposes is $228,444,420; the gross
unrealized appreciation is $1,248,009; and the unrealized depreciation is
$676,863; resulting in net unrealized appreciation of $571,146.
(b)Variable rate security. Rate shown reflects the current rate as of April 30,
1995.
(c)Convertible security.
(d)Non-income producing.
(e)Pays interest at LIBOR plus 137.5 basis points until July 12, 1995. After
July 12, 1995 the rate resets to 7.69%.
MTN = Medium Term Note
See notes to financial statements.
4
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND-PORTFOLIO OF INVESTMENTS (continued)
APRIL 30, 1995
Schedule of Open Forward Currency Contracts as of April 30, 1995
Unrealized
Currency Currency Appreciation
Sold Amount Purchased Amount Delivery Date (Depreciation)
Dem 27,281,492 Nlg 30,561,000 2-May-95 $(21,420)
Dem 20,246,000 Gbp 9,115,714 4-May-95 76,039
Dem 18,092,800 Itl 22,368,128,640 10-May-95 270,545
Itl 28,349,000,000 Dem 25,415,766 10-May-95 1,494,739
US$ 7,904,785 Jpy 778,400,000 10-May-95 1,371,578
US$ 10,000,000 Esp 1,289,950,000 10-May-95 471,053
US$ 24,600,661 Esp 3,075,082,650 10-May-95 385,791
-----------
Total Unrealized Appreciation $(4,091,165)
===========
Nlg 30,561,000 Dem 27,281,735 10-May-95 $ (21,246)
Gbp 7,490,400 US$ 11,879,774 10-May-95 (171,000)
US$ 10,000,000 Aud 13,747,594 10-May-95 (1,822)
US$ 15,000,000 Aud 20,270,270 10-May-95 (258,092)
US$ 9,785,787 Aud 13,241,931 10-May-95 (147,651)
Dem 48,433,000 US$ 34,643,997 10-May-95 (292,382)
Itl 29,710,219,600 US$ 17,099,407 10-May-95 (547,643)
Aud 45,976,000 US$ 33,333,979 10-May-95 (102,868)
Dem 29,903,730 Itl 31,967,087,370 10-May-95 (2,583,016)
Jpy 778,400,000 US$ 7,942,047 10-May-95 (1,334,316)
Esp 4,461,200,000 US$ 34,348,630 10-May-95 (1,864,761)
Gbp 9,170,090 Dem 20,246,000 4-Aug-95 (107,629)
-----------
Total Unrealized Depreciation $(7,432,426)
===========
Dem=Deutsche Marks Nlg=Dutch Guilders Esp=Spanish Pesetas
Itl=Italian Lira Gbp=British Pounds Aud= Australian Dollars
Jpy=Japanese Yen
Schedule of Foreign Currency Held as of April 30, 1995
Currency Held Cost Market Value
------------- ---- ------------
Australian Dollars 138,898 $ 101,097 $ 101,097
British Pounds 45 73 73
Deutsche Marks 1,101 793 793
Italian Lira 5,162,758,058 3,032,897 3,072,156
Spanish Pesetas 17,655,177 143,456 143,456
---------- ----------
$3,278,316 $3,317,575
========== ==========
See notes to financial statements.
5
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
Assets:
Investments in securities, at value (Identified
cost $228,441,795) (note 1) ................... $229,015,120
Cash ............................................ 2,426,706
Foreign currencies (Identified Cost
$3,278,316) ..................................... 3,317,575
Receivables for:
Investments sold .............................. 50,513,648
Shares of beneficial interest sold ............ 72,379
Interest ...................................... 3,600,873
Forward foreign currency contracts ............ 4,091,165
Deferred organizational expenses ............ 25,860
------------
Total assets ............................ 293,063,326
------------
Liabilities:
Payables for:
Shares of beneficial interest
repurchased ................................. 761,158
Investments purchased ......................... 50,456,095
Dividends ..................................... 184,269
Forward foreign currency contracts ............ 7,432,426
Accrued expenses and other liabilities .......... 359,930
------------
Total liabilities ....................... 59,193,878
------------
Net assets .............................. $233,869,448
============
Net assets are comprised of:
Paid in capital (unlimited authorized shares
of beneficial interest, $.01 par value,
141,135,916 shares outstanding) ............... $259,231,663
Accumulated overdistributed investment
income-net .................................... (12,018,933)
Accumulated realized loss-net ................... (10,744,046)
Unrealized net depreciation on investments,
forward foreign currency contracts,
options and net currency translation
adjustments ................................... (2,599,236)
------------
Net assets ...................................... $233,869,448
============
Net asset value per share ....................... $1.66
=====
(Right Column)
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
Investment income:
Interest (net of foreign withholding
tax of $85,010) ................................. $27,791,428
-----------
Expenses:
Investment manage-
ment fee
(note 2) .............$ 2,811,067
Plan of distribution
fee (note 3) ......... 937,022
Transfer agent fees .... 779,000
Trustees' fees, retire-
ment plan curtail-
ment and other
expenses (note 5) .... 403,258
Custodian fees ......... 337,214
Accounting fees ........ 230,000
Professional fees ...... 168,029
Shareholder reports
and notices .......... 62,136
Organizational
expenses (note 1) .... 26,748
Registration fees ...... 26,500
Other .................. 16,293
-----------
Total expenses ..... 5,797,267
Less: Fund expenses
voluntarily waived
by the Manager and
Distributor .......... (182,085) 5,615,182
----------- -----------
Net investment income ........................... 22,176,246
-----------
Realized and unrealized
gain (loss) - net
(note 1):
Realized gain (loss) on:
Investments in
securities - net .......(10,489,372)
Futures transac-
tions - net ............ (521,197)
Forward currency
contracts and
foreign exchange
transactions - net .....(33,387,574) (44,398,143)
-----------
Change in unrealized
appreciation/
depreciation on:
Investments - net ...... 7,167,814
Forward currency
contracts, futures
transactions and
translation of other
assets and liabilities
denominated in
foreign currency - net ... 8,408,763 15,576,577
----------- -----------
Net realized and unrealized losses .................. (28,821,566)
-----------
Net decrease in net assets resulting from
operations ........................................ $(6,645,320)
===========
See notes to financial statements.
6
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income - net $ 22,176,246 $ 41,432,828
Realized loss - net (44,398,143) (15,128,722)
Change in unrealized appreciation or depreciation - net 15,576,577 (4,248,674)
------------ ------------
Net increase (decrease) in net assets resulting from operations (6,645,320) 22,055,432
------------ ------------
Dividends and distributions to shareholders from:
Investment income - net - (3,616,387)
Tax return of capital (22,509,967) (37,657,313)
------------ ------------
(22,509,967) (41,273,700)
Transactions in shares of beneficial interest - net decrease
(note 6) (272,116,356) (144,823,458)
------------ ------------
Net decrease in net assets (301,271,643) (164,041,726)
Net assets:
Beginning of year 535,141,091 699,182,817
------------ ------------
End of year (including accumulated overdistributed net investment income of
$12,018,933 and $18,495,810, respectively) $233,869,448 $535,141,091
============ ============
</TABLE>
See notes to financial statements.
7
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard Short-Term Global Income Fund (the "Fund") is a series of
Blanchard Funds which was organized as a Massachusetts business trust on January
24, 1986. The Fund is a registered, open-end non-diversified management
investment company under the Investment Company Act of 1940, as amended ("the
Act"). The Fund had no operations before January 8, 1991 other than the sale of
shares of beneficial interest to four parties who are also shareholders of
Sheffield Management Company (the "Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sale
is made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. All other
securities and other assets of the Fund are valued at fair value as determined
in good faith by the Trustees. Foreign currency exchange rates are determined
when such rates are made available to the Fund at times prior to the close of
the New York Stock Exchange. The abilities of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic or
political developments in a particular country.
B. Accounting for Investments-Security transactions are accounted for on the
trade date (date the buy or sell order is executed). Realized gains and losses
on security transactions are determined on the identified cost method. Interest
income is accrued daily. Premiums or discounts on debt securities are amortized
or accreted as adjustments to interest income over the lives of such securities.
C. Foreign Currency Contracts & Translation-The books and records of the
Fund are maintained in U.S. dollars as follows: (1) the foreign currency market
value of investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rates at the end of the period; and (2) purchases, sales, income and expenses
are translated at the rates of exchange prevailing on the respective dates of
such transactions. The Fund does not separately identify that portion of the
results of operations of the Fund that arise as a result of changes in the
exchange rates from the fluctuations that arise from changes in market prices of
equity investments during the year. However, in accordance with the requirements
of the Internal Revenue Code, the Fund isolates the effect of changes in foreign
exchange rates from the fluctuations arising from changes in market prices of
foreign debt obligations sold, and such net foreign exchange gains, which
amounted to $2,904,998, are included in ordinary income for federal income tax
purposes and in realized gain (loss) on forward currency contracts and foreign
exchange transactions-net in the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
8
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future exchange rates. Forward currency contracts are valued based upon the
current forward rates. Fluctuations in the value of such contracts are recorded
as unrealized gains or losses; realized gains or losses include net gains or
losses on contracts which have settled. The Fund generally enters into a forward
currency contract as a hedge against foreign exchange rate fluctuation, upon the
purchase or sale of a security denominated in a foreign currency. The Fund
maintains, as collateral, U.S. Government or other highly liquid debt
obligations in an amount equal to or greater than its net obligation for forward
currency contracts. The Fund bears the risk of an unfavorable change in the
foreign exchange rate underlying the forward contracts. Risks may also arise as
a result of the potential inability of the counterparties to meet the terms of
their contracts. Forward contracts involve elements of market risk in excess of
the amount reflected in the Statement of Assets and Liabilities.
D. Futures Contracts-A futures contract is an agreement between two parties
to buy and sell a security at a set price on a future date. Upon entering into
such a contract the Fund is required to pledge to the broker an amount of cash
equal to the minimum "initial margin" requirement of the exchange on which the
futures contract is traded. The contract amount reflects the extent of the
Fund's exposure in these financial instruments. The Fund invests in futures
contracts in order to hedge its existing portfolio securities against
fluctuations in value caused by changes in prevailing interest rates. The Fund's
participation in the futures markets involves certain risks, including the
potential inability of the contract party to meet the terms of the contracts,
imperfect correlation between movements in the price of futures contracts and
movements in the price of securities hedged or used for cover. Should interest
rates move unexpectedly, the Fund may not achieve the anticipated benefits of
the futures contracts and may realize a loss. Pursuant to a contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the Fund as unrealized appreciation or
depreciation. The Fund maintains, as collateral, U.S. Government or other highly
liquid debt obligations in an amount equal to or greater than its potential loss
on futures contracts. When a contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
E. Option Writing-When the Fund writes an option, an amount equal to the
premium received by the Fund is recorded as a liability and is subsequently
adjusted to the current market value of the option written. Premiums received
from writing options which expire unexercised are treated by the Fund on the
expiration date as realized gains. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium is less than
the amount paid for the closing purchase transaction, as a realized loss. If a
call option is exercised, the premium is added to the proceeds from the sale of
the underlying security or currency in determining whether the Fund has realized
a gain or loss. If a put option is exercised, the premium reduces the cost basis
of the securities or currencies purchased by the Fund. The Fund as writer of an
option may have no control over whether the underlying securities or currencies
may be sold (called) or purchased (put) and as a result bears the market risk of
an unfavorable change in the price of the security or currency underlying the
written option.
F. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
9
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
G. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
H. Organizational Expenses-The Fund's Manager paid the organizational
expenses of the Fund incurred prior to the public offering of its shares
amounting to approximately $133,706. The Fund has reimbursed the Manager for
such expenses and deferred and is amortizing such expenses over five years from
the date of commencement of the Fund's operations.
I. Other-Certain expenses of the Blanchard Funds are allocated among the
funds based upon their relative average net assets.
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of .75% of the Fund's
average daily net assets.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses,
are subject to the expense limitation imposed by one of the states in which
shares of the Fund are offered for sale. For the year ended April 30, 1995, the
Fund's expenses did not exceed the above limitation.
Certain officers and/or Trustees of the Fund are officers/directors of the
Manager.
The Manager has a sub-advisory agreement with Lombard Odier International
Portfolio Management Limited (the "Portfolio Adviser"). The Manager has advised
the Fund that the amount of fees paid to the Portfolio Adviser was $612,384 for
the year ended April 30, 1995. The Manager and Distributor voluntarily waived a
portion of the advisory and distribution fee, which amounted to $146,844 and
$35,241, respectively, for the year ended April 30, 1995.
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor"), an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares,
10
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
including but not limited to advertising, printing of prospectuses and reports
for other than existing shareholders, preparation and distribution of
advertising material and sales literature, and payments to dealer and
shareholder servicing agents who enter into agreements with the Manager or
Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .25%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor, but
not yet reimbursed by the Fund, may be reimbursed through future distribution
fees from the Fund. The Distributor has advised the Fund that at April 30, 1995,
the unreimbursed distribution expenses amounted to $497,152. If the Plan is
terminated or discontinued in accordance with its terms, the obligation of the
Fund to make payments to the Distributor pursuant to the Plan will cease and the
Fund will not be required to make any payments past the date the Plan is
terminated.
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet assets relating to, and the ability to succeed to contracts
with, the Blanchard Funds, including Blanchard Short-Term Global Income Fund
(collectively, the "Funds"). The transactions contemplated by the Acquisition
Agreement which have been approved by the Board of Trustees of the Funds are
conditioned upon the approval of the shareholders of each Fund, of (1) a new
investment management agreement with Signet, (2) a new distribution agreement
with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities of the year ended April 30,
1995, excluding short-term investments with maturities of less than one year at
the time of purchase, aggregated $652,051,381 and $719,145,194, respectively,
including purchases and sales of U.S. Government obligations of $66,275,242 and
$5,226,497, respectively. The Distributor has advised the Fund that it received
$11,700 from shareholders as account opening fees for the year ended April 30,
1995. The Manager has advised the Fund that, for the same period, it incurred
costs amounting to $195,996, which were reimbursed by the Fund, for performing
internal accounting and transfer agency functions for the Fund.
Transactions in options written during the year ended April 30, 1995, were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Written options outstanding at April 30, 1994 ....................... 601 $ 304,257
Options written ..................................................... 2,155 893,630
Options expired or terminated in closing purchase transactions ...... (2,756) (1,197,887)
------ ----------
Options outstanding at April 30, 1995 ............................... 0 $ 0
====== ==========
</TABLE>
11
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expenses included in Trustees' fees, retirement
plan curtailment and other expenses in the Statement of Operations for the year
ended April 30, 1995 was $73,214. As indicated in Note 4, the Manager has
entered into an agreement which provides for the acquisition of the Manager by
Signet. Following the acquisition, the independent directors/trustees of the
Funds will not stand for re-election. As a result, the Plan was curtailed and
additional pension expense of $277,539 was recorded to reflect the previously
unrecognized prior service costs of the independent directors/trustees. Included
in accrued expenses and other liabilities at April 30, 1995 is $350,753 of
accrued pension expense.
NOTE 6 - Shares of Beneficial Interest:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold ...................... 46,167,838 $ 80,352,297 160,419,084 (298,532,697
Reinvestment of dividends . 10,834,258 18,687,481 20,537,136 38,161,388
------------ ------------- ----------- -------------
57,002,096 99,039,778 180,956,220 336,694,085
Repurchased ............... (214,657,986) (371,156,134) (259,498,407) (481,517,543)
------------ ------------- ----------- -------------
Net decrease .............. (157,655,890) $(272,116,356) (78,542,187) $(144,823,458)
============ ============= =========== =============
</TABLE>
NOTE 7 - Federal Income Taxes
Capital and foreign currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Fund's next taxable year. The Fund incurred and will elect to defer net
capital and foreign currency losses of approximately $3,036,000 and $13,924,000,
respectively during fiscal 1995.
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to post-October loss deferrals and non-deductible expenses. The
Fund had permanent book/tax differences primarily attributable to foreign
currency losses. To reflect reclassifications arising from permanent book/tax
differences for the year ended April 30, 1995, paid-in-capital was charged
$40,341,564, accumulated realized loss-net was credited $33,530,966 and
accumulated overdistributed investment income-net was credited $6,810,598.
At April 30, 1995 the Fund had a net capital loss carryover of $7,705,131
which is available through April 30, 2003 to offset future capital gains. To the
extent that these carryover losses are used to offset future capital gains, it
is probable that the gains so offset will not be distributed to shareholders.
12
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 8 - Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the Period
January 8,
1991*
For the Year Ended April 30, through
1995 1994 1993 1992 April 30, 1991
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period . $1.79 $1.85 $1.89 $1.95 $1.97
Income from investment operations:
Net investment income .............. .10(D) .12 .13 .17 .06
Net gains or losses on investments
(both realized and unrealized) ... (.07)(D) (.06) (.04) (.06) (.02)
Net income (loss)
from investment operations ... (.03) .06 .09 .11 .04
Less dividends and distributions:
Dividends from investment
income - net ..................... -- (.01) (.13) (.17) (.06)
Tax return of capital .............. (.10) (.11) .00 .00 .00
Change in net asset value ...... (.13) (.06) (.04) (.06) (.02)
Net asset value, end of period ....... $1.66 $1.79 $1.85 $1.89 $1.95
Total return .........................(1.45%) 3.12% 4.94% 5.85% 2.15%(3)
Ratios/Supplemental Data:
Net assets, end of period
($ Millions) ....................... $234 $535 $699 $1,241 $230
Ratio of expenses to average
net assets ......................... 1.51%(2) 1.44% 1.44%(2) 1.32%(2) .38%(1)(2)
Ratio of net investment income to
average net assets ................. 5.95%(2) 6.41% 6.97%(2) 8.50%(2) 11.30%(1)(2)
Portfolio turnover ................... 386% 327% 610% 412% 63%
</TABLE>
- ------------
*Commencement of operations.
(1)Annualized.
(2)The ratios of expenses to average net assets and net investment income to
average net assets would have been 1.56% and 5.90%, respectively, for the
year ended April 30, 1995, unchanged for the year ended April 30, 1993, 1.41%
and 8.41%, respectively, for the year ended April 30,1992 and 2.23% and
9.45%, respectively, for the period ended April 30, 1991 if the management
and distribution fees had not been waived and with respect to the period
ended April 30, 1991, other expenses had not been borne by the Manager.
(3)Not annualized.
(D)Calculated based on average shares outstanding.
13
<PAGE>
BLANCHARD SHORT-TERM GLOBAL INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Short-Term Global Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Short-Term Global Income
Fund (the "Fund") at April 30, 1995, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended and for the period January 8, 1991 (commencement of
operations) through April 30, 1991, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statement based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
14
<PAGE>
(Left Column)
Portfolio Advisers
Lombard Odier International
Portfolio Mgt. Ltd.
WLO Global Management
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Short-Term
Global Income Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Short-Term
Global Income
Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus dated August 7, 1995 (the
"Prospectus"), pursuant to which Blanchard Precious Metals Fund, Inc. (the
"FUND") is offered. Please retain this document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------- Page
----
Investment Objective and Policies .......................................... 2
Investment Restrictions .................................................... 10
Computation of Net Asset ................................................... 12
Performance Information..................................................... 12
Portfolio Transactions...................................................... 14
Dividends, Capital Gains Distributions
and Tax Matters........................................................... 15
The Management of the Fund ................................................. 22
Management Services ........................................................ 26
Portfolio Management Services............................................... 27
Administrative Services..................................................... 27
Distribution Plan........................................................... 27
Description of the FUND..................................................... 28
Shareholder Reports......................................................... 28
Financial Statements........................................................ A-1
Manager
- -------
Virtus Capital Management, Inc.
Portfolio Adviser
- -----------------
Cavelti Capital Management, Ltd.
Distributor
- -----------
Federated Securities Corp.
Custodian
- ---------
United States Trust Company of New York
Transfer Agent
- --------------
United States Trust Company of New York
Independent Accountants
- -----------------------
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the FUND are set forth in the FUND's
Prospectus which refers to the following investment strategies and additional
information:
Options and Futures Strategies
Through the writing and purchase of options and the purchase and sale of
stock index futures contracts, interest rate futures contracts, foreign currency
futures contracts and related options on such futures contracts, Virtus Capital
Management, Inc. ("VCM") may at times seek to hedge against a decline in the
value of securities included in the FUND's portfolio or an increase in the price
of securities which it plans to purchase for the FUND or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce the FUND's current
return.
The ability of the FUND to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices, U.S.
Government securities and foreign currencies are relatively new and still
developing. Although the FUND will not enter into an option or futures position
unless a liquid secondary market for such option or futures contract is believed
by FUND management to exist, there is no assurance that the FUND will be able to
effect closing transactions at any particular time or at an acceptable price.
Reasons for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market thereon would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures position and
the writing of an option involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. However, to the extent the FUND purchases or sells
futures contracts and options on futures contracts and purchases and writes
options on securities and securities indexes for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities held by
the FUND or decreases in the prices of securities the FUND intends to acquire.
It is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the FUND will be able to utilize these instruments effectively for the purposes
stated below. Furthermore, the FUND's ability to engage in options and futures
transactions may be limited by tax considerations. Although the FUND will only
engage in options and futures transactions for limited purposes, it will involve
certain risks which are described in the Prospectus. The FUND will not engage in
options and futures transactions for leveraging purposes.
Writing Covered Options on Securities
The FUND may write covered call options and covered put options on
optionable securities of the types in which it is permitted to invest from time
to time as Cavelti Capital Management, Ltd., the FUND's portfolio adviser (the
"Portfolio Manager"), determines is appropriate in seeking to attain its
objective. Call options written by the FUND give the holder the right to buy the
underlying securities from the FUND at a stated exercise price; put options give
the holder the right to sell the underlying security to the FUND at a stated
price.
-2-
<PAGE>
The FUND may write only covered options, which means that, so long as the
FUND is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the FUND will
maintain, in a segregated account, cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities or will hold a purchased put option with a higher strike price than
the put written. The FUND may also write combinations of covered puts and calls
on the same underlying security.
The FUND will receive a premium from writing a put or call option, which
increases the FUND's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the FUND
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the FUND assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its market value at the
time it is exercised resulting in a potential capital loss if the purchase price
is less than the underlying security's current market value minus the amount of
the premium received, unless the security subsequently appreciates in value.
The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The FUND will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option. In
the case of a put option, any loss so incurred may be partially or entirely
offset by the premium received from a simultaneous or subsequent sale of a
different put option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by unrealized appreciation of the underlying security owned
by the FUND.
Purchasing Put and Call Options on Securities
The FUND may purchase put options to protect its portfolio holdings in an
underlying security against a decline in market value. Such hedge protection is
provided during the life of the put option since the FUND, as holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the FUND will reduce any
profit it might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
The FUND may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the FUND, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the FUND will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
-3-
<PAGE>
Purchase and Sale of Options and Futures on Stock Indices
The FUND may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Portfolio Manager expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the FUND's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Portfolio Manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in the FUND's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the FUND's
position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures
The FUND may purchase and sell interest rate futures contracts on U.S.
Treasury bills, notes and bonds for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
The FUND may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by the FUND will
fall, thus reducing the net asset value of the FUND. This interest rate risk can
be reduced without employing futures as a hedge by selling long-term fixed
income securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to the FUND in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative means
of hedging against rising interest rates. As rates increase, the value of the
FUND's short position in the futures contracts will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
FUND's investments which are being hedged. While the FUND will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
-4-
<PAGE>
Options on Stock Index Futures Contracts and Interest Rate Futures Contracts
The FUND may purchase and write call and put options on stock index and
interest rate futures contracts. The FUND may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing and selling the underlying futures. For example, the FUND may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the FUND intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, the FUND may buy or sell foreign currencies or may deal in forward
currency contracts. The FUND may also invest in currency futures contracts and
related options. If a decline in exchange rates for a particular currency is
anticipated, the FUND may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, the FUND may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the FUND intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the FUND
will be covered.
A currency futures contract sale creates an obligation by the FUND, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the FUND, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The FUND will write (sell) only covered put and call options on currency
futures. This means that the FUND will provide for its obligations upon exercise
of the option by segregating sufficient cash or short-term obligations or by
holding an offsetting position in the option or underlying currency future, or a
combination of the foregoing. The FUND will, so long as it is obligated as the
writer of a call option on currency futures, own on a contract-for-contract
basis an equal long position in currency futures with the same delivery date or
a call option on stock index futures with the difference, if any, between the
market value of the call written and the market value of the call or long
currency futures purchased maintained by the FUND in cash, Treasury bills, or
other high-grade short-term obligations in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by the FUND falls below 100% of the market value of the call written
by the FUND, the FUND will so segregate an amount of cash, Treasury bills or
other high grade short-term obligations equal in value to the difference.
Alternatively, the FUND may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option multiplied by the number of options
written by the FUND. In the case of put options on currency futures written by
the FUND, the FUND will hold the aggregate exercise price in cash, Treasury
bills, or other high grade short-term obligations in a segregated account with
its custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by
the FUND in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures sold by
the FUND falls
-5-
<PAGE>
below 100% of the market value of the put options written by the FUND, the FUND
will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
If other methods of providing appropriate cover are developed, the FUND
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the FUND will be required to deposit as "initial margin" an amount
of cash and short-term U.S. Government securities equal to from 5% to 10% of the
contract amount. Thereafter, subsequent payments (referred to as "variation
margin") are made to and from the broker to reflect changes in the value of the
futures contract.
Forward Foreign Currency Exchange Contracts
The value of the FUND's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the FUND may incur costs in connection with
conversions between various currencies. The FUND will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties at a price set at the time of the contract.
These contracts are traded directly or indirectly between currency traders
(usually large commercial banks) and their customers. While the pursuit of
foreign currency gain is not a primary objective of the FUND, the FUND may, from
time to time, hold foreign currency to realize such gains. (These gains
constitute non-qualifying income that is subject to the 10% limitation with
respect to the "Income Requirement" of Subchapter M of the Internal Revenue Code
of 1986, as amended, which is discussed herein under "Dividends, Capital Gains
Distributions and Tax Matters.")
The FUND will enter into forward foreign currency exchange contracts as
described hereafter. When the FUND enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to establish
the U.S. dollar cost or proceeds. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the FUND will be able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships.
When the Portfolio Manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the FUND's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is extremely difficult and the successful execution of a
short-term hedging strategy is highly uncertain. The FUND does not intend to
enter into such forward contracts on a regular or continuous basis, and will not
do so if, as a result, the FUND would have more than 25% of the value of its
total assets committed to such contracts. The FUND will also not enter into such
forward contracts or maintain a net exposure in such contracts where the FUND
would be obligated to deliver an amount of foreign currency in excess of the
value of the FUND's portfolio securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall strategies. However, the Trustees of the FUND believe
that it is important to have the flexibility to enter into such forward
contracts when the Portfolio Manager determines that the best interests of the
FUND will be served. The FUND's custodian bank will segregate cash or marketable
high grade debt securities in an amount not less than the value of the FUND's
total assets committed to foreign currency exchange contracts entered into under
this type of transaction. If the value of the securities segregated declines,
additional cash or securities will be added on a daily basis, i.e.,
-6-
<PAGE>
marked-to-market, so that the segregated amount will not be less than the amount
of the FUND's commitments with respect to such contracts.
Generally, the FUND will not enter into a forward foreign currency exchange
contract with a term of greater than one year. At the maturity of the contract,
the FUND may either sell the portfolio security and make delivery of the foreign
currency, or may retain the security and terminate the obligation to deliver the
foreign currency by purchasing an "offsetting" forward contract with the same
currency trader obligating the FUND to purchase, on the same maturity date, the
same amount of foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the FUND to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the FUND is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the FUND is obligated to
deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the FUND
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the FUND enters into an offsetting contract for
the purchase of the foreign currency, the FUND will realize a gain to the extent
the price of the currency the FUND has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the FUND
will suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.
The FUND's dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the FUND is not required
to enter into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Portfolio
Manager. It also should be realized that this method of protecting the value of
the FUND's portfolio securities against the decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which one can achieve at some future point
in time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain which might result should the value of such currency
increase.
Additional Risks of Futures Contracts and Related Options and Forward Foreign
Currency Exchange Contracts
The market prices of futures contracts may be affected by certain factors.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the FUND may invest may be subject
to commodity exchange imposed limitations on fluctuations in futures contract
prices during a single day. Such regulations are referred to as "daily price
fluctuation limits or daily limits". During a single trading day no trades may
be executed at prices beyond the daily limit. Once the price of a futures
contract has increased or decreased by an amount equal to the daily limit,
positions in those futures cannot be taken or liquidated unless both a buyer and
seller are willing to effect trades at or within the limit. Daily limits, or
regulatory intervention in the commodity
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markets, could prevent the FUND from promptly liquidating unfavorable positions
and adversely affect operations and profitability.
Forward foreign currency exchange contracts ("forward contracts") are not
traded on contract markets regulated by the Commodity Futures Trading Commission
("CFTC") and are not regulated by the SEC. Rather, forward contracts are traded
through financial institutions acting as market-makers. In the forward currency
market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
In addition, futures contracts and related options, and forward contracts
may be traded on foreign exchanges, to the extent permitted by the CFTC. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (a) other complex foreign
political and economic factors, (b) lesser availability than in the United
States of data on which to make trading decisions, (c) delays in the FUND's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States and the United Kingdom, (d) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (e) lesser trading volume.
Ratings of Debt Instruments
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
U.S. corporate and municipal bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are
judged by Moody's to be of the best quality. Bonds rated Aa are judged to be of
high quality by all standards. Together with the Aaa group, they comprise what
are generally known as high-grade bonds. Moody's states that Aa bonds are rated
lower than the best bonds because margins of protection or other elements make
their long-term risks appear somewhat larger than the long-term risks for Aaa
bonds. Bonds which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated bonds are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds that are rated Baa are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and have speculative characteristics as
well.
The four highest ratings of Standard & Poor's Corporation ("S&P") for U.S.
bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating assigned
by S&P to an obligation. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a small degree.
Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB are considered on the
borderline between definitely sound obligations and obligations where the
speculative element begins to predominate.
Ratings of Commercial Paper
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer has access
to at least two additional channels of borrowing; basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; the issuer's
industry is well established and the issuer has a strong position within the
industry and the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2)
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economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Regulatory Matters
In connection with its proposed futures and options transactions, the FUND
has filed with the Commodity Futures Trading Commission ("CFTC") a notice of
eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
FUND has represented in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures contracts
or stock indices if as a result the sum of the initial margin
deposits on its existing futures contracts and related options
positions and premiums paid for options on futures contracts or
stock indices would exceed 5% of the FUND's assets; and
(ii) with respect to each futures contract purchased or long position in
an option contract, the FUND will set aside in a segregated account
cash or cash equivalents in an amount equal to the market value of
such contracts less the initial margin deposit.
The Staff of the SEC has taken the position that the purchase and sale of
futures contracts and the writing of related options may involve senior
securities for the purposes of the restrictions contained in Section 18 of the
Investment Company Act of 1940 (the "1940 Act") on investment companies issuing
senior securities. However, the staff has issued letters declaring that it will
not recommend enforcement action under Section 18 if an investment company:
(i) sells futures contracts to offset expected declines in the value of
the investment company's portfolio securities, provided the value of
such futures contracts does not exceed the total market value of
those securities (plus such additional amount as may be necessary
because of differences in the volatility factor of the portfolio
securities vis-a-vis the futures contracts);
(ii) writes call options on futures contracts, stock indexes or other
securities, provided that such options are covered by the investment
company's holding of a corresponding long futures position, by its
ownership of portfolio securities which correlate with the
underlying stock index or otherwise;
(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account")
consisting of cash or cash equivalents in an amount equal to the
total market value of such futures contracts less the initial margin
deposited therefor; and
(iv) writes put options on futures contracts, stock indices or other
securities, provided that such options are covered by the investment
company's holding of a corresponding short futures position, by
establishing a cash segregated account in an amount equal to the
value of its obligation under the option, or otherwise.
The FUND will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the foregoing.
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Additional Information Regarding Precious Metals and Precious Metals Securities
The production and marketing of gold and precious metals may be affected by
the action of certain governments and changes in existing governments. For
example, the mining of gold is highly concentrated in a few countries. In
current order of magnitude of production of gold bullion, the five largest
producers of gold are the Republic of South Africa, the Union of Soviet
Socialist Republics, Canada, Brazil and the United States. Economic and
political conditions prevailing in these countries may have a direct effect on
the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the FUND will invest will be located within the United States and Canada.
Prices of Precious Metals Securities can be volatile and tend to experience
greater volatility than the prices of physical precious metals. This is due to
the fact that the costs of mining precious metals remain relatively fixed, so
that an increase or decrease in the price of precious metals has a direct and
greater than proportional effect on the profitability of precious metals mining
companies. Investments tied to precious metals characteristically involve high
risk because of precious metals' price volatility. The price of precious metals
is affected by factors such as cyclical economic conditions, political events
and monetary policies of various countries. During periods of rising precious
metals prices, the FUND will tend to emphasize investments in Precious Metals
Securities.
Portfolio Turnover
As a result of its investment policies, the FUND expects to engage in a
substantial number of portfolio transactions. However, the FUND's portfolio
turnover rate is not expected to exceed 100%. A 100% portfolio turnover rate
would occur if 100% of the securities owned by the FUND were sold and either
repurchased or replaced by it within one year. The FUND's portfolio turnover
rate is, generally, the percentage computed by dividing the lesser of FUND's
purchases or sales exclusive of short-term securities and bullion, by the
average value of the FUND's total investments exclusive of short-term securities
and bullion. The portfolio turnover rates for the fiscal years ended April 30,
1995 and 1994, were 116% and 174%, respectively. High portfolio turnover
involves correspondingly greater brokerage commissions, other transaction costs,
and a possible increase in short-term capital gains or losses. Shareholders are
taxed on any such net gains at ordinary income rate.
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means respectively the vote of the lesser of (i) 67% or more of the shares
of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions.
1. As a non-diversified management investment company, the FUND has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND may not invest more than 25% of the market value
of its total assets in a single issuer (except the securities of the U.S.
Government, its agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having as few as twelve issuers.
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2. The FUND will not purchase a security if, as a result: (a) it would own
more than 10% of any class or of the outstanding voting securities of any single
company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) 25% or more of its total assets would be
concentrated in companies within any one industry except the FUND may invest 25%
or more of its assets in Precious Metals Securities as defined in the Prospectus
and (d) more than 5% of total assets would be invested in warrants or rights or
invest more than 2% of its total assets if such warrants are not listed on the
New York Stock Exchange.
3. The FUND may borrow money from a bank solely for temporary or emergency
purposes (but not in an amount equal to more than 10% of the market value of its
total assets). The FUND will not purchase securities while borrowing is in
excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities other than (a)
through the purchase of publicly distributed debt securities in accordance with
its investment objective and (b) through repurchase agreements.
5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities.
6. The FUND may not knowingly purchase or otherwise acquire securities
which are subject to legal or contractual restrictions on resale or for which
there is no readily available market if, as a result thereof, more than 10% of
the assets of the FUND (taken at market value) would be invested in such
securities, including repurchase agreements with maturity dates in excess of 7
days.
7. The FUND may not pledge, mortgage or hypothecate its assets, except that
to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
8. The FUND may not purchase or sell commodity contracts, except for
futures contracts and related options as described under "Investment Objective
and Policies" in the Prospectus and this Statement of Additional Information.
9. The FUND may not buy any securities or other property on margin (except
for options and futures trading and for such short term credits as are necessary
for the clearance of transactions) or engage in short sales.
10. The FUND may not invest in companies for the purpose of exercising
control or management.
11. The FUND may not underwrite securities issued by others except to the
extent that the FUND may be deemed an underwriter in the resale of any portfolio
securities.
12. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Directors of the FUND and the officers and directors of VCM, who individually
own beneficially more than 1/2 of 1% of the outstanding securities of such
issuer, together own beneficially more than 5% of such outstanding securities.
13. The FUND may not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
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14. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs; provided, however, that if consistent with
the objectives of the FUND, the FUND may purchase securities of issuers whose
principal business activities fall within such areas.
15. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states, the
FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any subsequent
change in percentages due to changes in market value of portfolio securities or
other changes in total assets will not be considered a violation of such
restrictions.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York time,
on each day that the New York Stock Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per share is
computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding. Each determination of the
FUND's net asset value is made (i) by valuing portfolio securities which are
traded on the New York Stock Exchange or the American Stock Exchange at the last
sale price, or, if no sale, at the closing bid price, (ii) by valuing other
securities as nearly as possible in the manner described in clause (i) if traded
on any other U.S. or foreign exchange, and, if not so traded, on the basis of
the latest available bid prices. A security which is listed or traded on more
than one exchange, is valued at the quotation on the exchange determined to be
the primary market for such security by the Board of Directors or VCM.
High-quality short-term debt securities which mature in 60 days or less are
valued at amortized cost if their original maturity was 60 days or less, or by
amortizing their value on the 61st day prior to maturity if their original term
to maturity exceeded 60 days. Amortized cost will be used unless the Board of
Directors determines that such method does not represent fair value.
Generally, trading in foreign securities, as well as trading in corporate
bonds, U.S. government securities and money market instruments, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the FUND are determined as of such times. Foreign currency exchange rates are
also generally determined prior to 4:15 p.m. Bullion investments are valued at
the closing spot price based on dealer or exchange quotations. Occasionally,
events affecting the value of metal securities may occur between such times and
4:15 p.m. which will not be reflected in the computation of the FUND's net asset
value. If events occur which materially affect the value of metal securities,
the securities will be valued at fair value as determined in good faith by the
Board of Directors.
Puts and calls held by the FUND are valued at the last sales price or, if
there are no transactions, at the mean between the closing bid and asked prices.
When the FUND writes a call, an amount equal to the premium received is included
in the FUND's statement of assets and liabilities as an asset, and an equivalent
credit is included in the liability section. The credit is "marked-to-market" to
reflect the current market value of the call. If a call expires, the FUND has a
gain in the amount of the premium received; if the FUND enters into a closing
purchase transaction, it will have a gain or loss depending on whether the
premium received was more or less than the cost of the closing transaction. All
other securities and other assets of the FUND are valued at fair value as
determined in good faith by the Board of Directors.
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PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to that
of other mutual funds and to stock or other relevant indices in advertisements
or in reports to shareholders, performance will be stated in terms of total
return, rather than in terms of yield. The total return basis combines principal
and dividend income changes for the periods shown. Principal changes are based
on the difference between the beginning and closing net asset values for the
period and assume reinvestment of dividends and distributions paid by the FUND.
Dividends and distributions are comprised of net investment income and net
realized capital gains. Under the rules of the SEC, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or at
the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's average annual total return figures, reflecting the initial
investment and reinvestment of all dividends and distributions, net of the pro
rata share of the account opening fee, for the one and five year periods and the
life of fund (June 22, 1988 to April 30, 1995) ended April 30, 1995 were -4.39%,
5.79% and .87%, respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, the FUND calculates its aggregate
total return for the specified periods of time by assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment
dates. Percentage increases are determined by subtracting the initial net asset
value of the investment from the ending net asset value and by dividing the
remainder by the beginning net asset value. The FUND does not, for these
purposes, deduct the pro rata share of the account opening fee which was in
effect until December 1994 from the initial value invested. The FUND will,
however, disclose the pro rata share of the account opening fee and will
disclose that the performance data does not reflect such non-recurring charge
and that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under SEC rules and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
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PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Board of Directors and pursuant to authority contained in the Investment
Advisory Contract and Sub-Advisory Agreements between the FUND and VCM, and VCM
and the Portfolio Manager. In selecting such brokers or dealers, the Portfolio
Manager will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution efficiency, settlement capability, and financial condition of the
broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Manager for the
FUND's use, which in the opinion of the Board of Directors are reasonable and
necessary to the FUND's normal operations. Those services may include economic
studies, industry studies, security analysis or reports, sales literature and
statistical services furnished either directly to the FUND or to the Portfolio
Manager. Such allocation shall be in such amounts as VCM shall determine and the
Portfolio Manager shall report regularly to VCM who will in turn report to the
Board of Directors on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the Portfolio
Manager in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of the Portfolio Manager's other clients may be useful to the
Portfolio Manager in carrying out its obligations to the FUND. The receipt of
such research may not reduce the Portfolio Manager's normal independent research
activities.
The Portfolio Manager is authorized, subject to best price and execution,
to place portfolio transactions with brokerage firms that have provided
assistance in the distribution of shares of the FUND and are authorized to use
Federated Securities Corp. (the "Distributor"), and the Portfolio Manager or
their affiliated broker-dealers on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from brokerage commissions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Manager does
not provide for any reduction in the advisory fees as a result of profits
resulting from brokerage commissions effected through the Portfolio Manager or
any affiliated brokerage firms. For the years ended April 30, 1995, 1994, and
1993 the FUND incurred brokerage commission expenses of $395,000, $654,000, and
$190,954, respectively from the purchase and sale of portfolio securities.
The Board of Directors had adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the Investment Company Act of 1940 (the
"1940 Act") which requires that the commissions paid the Distributor or to the
Portfolio Manager or to their affiliated broker-dealers must be "reasonable and
fair compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time." The Rule and the
procedures also contain review requirements and require VCM to furnish reports
to the Directors and to maintain records in connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the FUND
may receive commissions which are in excess of the amount of commission which
other brokers or dealers would have charged
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for effecting such transactions provided the Portfolio Manager determines in
good faith that such commissions are reasonable in relation to the value of the
brokerage and/or research services provided by such executing brokers or dealers
viewed in terms of a particular transaction or VCM's overall responsibilities to
the FUND.
It may happen that the same security will be held by other clients of VCM
or of the Portfolio Manager. When the other clients are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts will be
allocated in accordance with a formula considered by VCM to be equitable to
each, taking into consideration such factors as size of account, concentration
of holdings, investment objectives, tax status, cash availability, purchase
cost, holding period and other pertinent factors relative to each account. In
some cases this system could have a detrimental effect on the price or volume of
the security as far as the FUND is concerned. In other cases, however, the
ability of the FUND to participate in volume transactions will produce better
execution results for the FUND.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the FUND and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the FUND or its shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the FUND is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
If the FUND has a net capital loss (i.e., the excess of capital losses over
capital gains) for any year, the amount thereof may be carried forward up to
eight years and treated as a short-term capital loss which can be used to offset
capital gains in such years.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short
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Gain Test, the FUND may have to limit the sale of appreciated securities that it
has held for less than three months. However, the Short-Short Gain Test will not
prevent the FUND from disposing of investments at a loss, since the recognition
of a loss before the expiration of the three-month holding period is disregarded
for this purpose. Interest (including original issue discount) received by the
FUND at maturity or upon the disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain Test.
However, income that is attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose.
In general, gain or loss recognized by the FUND on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Section 1256, will generally be treated as ordinary income or
loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as regulated
futures contracts, certain foreign currency contracts and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss (except for Section 1256 forward
foreign currency contracts, which are subject to the Section 988 Rules). The
FUND may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the FUND
that are not Section 1256 contracts. The Internal Revenue Service has held in
several private rulings that gains arising from Section 1256 contracts will be
treated for purposes of the
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Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under Code
Section 1256.
The FUND may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the FUND invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the FUND
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
FUND receives distributions of any such ordinary earnings or net capital gain
from the PFIC. If the FUND does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (i) any gain
recognized by the FUND upon a sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the FUND from the
PFIC will be allocated ratably over the FUND's holding period of its interest in
the PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is received
shall be included in the FUND's gross income for such year as ordinary income
(and the distribution of such portion by the FUND to shareholders will be
taxable as an ordinary income dividend, but such portion will not be subject to
tax at the FUND level), (iii) the FUND shall be liable for tax on the portions
of such gain or excess distribution so allocated to prior years in an amount
equal to, for each such prior year, (A) the amount of gain or excess
distribution allocated to such prior year multiplied by the highest corporate
tax rate in effect for such prior year plus (B) interest on the amount
determined under clause (A) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (iv) the
distribution by the FUND to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the FUND
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Under recently proposed Treasury Regulations a Fund can elect to recognize
as gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over the Fund's adjusted tax basis in that
share ("mark to market gain"). Such mark to market gain will be included by the
Fund as ordinary income, such gain will not be subject to the Short-Short Gain
Test, and the Fund's holding period with respect to such PFIC stock commences on
the first day of the next taxable year. If the Fund makes such election in the
first taxable year it holds PFIC stock, the Fund will include ordinary income
from any mark to market gain, if any, and will not incur the tax described in
the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
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Although the FUND's management and the Portfolio Manager will endeavor to
manage the FUND's portfolio so that the FUND's investment in Physical Precious
Metals Investments (as defined in the Prospectus) does not result in its failure
to satisfy the asset diversification test or the source of income requirement
described above, the FUND's management reserves the right to depart from this
policy whenever, in its sole judgment, it is deemed in the best interests of the
FUND and its shareholders to do so. If for any taxable year the FUND does not
qualify as a regulated investment company, all of its taxable income (including
its net capital gain) will be subject to tax at regular corporate rates without
any deduction for distributions to shareholders, and such distributions will be
taxable as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
According to an Internal Revenue Service announcement of Treasury regulations to
be promulgated, if the FUND qualifies and elects to be taxed as a regulated
investment company after not qualifying as a regulated investment company for
more than one year, the FUND will be subject to federal income tax on the amount
of the net unrealized gain on its assets at the time of requalification (or, if
the FUND so elects, at the time such net unrealized gain is recognized during
the following ten year period).
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that the FUND may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporations only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net capital
gain for each taxable year. The FUND currently intends to distribute any such
amounts. Net capital gain distributed and designated as a capital gain dividend
it will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his or her shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
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Ordinary income dividends paid by the FUND with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as "S" corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the FUND from domestic corporations for the taxable year.
A dividend received by the FUND will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the FUND has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the FUND has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the FUND is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends- received deduction for
a corporate shareholder may be disallowed or reduced (i) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the FUND or (ii) by application of Code Section 246(b) which in
general limits the dividends-received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends-received deduction
and certain other items).
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at the rate of 26% (or 28%,
for taxable income in excess of $175,000) for noncorporate taxpayers and 20% for
corporate taxpayers on the excess of the taxpayer's alternative minimum taxable
income ("AMTI") over an exemption amount. In addition, under the Superfund
Amendments and Reauthorization Act of 1986, a tax is imposed for taxable years
beginning after 1986 and before 1996 at the rate of 0.12% on the excess of a
corporate taxpayer's AMTI (determined without regard to the deduction for this
tax and the AMT net operating loss deduction) over $2 million. The corporate
dividends received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from the FUND into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not
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itemize deductions. Each shareholder should consult his own tax advisor
regarding the potential application of foreign tax credits.
Distributions by the FUND that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the U.
S. Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the Internal Revenue Service for failure to
report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the FUND
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
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If the income from the FUND is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends will
be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other state and
local tax rules affecting an investment in the FUND under their particular
circumstances.
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THE MANAGEMENT OF THE FUND
Officers and Directors are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Director of the Fund; Chairman
and Trustee of Blanchard Funds; Chairman and
Trustee of The Virtus Funds; Chairman and
Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research,
Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and
Director, Trustee, or Managing General
Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds; Director,
Oberg Manufacturing Co.; Chairman of the
Board, Children's Hospital of Pittsburgh;
Director, Trustee or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst
& Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
President, Investment Properties Corporation;
Senior Vice-President, John R. Wood and
Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate
ventures in Southwest Florida; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds; Director
and Member of the Executive Committee,
Michael Baker, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman and Director,
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PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Attorney-at-law; Director, The Emerging
Germany Fund, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals;
Professor of Medicine and Member, Board of
Trustees, University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center-Downtown, Member, Board of Directors,
University of Pittsburgh Medical Center;
Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Attorney-at-law; Partner, Henny, Kochuba,
Meyer & Flaherty; Director, Eat'N Park
Restaurants, Inc., and Statewide Settlement
Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western
Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Director and Treasurer of the
Fund; President, Trustee and Treasurer of
Blanchard Funds; President, Trustee and
Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director
of some of the Funds; Vice President and
Treasurer of the Funds.
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Peter E. Madden, 53
225 Franklin Street
Boston, MA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Attorney-at-law; Partner, Henny, Kochuba,
Meyer & Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr.,
J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
President, Law Professor, Duquesne
University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or
Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds;
Professor, Foreign Policy and Management
Consultant; Trustee, Carnegie Endowment for
International Peace, RAND Corporation, Online
Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or
Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh;
formerly, Chairman, National Advisory Council
for Environmental Policy and Technology.
-24-
<PAGE>
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Director of the Fund; Trustee of Blanchard
Funds; Trustee of The Virtus Funds; Public
relations/marketing consultant; Director,
Trustee, or Managing General Partner of the
Funds.
- ---------------
(1) This Director is deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board of Directors between
meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations related
to the financial reporting process.
The Funds
As referred to in the list of Directors and Officers, "Funds" includes the
following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of July 31, 1995, Officers and Directors own less than 1% of the
outstanding shares of each Fund.
-25-
<PAGE>
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
Officers and Directors Compensation
<TABLE>
- -------------------------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Director
Thomas G. Bigley, Director $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Director $-0- $2,001.50 for the Fund Complex
William J. Copeland, Director $-0- $2,001.50 for the Fund Complex
James E. Dowd, Director $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Director
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Director
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Director
Peter E. Madden, Director $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Director $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Director
Wesley W. Posvar, Director $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Director
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The Virtus Funds.
</TABLE>
MANAGEMENT SERVICES
Manager to the Fund
The Fund's manager is Virtus Capital Management, Inc. ("VCM"), which is a
division of Signet Trust Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls maintained by Signet Bank to
restrict the flow of non-public information, Fund investments
-26-
<PAGE>
are typically made without any knowledge of Signet Bank's or its affiliates'
lending relationships with an issuer.
The manager shall not be liable to the Fund, or any shareholder of any of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
Management Fees
For its services, VCM receives an annual management fee as described in the
prospectus. For the fiscal years ended April 30, 1995, 1994 and 1993, the
aggregate amounts paid or accrued by the Fund to the prior manager under the
then existing management agreement were $756,766, $602,610 and $227,978,
respectively. The prior manager was not required to reimburse the Fund for any
expenses during the years ended April 30, 1995, 1994 and 1993.
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement") between
VCM and the portfolio manager, Cavelti Capital Management, Ltd. (the "Portfolio
Manager"), VCM has delegated to the Portfolio Manager the authority and
responsibility to make and execute decisions for the Fund within the framework
of the Fund's investment policies, subject to review by VCM and the Board of
Directors of the Fund. Under the terms of the Sub-Advisory Agreement, the
Portfolio Manager has discretion to purchase and sell securities, except as
limited by the Fund's investment objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to the Portfolio
Manager, by VCM, of monthly compensation based on the Fund's average daily net
assets for providing investment advice to the Fund and managing the investment
of the assets of the Fund. These fees are determined by applying the following
annual rates to the Fund's average daily net assets: .30% of the Fund's net
assets up to the first $150 million; .2625% of the Fund's net assets in excess
of $150 million but less than $300 million; and .225% of the Fund's net assets
in excess of $300 million. The Agreement provides that the Portfolio Manager's
fee shall be reduced proportionately based on the ratio of the Portfolio
Manager's fee to VCM's fee in the event VCM's fee is reduced as a result of a
state expense limitation. For the fiscal years ended April 30, 1995, 1994 and
1993, the aggregate amounts paid or accrued by the prior manager to the
Portfolio Manager under the Sub-Advisory Agreement were $227,033, $170,058, and
$95,907, respectively.
The Sub-Advisory Agreement, dated July 11, 1995, was approved by the Fund's
Directors on March 24, 1995 and the Fund's shareholders on July 11, 1995. The
Sub-Advisory Agreement provides that it may be terminated without penalty by
either the Fund or the Portfolio Manager at any time by the giving of 60 days'
written notice to the other and terminates automatically in the event of
"assignment", as defined in the Investment Company Act. The Sub-Advisory
Agreement provides that, unless sooner terminated, it shall continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Fund or by a vote of the
majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Directors who are not parties to the Sub-Advisory Agreement or "interested
persons" of such parties cast in person at a meeting called for the purpose of
voting on such approval.
-27-
<PAGE>
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Fund has adopted a Plan for Shares of the Fund pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that the Funds' Distributor
shall act as the Distributor of shares, and it permits the payment of fees to
brokers and dealers for distribution and administrative services and to
administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Director reasonably
requests. For the fiscal year ended April 30, 1995, the FUND accrued payments
under the Plan amounting to $567,575.
Other benefits which the Fund hopes to achieve through the Plan include,
but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Directors expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
The FUND is a Maryland corporation. The FUND's authorized shares consists
of 1,000,000,000 shares of common stock, par value $.001 per share. Shares of
the FUND entitle the holders to one vote per share. The shares have no
preemptive or conversion rights. The voting and dividend rights, the right of
redemption and the privilege of exchange are described in the Prospectus. Shares
are fully paid and non-assessable.
The FUND may be terminated upon the sale of its assets to another open-end
management investment company if approved by the vote of the holders of a
majority of the outstanding shares of the FUND. The FUND may also be terminated
upon liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specifically allocated to the FUND, and constitute the underlying
assets of the FUND.
-28-
<PAGE>
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments of
the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
-29-
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Precious Metals
Fund for the fiscal year ending April 30, 1995. Morningstar has ranked the Fund
8th out of the 26 funds in its precious metals category, based on total
reinvested performance, for the 5 years ending 4/30/95.
Naturally, past performance is no guarantee of future performance. As with
all mutual funds, principal value and return will vary with market conditions so
that shares, when redeemed, may be worth more or less than their original cost.
The Year In Review
We started the year fully invested, but with almost one third of the
portfolio in gold and silver bullion _ an unusual asset mix for the fund. This
positioning reflected our view that a more defensive stance was warranted while
the U.S. Federal Reserve was raising interest rates. With the likelihood that
gold might be stuck in a trad ing range below $400 for some months, it seemed
quite likely that bullion would outperform gold mining shares. This proved to be
the case as gold shares grew increasingly out of favor as the year progressed.
For the past year, gold has essentially marked time by swinging back and
forth between the $370 and $400 levels. If an interest rate hike was
anticipated, gold would move lower in advance of the hike. After the rate change
occurred, gold would rally back towards the top of the trading range until
convictions grew that rates would be raised again. All in all, a difficult
environment for gold share investors.
In 1995, a new element was added to the gold market dynamics _ a rapidly
devaluing U.S. dollar. Many investors were confused and disappointed by the
failure of gold to soar during this period. This is understandable because, on
the surface, a dollar devaluation is bullish for gold. However, the linkage is
often quite weak. Clearly, this was one of those times, as the value of gold
priced in non-dollar terms fell quite sharply. The sober conclusion is that the
gold market viewed the outcome of the dollar crisis as
(over, please)
The following information was represented as a line graph
- --------------------------------------------------------------------------------
The Value of a $10,000 Investment in the
Blanchard Precious Metals Fund
from inception 6/23/88 through 4/30/95 as compared to the
Toronto Stock Exchange Gold & Silver Index for the same period
-----------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Precious Metals Fund*
-----------------------------------
1 year -4.39%
-----------------------------------
5 year 5.79%
-----------------------------------
since inception 0.87%
-----------------------------------
<TABLE>
<CAPTION>
FYE 4/30/89 FYE 4/30/90 FYE 4/30/91 FYE 4/30/92 FYE 4/30/93 FYE 4/30/94 FYE 4/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
RMF -10.20% -10.90% -16.00% -4.70% 35.50% 27.80% -4.39%
TSE G&S IDX -16.19% 8.65% -17.22% -11.28% 74.98% 24.82% 4.11%
$9,925 $8,913 $7,941 $6,671 $6,357 $8,614 $11,008 $10,525
$10,000 $8,381 $9,106 $7,538 $6,688 $11,702 $14,606 $15,207
</TABLE>
Blanchard Toronto Stock
Precious Metals Exchange Gold &
Fund* Silver Index (D)
*The average annual returns quoted above do not reflect the deduction of the
account opening fee and assume reinvestment of distributions. If fee was
reflected, returns would be lower. Total return includes changes in principal
value. Average annual return is total return annualized and compounded. Past
performance is no guarantee of future results.
(D)Source: The Toronto Stock Exchange Gold & Silver Index is an unmanaged index
of the stock performance of companies engaged in gold and silver mining
activities.
^Reflects the deduction of the one-time-only $75 account opening fee.
This chart is for comparative purposes only and is not intended to reflect
future performance of the index or the BPMF.
- --------------------------------------------------------------------------------
<PAGE>
deflationary. Certainly, for exporting nations like Germany and Japan, the
strong rise in their currencies is deflationary. For the U.S., dollar weakness
is another inflationary strain that could prompt the Federal Reserve to tighten
monetary policy when it otherwise wouldn't.
A Look Ahead
Fortunately, there have recently been two important changes in the global
investment scene which underpin the bullish commodity fundamentals for gold and
which alleviate the deflationary pressure. First, the central banks of Germany
and Japan have cut domestic interest rates. Secondly, U.S. monetary policy has
shifted into neutral from the steady tightening experienced in 1994. In fact,
there are some who argue that the U.S. should now cut rates in response to an
obvious softening in the economy. We believe gold would shoot through the $400
level decisively if this pleasant scenario were to unfold. We note that gold
rose from the $381 level to the $400 level in just two days after the German
central bank cut rates in late March!
The commodity supply-demand picture for gold continues to remain quite
bullish. On the supply side, global gold production is now in decline for the
first time in twenty years. Moreover, labor productivity problems in South
Africa virtually ensure that global output will contract again in 1995. South
African gold output is now at the lowest level since 1958. Last year's
production was 584 tonnes, and we look for a further slide to about 540 tonnes
in 1995.
Demand in 1994 was steady at near-record levels, and only huge disinvestment
of about 500,000 ounces per month kept the price from rising. With physical
demand now accelerating sharply outside of North America, we estimate that net
disinvestment of about one million ounces per month is required to prevent gold
from rising. How likely is this to continue? Given the increased volatility in
currency markets and the more favorable monetary conditions, we think it much
less likely that investors will be willing to part with their gold below the
$400 level. From this perspective, the next upleg in the bull market in gold may
lie just ahead of us!
In anticipation of improving gold prices, the Fund's portfolio is once again
in an aggressive posture. A 5% weighting in silver is our only bullion position,
and cash levels are being kept near 3% while 92% of the portfolio is invested in
gold mining equities. We have also increased our exposure to junior producers,
favoring those companies which are already in production, yet have a number of
years of solid growth ahead of them.
Sincerely,
PC:ml Peter C. Cavelti
President
Cavelti Capital Management
Portfolio Manager of the Blanchard Precious Metals Fund
Distributed by Sheffield Investments, Inc. (1551) 01ARSL0695
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Shares Value
------ -----
COMMON STOCKS (83.12%)
METAL MINING SECURITIES (83.12%)
AUSTRALIA (5.75%)
*Great Central Mines .............. 150,000 $ 316,615
Newcrest Mining Ltd. ............. 500,000 2,139,878
*Saint Barbara Mines .............. 1,575,000 1,318,318
*Valdora Minerals ................. 2,800,000 550,254
-----------
TOTAL AUSTRALIA 4,325,065
-----------
CANADA (40.47%)
Barrick Gold Corp. ............... 140,000 3,397,683
*Dayton Mining Corp. .............. 505,000 1,559,846
(DD)Franco Nevada Mining Ltd. ........ 8,000 400,074
Franco Nevada Mining Ltd. ........ 40,200 2,010,369
*Golden Knight Resources, Inc. .... 86,400 571,870
*Great Lakes Minerals, Inc. ....... 500,000 588,343
*Pegasus Gold, Inc. ............... 252,300 3,107,941
Placer Dome, Inc. ................ 190,000 4,523,810
*Prime Resources Group, Inc. ...... 494,700 3,410,783
*TVX Gold, Inc. ................... 1,500,000 10,893,547
-----------
TOTAL CANADA 30,464,266
-----------
SOUTH AFRICA (10.10%)
(D)Ashanti Goldfields (ADR) ......... 125,000 3,125,000
Deelkraal Gold Mining Co. Ltd.
(ADR) .......................... 138,300 131,385
Free State Consolidated
Gold Mines Ltd. (ADR) ............ 120,000 1,425,000
Vaal Reef Exploration (ADR) ...... 477,000 2,921,625
-----------
TOTAL SOUTH AFRICA ........... 7,603,010
-----------
UNITED STATES (26.80%)
*Atlas Corp. (b) ................. 455,000 830,375
*Canyon Resources Corp. .......... 875,000 1,804,688
*Greenstone Resources Ltd. ....... 1,293,100 1,737,603
Homestake Mining ................ 195,800 3,304,125
*Kinross Gold Corp. .............. 600,000 3,600,000
Newmont Mining Corp. ............ 70,000 2,931,250
*Santa Fe Pacific Gold Corp. ..... 473,000 5,971,625
-----------
TOTAL UNITED STATES .......... 20,179,666
-----------
(Right Column)
Value
-----
TOTAL METAL MINING
SECURITIES ................... $62,572,007
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$68,453,952) ................. 62,572,007
-----------
BULLION (3.04%) Ounces
------
*Silver ............................ 400,000 2,288,800
-----------
TOTAL BULLION
(IDENTIFIED COST
$2,148,000) .................. 2,288,800
-----------
WARRANTS (1.56%) Warrants
--------
(DD)*Triton Mining Corp. Warrants
(expire 10/27/95) .......... 439,000 1,178,415
-----------
TOTAL WARRANTS
(IDENTIFIED COST
$890,006) ................... 1,178,415
-----------
Principal
---------
SHORT-TERM SECURITIES (13.23%)
GOVERNMENT OBLIGATION (12.22%)
U.S. Treasury Bill 5.75%,
5/4/95 ...................... 9,200,000 9,195,754
COMMERCIAL PAPER (1.01%)
American Express Credit Corp.
5.70%, 5/1/95 ............... 760,000 760,000
-----------
TOTAL SHORT-TERM
SECURITIES
(IDENTIFIED COST
$9,955,754) ................. 9,955,754
-----------
TOTAL INVESTMENTS
(IDENTIFIED COST
$81,447,712) (a)
(100.95%) ................... 75,994,976
LIABILITIES IN EXCESS OF
CASH AND OTHER
ASSETS
(-.95%) ..................... (713,115)
-----------
NET ASSETS (100%) ........... $75,281,861
===========
*Non-income producing.
(D)Registered under SEC rule 144a, resale restricted as to qualified
institutional buyers; represents 4.1% of net assets.
(DD)The following securities are restricted:
Security Acquisition Cost Date Acquired % of Net Assets
-------- ---------------- ------------- ---------------
Franco Nevada Mining Ltd. $ 93,586 November 1991 0.53
Triton Mining Corp. Warrants $890,007 October 1994 1.57
(a)The aggregate cost for federal income tax purposes is $81,572,091;
the gross unrealized appreciation is $3,908,323 and the gross unrealized
depreciation is $9,485,438; resulting in net unrealized depreciation of
$5,577,115. (b) Security is a unit consisting of one share of common stock
and half a warrant.
See notes to financial statements.
3
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
Assets:
Investments in securities, at value
(Identified Cost $79,299,712) (note 1) ... $73,706,176
Investment in bullion, at value
(Identified Cost $2,148,000) ............. 2,288,800
Cash ....................................... 73,396
Receivables for:
Investments sold ......................... 1,916,605
Capital stock sold ....................... 295,703
Interest and Dividends ................... 10,151
Total assets ................ 78,290,831
Liabilities:
Payables for:
Investments purchased .................... 1,488,195
Capital stock repurchased ................ 1,397,636
Accrued expenses and other liabilities ... 123,139
Total liabilities ........... 3,008,970
Net assets .................. $75,281,861
Net assets are comprised of:
Paid in capital (unlimited authorized
shares of capital stock, $.001 par value,
10,570,288 shares outstanding) ............. $83,303,714
Accumulated distributions in excess of realized
gain-net ..................................... (2,402,669)
Accumulated investment loss-net .............. (166,448)
Unrealized net depreciation of investments ... (5,452,736)
Net assets ................................... $75,281,861
Net asset value per share .................... $7.12
(Right Column)
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
Investment Income:
Dividends (net of w/h taxes of $25,242) ..... $ 480,104
Interest .................................... 280,575
-----------
Total income ................. 760,679
-----------
Expenses:
Investment management fee (note 2) .......... 756,766
Plan of distribution fee (note 3) ........... 567,575
Transfer agent fees ......................... 186,770
Directors' fees, retirement plan curtailment
and other expenses (note 5) ............... 91,330
Accounting fees ............................. 78,900
Professional fees ........................... 72,297
Registration fees ........................... 52,274
Custodian fees .............................. 37,000
Shareholder reports and notices ............. 34,767
Other ....................................... 4,095
-----------
Total expenses ............... 1,881,774
-----------
Investment loss-net .......... (1,121,095)
-----------
Realized and unrealized gain
(loss)-net (note 1):
Realized gain (loss) on:
Investments in securities,
net ........................ 401,623
Bullion transactions-net ......... (140,613)
Foreign exchange
transactions-net ............... (6,934) 254,076
-------
Change in unrealized appreciation or
depreciation on investments-net ........... (3,793,965)
-----------
Net realized and unrealized gain (loss) ..... (3,539,889)
-----------
Net decrease in net assets resulting from
operations ................................ $(4,660,984)
===========
See notes to financial statements.
4
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment loss-net .............................................. $(1,121,095) $(726,850)
Realized gain-net ................................................ 254,076 15,050,535
Change in unrealized appreciation (depreciation)-net ............ (3,793,965) (4,623,669)
----------- ---------
Net increase (decrease) in net assets resulting from operations .. (4,660,984) 9,700,016
----------- ---------
Dividends and distributions to shareholders from:
Realized gains-net ............................................... (254,076) -
Distribution in excess of realized gains-net ..................... (9,876,340) -
Tax return of capital ............................................ (894,701) -
----------- ---------
(11,025,117) -
----------- ---------
Transactions in capital stock-net increase (note 6) .................. 22,875,091 25,755,918
----------- ---------
Net increase in net assets ....................................... 7,188,990 35,455,934
Net assets:
Beginning of year .................................................. 68,092,871 32,636,937
----------- ---------
End of year (including accumulated investment loss-net of $166,448
and $7,356, respectively.) ....................................... $75,281,861 $68,092,871
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard Precious Metals Fund, Inc. (the "Fund") is a corporation under the
laws of the State of Maryland. The Fund is a registered, open-end
non-diversified management investment company under the Investment Company Act
of 1940 (the "Act"). The Fund had no operations before June 22, 1988 other than
the sale of 12,500 shares of capital stock for $100,000 to eight parties who are
also shareholders or affiliates of shareholders of Sheffield Management Company
(the "Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sale
is made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Directors or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. Bullion
investments are valued at the closing spot price based on dealer or exchange
quotations. All other securities and other assets of the Fund are valued at fair
value as determined in good faith by the Directors. Foreign currency exchange
rates are determined when such rates are made available to the Fund at times
prior to the close of the New York Stock Exchange.
There are certain risks involved in concentrating in specific industries
such as mining that are in addition to the usual risks inherent in domestic
instruments. These risks include those resulting from future adverse political
and economic developments and possible imposition of foreign governmental laws
or restrictions.
B. Accounting for Investments-Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined on the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the Fund is informed after the ex-dividend date. Interest income is accrued
daily. Premiums or discounts on debt securities are amortized or accreted as
adjustments to interest income over the lives of such securities.
C. Foreign Currency Translation-The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rates at the end of the period; and (2) purchases, sales, income and expenses
are translated at the rates of exchange prevailing on the respective dates of
such transactions. The Fund does not separately identify that portion of the
results of operations of the Fund that arise as a result of changes in the
exchange rates from the fluctuations that arise from changes in market prices of
equity investments during the year.
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future foreign exchange rates. Forward currency contracts are valued based
upon the current forward rates. Fluctuations in the value of such contracts are
recorded as unrealized gains or losses; realized gains or losses include net
gains or losses on contracts which have settled. Risks may arise as a result of
the potential inability of the counterparties to meet the terms of their
contracts. At April 30, 1995, the Fund had no outstanding forward currency
contracts.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
D. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
6
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
E. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains or net investment income. To the extent they exceed net
investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in capital.
F. Organizational Expenses-The Manager paid organizational expenses of the
Fund incurred prior to the public offering of its shares amounting to
approximately $179,000. The Fund has reimbursed the Manager for such expenses.
The Fund has deferred and amortized such expenses over five years from the date
of commencement of the Fund's operations.
G. Other-Certain expenses for the Blanchard Group of Funds are allocated
among the Funds based upon their relative average net assets.
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Directors. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of 1% of the first $150
million of the Fund's average daily net assets, .875% of the Fund's average
daily net assets in excess of $150 million but not exceeding $300 million and
.75% of the Fund's average daily net assets in excess of $300 million.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses
for which a waiver has been obtained, are subject to the expense limitation
imposed by one of the states in which shares of the Fund are offered for sale.
For the year ended April 30, 1995, the Fund's expenses did not exceed the above
limitation.
Certain officers and/or Directors of the Fund are officers/directors of the
Manager.
The Manager has a sub-advisory agreement with Cavelti Capital Management,
Ltd. (the "Portfolio Adviser"). The
Manager has advised the Fund that the aggregate amount of fees paid to the
Portfolio Adviser was $227,033 for the year ended April 30, 1995.
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor"), an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealer and shareholders servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .75%
per annum of the Fund's average daily net assets. Payments under the Plan will
be made for expenses actually incurred by the Distributor. Provided that the
Plan continues in effect, any cumulative expenses incurred by the Distributor on
or after May 1, 1988, but not yet
7
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
reimbursed by the Fund, may be reimbursed through future distribution fees from
the Fund. The Distributor has advised the Fund that at April 30, 1995, the
unreimbursed distribution expenses amounted to $425,390. If the plan is
terminated or discontinued in accordance with its terms, the obligation of the
Fund to make payments to the Distributor pursuant to the Plan will cease and the
Fund will not be required to make any payments past the date the Plan is
terminated.
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Precious Metals Fund
(collectively, the "Funds"). The transactions contemplated by the Acquisition
Agreement which have been approved by the Board of Trustees of the Funds are
conditioned upon the approval of the shareholders of each Fund, of (1) a new
investment management agreement with Signet, (2) a new distribution agreement
with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments and bullion, aggregated $72,351,960 and
$74,096,773, respectively. The Distributor has advised the Fund that it received
$2,250 from shareholders as account opening fees for the year ended April 30,
1995. The Manager has advised the Fund that for the year ended April 30, 1995 it
incurred costs, which were reimbursed by the Fund, amounting to $83,948 for
performing internal accounting and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Directors fees and expenses in
the Statement of Operations for the year ended April 30, 1995 was $18,304. As
indicated in Note 4, the Manager has entered into an agreement which provides
for the acquisition of the Manager by Signet. Following the acquisition, the
independent directors/trustees of the Funds will not stand for re-election. As a
result, the Plan was curtailed and additional pension expense of $58,569 was
recorded to reflect the previously unrecognized prior service costs of the
independent directors/trustees. Included in accrued expenses and other
liabilities at April 30, 1995 is $76,873 of accrued pension expense.
NOTE 6 - Capital Stock:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
April 30, 1995 April 30, 1994
----------------------------- ------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold ......................................... 9,822,619 $81,070,800 12,811,047 $109,869,217
Reinvestment of Dividends .................... 1,474,694 10,092,477 - -
---------- ----------- ---------- ------------
11,297,313 91,163,277 12,811,047 109,869,217
---------- ----------- ---------- ------------
Repurchased .................................. (8,527,815) (68,288,186) (9,789,580) (84,113,299)
---------- ----------- ---------- ------------
Net increase ................................. 2,769,498 $22,875,091 3,021,467 $ 25,755,918
========== =========== ========== ============
</TABLE>
8
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 7 - Federal Income Taxes:
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $2,368,000 during fiscal 1995.
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to post-October loss deferrals and non-deductible expenses. The
Fund had permanent book/tax differences primarily attributable to a tax basis
return of capital and net operating losses. To reflect reclassifications arising
from permanent book/tax differences for the year ended April 30, 1995,
paid-in-capital was charged $1,073,701, accumulated realized gain-net was
credited $119,054 and accumulated investment loss-net was credited $954,647.
NOTE 8 - Financial Highlights:
Selected ratios and per share data for a share of capital stock outstanding:
<TABLE>
<CAPTION>
For the Year Ended April 30,
--------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 8.73 $ 6.83 $ 5.04 $ 5.29 $ 6.30
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss (.02) (.11)(D) (.08)(D) (.09)(D) (.08)(D)
Net gains or losses on investments
(both realized and unrealized) (.41) 2.01(D) 1.87(D) (.16)(D) (.93)(D)
------ ------ ------ ------ ------
Net income (loss) from investment
operations (.43) 1.90 1.79 (.25) (1.01)
------ ------ ------ ------ ------
Less dividends and distributions:
Distributions from realized gains-net (.03) - - - -
Distributions in excess of realized gains-net (1.06) - - - -
Tax return of capital (.09) - - - -
------ ------ ------ ------ ------
Change in net asset value (1.61) 1.90 1.79 (.25) (1.01)
------ ------ ------ ------ ------
Net asset value, end of year $ 7.12 $ 8.73 $ 6.83 $ 5.04 $ 5.29
====== ====== ====== ====== ======
Total return (4.39%) 27.8% 35.5% (4.7%) (16%)
Ratio/Supplemental Data:
Net assets, end of year ($ Million) $75 $68 $33 $21 $25
Ratio of expenses to average
net assets 2.49% 2.46% 3.24% 3.09% 3.05%
Ratio of net investment loss to average
net assets (1.48%) (1.21%) (1.46%) (1.57%) (1.28%)
Portfolio turnover 116% 174% 66% 62% 57%
</TABLE>
- -------------
(D) Calculated based on average shares outstanding.
9
<PAGE>
BLANCHARD PRECIOUS METALS FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Blanchard Precious Metals Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Precious Metals Fund,
Inc. (the "Fund") at April 30, 1995, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities and
bullion at April 30, 1995 by correspondence with custodians and brokers, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
10
<PAGE>
(Left Column)
Portfolio Advisers
Shufro, Rose and Ehrman
U.S. Equity Securities
Fiduciary Trust International, Inc.
Foreign Equity Securities
Cavelti Capital Management, Ltd.
Precious Metals Securities and Bullion
Investment Advisers, Inc.
U.S. Fixed Income
Fiduciary Trust International, Inc.
Foreign Fixed Income
Martin Currie Inc.
Emerging Markets
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Global
Growth Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Global
Growth Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD AMERICAN EQUITY FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard American Equity Fund (the "FUND") is offered.
Please retain this document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History.............................................. 2
Investment Objective and Policies............................................ 2
Investment Restrictions...................................................... 6
Portfolio Transactions....................................................... 8
Computation of Net Asset Value............................................... 9
Performance Information...................................................... 10
Additional Purchase and Redemption Information............................... 12
Tax Matters.................................................................. 12
The Management of the FUND................................................... 17
Management Services.......................................................... 22
Portfolio Advisory Services.................................................. 23
Administrative Services...................................................... 23
Distribution ^ Plan.......................................................... 24
Description of the FUND...................................................... 24
Shareholder Reports.......................................................... 25
Financial Statements.........................................................A-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
Provident Investment Counsel, Inc.
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide long-term growth of capital. This
objective is a fundamental policy and may not be changed except by a majority
vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies" and "Certain Investment Techniques and Policies."
The investment objective of the Fund is to provide long-term growth of
capital. There is no assurance that the Fund will achieve its objective. The
Fund will invest in equity securities, consisting of common stocks and
securities having the characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities and warrants. The Fund will invest
at least 65% and under normal circumstances expects to invest at least 80% of
its assets in such equity securities. In selecting investments for the Fund,
Provident Investment Counsel, Inc., the Fund's portfolio adviser ("Provident"),
will select equity securities of companies of various sizes which are currently
experiencing a rate of earnings growth greater than the average of such rate for
all companies included in Standard & Poor's 500-Stock Index. It is expected that
approximately half of the equity securities in which the Fund will invest will
be listed and traded on the New York Stock Exchange, and the remainder will be
traded on the National Association of Securities Dealers' NASDAQ system or are
otherwise traded over the counter. Provident supports its selection of
individual securities through intensive research and uses qualitative and
quantitative disciplines to determine when securities should be sold.
Short-Term Investments. During those times when Provident does not
believe that substantially all of the Fund's assets should be invested in equity
securities, all or part of the Fund's assets may be invested temporarily in
short-term investments. Under normal market conditions, it is expected that
investments in such short-term instruments may range from zero (fully invested)
to 30% of the Fund's assets. The short-term investments that may be purchased by
the Fund consist of high quality debt obligations maturing in one year or less
from the date of purchase, such as U.S. Government securities, certificates of
deposit, bankers' acceptances and commercial paper. High quality means the
obligations have been rated at least A-1 by S&P or Prime-1 by Moody's, or have
an outstanding issue of debt securities rated at least A by S&P or Moody's, or
are of comparable quality in the opinion of Provident. Short-term investments
also include repurchase agreements with respect to the high quality debt
obligations listed above. See "Repurchase Agreements" below.
U.S. Government Securities. U.S. Government securities include direct
obligations issued by the United States Treasury, such as Treasury bills,
certificates of indebtedness, notes and bonds. U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal Home Loan Banks, the Federal National Mortgage
Association and the Student Loan Marketing Association. Except for U.S. Treasury
securities, obligations of U.S. Government agencies and instrumentalities may or
may not be supported by the full faith and credit of the United States. Some,
such as those of the Federal Home Loan Banks, are backed by the right of the
issuer to borrow from the Treasury; others by discretionary authority of the
U.S. Government to purchase the agencies' obligations; while still others, such
as the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment
and
-2-
<PAGE>
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.
Non-Diversification. The FUND is a "non-diversified" investment company
portfolio, which means that the FUND is not limited in the proportion of its
assets that may be invested in the securities of a single issuer. However, the
FUND intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the FUND of any liability for Federal
income tax to the extent its earnings are distributed to shareholders. See "Tax
Matters." To so qualify, among other requirements, the FUND will limit its
investments so that, at the close of each calendar quarter, (i) not more than
25% of the market value of the FUND's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the FUND will not own
more than 10% of the outstanding voting securities of a single issuer. For
purposes of the FUND's requirements to maintain diversification for tax
purposes, the issuer of a loan participation will be the underlying borrower. In
cases where the FUND does not have recourse directly against the borrower, both
the borrower and each agent bank and co-lender interposed between the FUND and
the borrower will be deemed issuers of the loan participation for tax
diversification purposes. The FUND's investments in U.S. Government Securities
are not subject to these limitations. Since the FUND, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in the FUND may, under certain
circumstances, present greater risk to an investor than an investment in a
diversified company.
Stock Index Futures Contracts
The Fund may buy and sell stock index futures contracts. The Fund will
enter into these transactions for bona fide hedging purposes, i.e., in order to
hedge against changes in prices of the Fund's securities. A stock index futures
contract is an agreement pursuant to which one party agrees to deliver to the
other an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of securities is made. If Provident expected general stock market
prices to rise, it might purchase a stock index futures contract as a hedge
against an increase in prices of particular equity securities it wanted
ultimately to buy. If in fact the stock index did rise, the price of the equity
securities intended to be purchased might also increase, but that increase would
be offset in part by the increase in the value of the Fund's futures contract
resulting from the increase in the index. On the other hand, if Provident
expected general stock market prices to decline, it might sell a futures
contract on the index. If that index did in fact decline, the value of some or
all of the equity securities held by the Fund might also be expected to decline,
but that decrease would be offset in part by the increase in the value of the
futures contract. Transactions are covered by owning or having the right to
acquire corresponding securities or by maintenance of a cash segregated account
pursuant to applicable provisions and staff interpretations of the 1940 Act.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts would exceed
5% of the fair market value of the FUND'S total assets. The FUND will not use
leverage when it enters into long futures contracts and for each such long
position the FUND will deposit cash or cash equivalents, such as U.S. Government
Securities or high grade debt obligations, having a value equal to the
underlying commodity value of the contract as collateral with its custodian in a
segregated account.
The purpose of entering into a futures contract is to protect the FUND
from fluctuations in the value of its portfolio securities or to hedge against
an increase in prices of certain securities without necessarily buying or
selling the securities. Of course, because the value of portfolio securities
will far exceed the value of the futures contracts sold by the FUND, an increase
in the value of the futures contracts could only mitigate but
-3-
<PAGE>
not totally offset the decline in the value of the FUND's assets. No
consideration is paid or received by the FUND upon entering into a futures
contract. Upon entering into a futures contract, the FUND will be required to
deposit in a segregated account with its custodian an amount of cash or cash
equivalents, such as U.S. Government Securities or high grade debt obligations,
equal to approximately 1% to 10% of the contract amount (this amount is subject
to change by the exchange on which the contract is traded and brokers may charge
a higher amount). This amount is known as "initial margin" and is in the nature
of a performance bond or good faith deposit on the contract which is returned to
the FUND upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in the
margin account if the FUND fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the FUND may elect to close the position by
taking an opposite position, which will operate to terminate the FUND's existing
position in the contract.
There are several risks in connection with the use of futures contracts
as a hedging device. Successful use of futures contracts is subject to the
ability of FUND management to predict correctly movements in the price of the
securities or currencies underlying the particular hedge. These predictions and,
thus, the use of futures contracts involve skills and techniques that are
different from those involved in the management of the portfolio securities
being hedged. In addition, there can be no assurance that there will be a
correlation between movements in the price of the underlying securities and
movements in the price of the securities which are the subject of the hedge. A
decision concerning whether, when and how to hedge involves the exercise of
skill and judgment and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior or trends in interest rates.
Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No secondary
market for such contracts exists. Although the FUND intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting the FUND to substantial losses. In such event, and in the event of
adverse price movements, the FUND would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the FUND's securities being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
If the FUND has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does not
occur, the FUND will lose part or all of the benefit of the increased value of
securities which it has hedged because it will have offsetting losses in its
futures positions. Losses incurred in hedging transactions and the costs of
these transactions will affect the FUND's performance. In addition, in such
situations, if the FUND had insufficient cash, it might have to sell securities
to meet daily variation margin requirements at a time when it would be
disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in interest rates
or currency values, as the case may be.
-4-
<PAGE>
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the Investment Company Act of 1940, as amended (the "1940
Act"), collateralized by the underlying securities. The return on the collateral
may be more or less than that from the repurchase agreement. The securities
underlying a repurchase agreement will be marked to market every business day
and the value of the collateral maintained will be at least equal to the value
of the loan, including the accrued interest earned. In evaluating whether to
enter into a repurchase agreement, the Manager will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the FUND may incur a
loss.
Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM. The borrower at all
times during the loan must maintain with the FUND cash or cash equivalent
collateral or provide to the FUND an irrevocable letter of credit equal in value
at all times to at least 100% of the value of the securities loaned. During the
time portfolio securities are on loan, the borrower pays the FUND any dividends
or interest paid on such securities, and the FUND may invest the cash collateral
and earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered equivalent collateral or a letter of
credit. Loans are subject to termination at the option of the FUND or the
borrower at any time. The FUND may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the income
earned on the cash to the borrower or placing broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. This limitation may be subject to additional restrictions imposed by
jurisdictions in which the Fund's shares are offered for sale. For this purpose,
illiquid securities include (a) securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale, (b) participation interests in loans that are not subject to puts, and
(c) repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions
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within seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering".
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The Commission has recently adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. FUND management anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decisions, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means the vote of the lesser of (i) 67% or more of the shares of the FUND
present at a meeting, if the holders of more than 50% of the outstanding shares
of the FUND are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the FUND. The following are the FUND's investment
restrictions set forth in their entirety.
1. As a non-diversified management investment company, the FUND has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND may not invest more than 25% of the market value
of its total assets in a single issuer (except the securities of
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the U.S. Government, its agencies and instrumentalities). These two
restrictions, hypothetically, could give rise to the FUND having as few as
twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within any one industry other than the banking
industry; or (d) more than 5% of net assets would be invested in warrants or
rights. (Included within that amount, but not to exceed 2% of the value of the
FUND's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the market
value of its total assets). This does not preclude the FUND from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities. The FUND will not purchase additional securities
while the amount of any borrowings is in excess of 5% of the market value of its
total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and (iii)
through the lending of its portfolio securities as described in "Lending of
Portfolio Securities" in the Prospectus and in this Statement.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired as part
of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales or maintain a short position (except for
short sales against the box).
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which invest in
real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
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13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders, it will revoke the commitment
by terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by Provident subject to the supervision of VCM and the
Trustees and pursuant to authority contained in the Investment Advisory Contract
between the FUND and VCM, and the Sub-Advisory Agreement between VCM and
Provident. In selecting such brokers or dealers, Provident will consider various
relevant factors, including, but not limited to the best net price available,
the size and type of the transaction, the nature and character of the markets
for the security to be purchased or sold, the execution efficiency, settlement
capability, financial condition of the broker-dealer firm, the broker-dealer's
execution services rendered on a continuing basis and the reasonableness of any
commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to Provident for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to Provident. Such allocation shall be
in such amounts as VCM shall determine and Provident shall report regularly to
VCM who will in turn report to the Trustees on the allocation of brokerage for
such services.
The receipt of research from broker-dealers may be useful to Provident
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of Provident's other clients may be useful to Provident in
carrying out its obligations to the FUND. The receipt of such research may not
reduce Provident's normal independent research activities.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
Provident is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and Provident or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges where relevant, or which are traded in the
Over-the-Counter market. Any profits resulting from brokerage commissions earned
by the Distributor as a result of FUND transactions will accrue to the benefit
of the shareholders of the Distributor who are also shareholders of
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VCM. The Investment Advisory Contract does not provide for any reduction in the
management fee as a result of profits resulting from brokerage commissions
effected through the Distributor. In addition, the Sub-Advisory Agreement
between VCM and Provident does not provide for any reduction in the advisory
fees as a result of profits resulting from brokerage commissions effected
through Provident or an affiliated brokerage firm. For the period November 9,
1992 (commencement of operations) through April 30, 1993 and for the years ended
April 30, 1995 and 1994, the FUND incurred brokerage commission expenses of
$29,374, $19,368 and $59,728, respectively from the purchase and sale of
portfolio securities.
The Trustees had adopted certain procedures incorporating the standards
of Rule 17e-1 issued under the 1940 Act which requires that the commissions paid
the Distributor or to Provident or an affiliated broker-dealer must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time".
The Rule and the procedures also contain review requirements and require VCM to
furnish reports to the Trustees and to maintain records in connection with such
reviews.
It may happen that the same security will be held by other clients of
VCM or of Provident. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.
For the fiscal years ended April 30, 1995 and 1994, the FUND's annual
rate of portfolio turnover was 45% and 97%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4: ^ 15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Years Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
When portfolio securities are traded, the valuation will be the last
reported sale price on the day of valuation. (For securities traded on the New
York Stock Exchange, the valuation will be the last reported sales price as of
the close of the Exchange's regular trading session, normally 4:00 p.m. New York
Time.) If there is no such reported sale or the valuation is based on the
Over-the-Counter market, the securities will be valued at the last available bid
price. As of the date of this Statement of Additional Information, such
securities will be valued by the latter method. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Trustees of the FUND.
Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior
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to maturity, and will then be valued on an amortized cost basis based upon the
value on such date unless the Board determines during such 60-day period that
this amortized cost value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 P.M. (New York Time) will be
confirmed at the previous offering price computed as of the close of the regular
trading session on the New York Stock Exchange (normally 4:00 P.M., New York
Time), provided the order is received by the FUND's Transfer Agent prior to 4:15
P.M. on that day. It is the responsibility of the dealer to insure that all
orders are transmitted timely to the FUND. Orders received by dealers after 4:15
P.M. will be confirmed at the next computed offering price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
one year period ended April 30, 1995 and for the life of fund (November 9, 1992
to April 30, 1995 was 4.83% and -.51%, respectively.
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The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under the
Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
YIELD 2[( a-b+1)6-1]
----------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing
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performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND; however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock
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or securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement");
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign currency
gains, including those derived from options, futures and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the FUND may
have to limit the sale of appreciated securities that it has held for less than
three months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the FUND held the debt obligation.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, regardless of whether a taxpayer's
obligations (or rights) under such contract have terminated (by delivery,
exercise, entering into a closing transaction or otherwise) as of such date. Any
gain or loss recognized as a consequence of the year-end deemed disposition of
Section 1256 contracts is taken into account for the taxable year together with
any other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the entire taxable year with respect to Section 1256 contracts (including any
capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The FUND may elect not to have this special
tax treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the FUND that are not Section 1256
contracts. The Internal Revenue Service has held in several private rulings
(which may not be applicable to the FUND), that gains arising from Section 1256
contracts will be treated for purposes of the Short-Short Gain Test
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as being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year. At
April 30, 1995, the FUND had a net capital loss carryover of $891,524 which is
available, to the extent provided in regulations, to 2003.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
year, at least 50% of the value of the FUND's assets must consist of cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the FUND has not
invested more than 5% of the value of the FUND's total assets in securities of
such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
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<PAGE>
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporations only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Ordinary income dividends paid by the FUND with respect to a taxable
year will qualify for the 70% dividends-received deduction generally available
to corporations (other than corporations, such as "S" corporations, which are
not eligible for the deduction and other than for purposes of special taxes such
as the accumulated earnings tax and the personal holding company tax) to the
extent of the amount of qualifying dividends received by the FUND from domestic
corporations for the taxable year. A dividend received by the FUND will not be
treated as a qualifying dividend (1) if it has been received with respect to any
share of stock that the FUND has held for less than 46 days (91 days in the case
of certain preferred stock), excluding for this purpose (under the rules of Code
Section 246(c)(3) and (4)) (i) any day more than 45 days (or 90 days in the case
of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the FUND has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
FUND is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (i) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the FUND or (ii) by application of
Code Section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at the maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax
is imposed for taxable years beginning after 1986 and before 1996 at the rate of
0.12% on the excess of a corporate taxpayer's AMTI (determined without regard to
the deduction for this tax and the AMT net operating loss deduction) over $2
million. The corporate dividends-received deduction is not itself an item of tax
preference that must be added back to taxable income or is otherwise disallowed
in determining a corporation's AMTI. However, corporate shareholders will
generally be required to take the full amount of any dividend received from the
FUND into account (without a dividends-received deduction) in determining its
adjusted current earnings, which are used in computing an additional corporate
preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted
current earnings
-15-
<PAGE>
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid by January 31 of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
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<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Such a foreign shareholder
would generally be exempt from U.S. Federal income tax on gains realized on the
sale of shares of the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company,
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<PAGE>
Federated Investors, Federated Securities Corp., Federated Services Company, and
Federated Administrative Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The Virtus
Funds; Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Professor
of Medicine and member, Board of Trustees,
University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center-Downtown,
Member, Board of Directors, University of
Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Treasurer
and Trustee of The Virtus Funds; Vice President,
Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers,
Federated Management, Federated Research,
Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee,
Federated Services
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C>
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of
some of the Funds; Vice President and Treasurer
of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
<FN>
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of Trustees handles
the responsibilities of the Board of Trustees between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</FN>
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
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<PAGE>
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C> <C>
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
<FN>
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
</FN>
</TABLE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's Manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the period from November 9, 1992 (commencement of
operations) to April 30, 1993 and the fiscal years ended April 30, 1995 and
1994, the FUND's investment management fees paid to the prior manager were
$75,933, $128,735 and $252,733, respectively, less voluntary expense
reimbursements of $42,014, $92,524 and $2,469, respectively.
PORTFOLIO ADVISORY SERVICES
Pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement")
between VCM and the portfolio manager, Provident Investment Counsel, Inc.
("Provident"), VCM has delegated to Provident the authority and responsibility
to make and execute decisions for the Fund within the framework of the Fund's
investment policies, subject to review by VCM and the Board of Trustees of the
Fund. Under the terms of the Sub-Advisory Agreement, Provident has discretion to
purchase and sell securities, except as limited by the Fund's investment
objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to Provident, by
VCM, of monthly compensation based on the Fund's average daily net assets for
providing investment advice to the Fund and managing the investment of the
assets of the Fund. These fees are determined by applying the following annual
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<PAGE>
rates to the Fund's average daily net assets: .50% of the first $150 million;
.45% of the next $100 million; .40% of the next $150 million; and .35% of
average daily net assets in excess of $400 million. The prior manager has
advised the FUND that the fees paid to Provident were $34,537 for the period
ended April 30, 1993 $122,075 for the fiscal year ended April 30, 1994 and
$45,521 for the year ended April 30, 1995.
The Sub-Advisory Agreement, dated July 11, 1995 was approved by the
then Trustees on March 24, 1995. The Sub-Advisory Agreement provides that it may
be terminated without penalty by either the Fund or Provident at any time by the
giving of 60 days' written notice to the other and terminates automatically in
the event of "assignment", as defined in the Investment Company Act. The
Sub-Advisory Agreement provides that, unless sooner terminated, it shall
continue in effect for an initial two year period, and from year to year
thereafter only so long as such continuance is specifically approved at least
annually by either the Board of Trustees of the Fund or by a vote of the
majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Trustees who are not parties to the Sub-Advisory Agreement or "interested
persons" of such parties cast in person at a meeting called for the purpose of
voting on such approval.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that the Funds' Distributor
shall act as the Distributor of shares, and it permits the payment of fees to
brokers and dealers for distribution and administrative services and to
administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended April 30, 1995, the Fund accrued payments under the
Plan amounting to $58,516.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives,
-24-
<PAGE>
and properly servicing these accounts, the Fund may be able to curb sharp
fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants. ^
FINANCIAL STATEMENTS
Audited financial statements of the FUND for the fiscal year ended
April 30, 1995 are attached hereto.
-25-
<PAGE>
Dear Shareholders,
Enclosed you will find the Annual Report for your Blanchard American Equity
Fund for the fiscal year ending April 30, 1995.
As you know, the investment objective of the Fund is to seek long-term price
appreciation through a portfolio of high-quality securities of well-established
"growth" companies. These companies have a history of consistent and sustainable
revenue and earnings growth, regardless of the economic environment. Other
superior financial characteristics of the stocks in the Fund's portfolio include
excellent pre-tax margins, high returns on equity, and high-dividend growth
rates.
The Year In Review
The equity markets have advanced during the first quarter of calendar 1995,
pushing both the Dow Jones and the S&P 500 indices to record levels. As the
quarter progressed, investors gained confidence that the economy was beginning
to slow in reaction to the Federal Reserve's seven interest rate increases over
the last year. Evidence of slowing economic growth convinced investors that
long-term rates had probably peaked during this cycle. As a result, the market
shrugged off weakness in the dollar and the economic crisis in Mexico and
concentrated on the favorable implications of a domestic "soft landing".
The Fund has advanced in a similar fashion, although it has trailed the S&P
500 index. The technology sector showed continued strength, as did
telecommunications, financial and gaming-related issues. This was partially
offset by the underperformance of issues in the retail and HMO industries.
The dramatic move that the market made during the first quarter of 1995
stands in stark contrast to the preceding nine months, during which the market
was constantly
The following information was reprint as a line graph.
The Value of a $10,000 Investment in the
Blanchard American Equity Fund
inception 11/2/92 through 4/30/95 as compared to
the Standard & Poor's 500 for the same period
-----------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard American Equity Fund*
-----------------------------------------
1 year 4.83%
since inception -0.51%
-----------------------------------------
FYE 4/30/93 FYE 4/30/94 FYE 4/30/95
AEF -9.00% 3.52% 4.83%
S&P 500 6.60% 5.33% 17.40%
$9,925 $ 9,032 9,350 $ 9,801
$10,000 $10,660 $11,228 $13,182
Reflects deduction of $75 acct opening fee
Blanchard Standard
American Equity & Poor's
Fund^ 500(D)
*The average annual returns quoted above reflect reinvestment of distributions
but do not reflect the deduction of the account opening fee. If fee was
reflected, the returns would be lower. The total return includes changes in
principal value. The average annual return is total return annualized and
compounded. Past performance is no guarantee of future results.
(D)Source: S&P 500 is an unmanaged composite index of U.S. stock market
performance.
^Reflects deduction of the one-time account opening fee of $75.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the index or the BAEF.
(over, please)
<PAGE>
battling to overcome the interest rate increases by the Federal Reserve. These
nine months were characterized by extreme volatility in the prices of individual
stocks and overall returns which were disappointing for both the Fund and the
market.
Investment Outlook
At Provident we continue to focus on company fundamentals. Relative to the
market, the companies in your portfolio _ such as Microsoft and Motorola, two of
the Fund's top ten holdings as of this writing, 5/22/95 _ generate superior
revenue growth, earnings growth and returns on equity.
Naturally, past performance of these companies or of the Fund itself is no
guarantee of future results. As with any stock mutual fund, principal value and
investment return will vary with market conditions so that shares, when
redeemed, may be worth more or less than their original purchase price.
However, with a relative valuation in the lower part of its historical
range, we believe your portfolio is well positioned for future performance. In
addition, initial signs that the economy is beginning to slow should make
earnings gains by cyclical companies more difficult. Evidence of a peak in
cyclical earnings is supported by the fact that the ratio of earnings estimate
increases versus decreases for economically sensitive stocks appears to have
peaked last quarter. This scenario favors the growth stocks in which your
portfolio invests _ companies whose earnings potential has traditionally been
unaffected by cyclical changes in the economy.
While there can be no assurances of success, we enter the current year with
a great deal of optimism about the prospects for your Blanchard American Equity
Fund, and we look forward to reporting strong results to you at this time next
year.
Sincerely,
JM:ml Jeffrey Miller
Managing Director
Provident Investment Counsel
Portfolio Managers of the Blanchard American Equity Fund
Distributed by Sheffield Investments, Inc. (1551) 04ARSL0695
<PAGE>
BLANCHARD AMERICAN EQUITY FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Shares Value
------ -----
EQUITY SECURITIES (97.15%)
Auto Parts (1.73%)
*Autozone, Inc. ..................... 7,200 $ 166,500
---------
Building Products (3.80%)
Home Depot, Inc. ................... 8,767 366,022
---------
Broadcast, Radio & TV (3.16%)
Capital Cities/ABC, Inc. ........... 3,600 304,200
---------
Computer Software & Service (16.65%)
*Analog Devices, Inc. ............... 4,800 129,000
Automatic Data Processing, Inc. .... 2,800 179,900
*Cabletron Systems, Inc. ............ 2,350 111,625
Computer Associates
International, Inc. .............. 2,200 141,625
*Computer Sciences Corp. ............ 2,200 108,625
*Microsoft, Inc. 6,000 490,500
*Oracle System Corp. ................ 12,600 384,300
Paychex, Inc. ...................... 1,200 57,150
---------
1,602,725
---------
Electronics & Electrical (15.70%)
*Applied Material, Inc. ............. 3,000 184,875
Hewlett Packard .................... 2,800 185,150
Intel Corp. ........................ 3,500 358,312
Molex Inc.-Cl. A ................... 750 27,000
Motorola, Inc. ..................... 6,300 358,313
Nokia Corp. (ADR) .................. 6,800 278,800
Sensormatics Electronics Corp. ..... 4,000 119,000
---------
1,511,450
---------
Employment Services (.94%)
Manpower Inc. ...................... 2,700 90,112
---------
Entertainment & Leisure (1.32%)
*British Sky Broadcasting (ADR) ..... 2,400 57,600
*Hospitality Franchise System, Inc. . 2,300 69,863
---------
127,463
---------
Environmental Control (.82%)
Browning-Ferris Industries, Inc. ... 2,400 79,200
---------
Financial Services (13.51%)
Federal Home Loan Mortgage
Corp. ............................ 1,300 84,825
Federal National Mortgage
Association ...................... 2,500 220,625
First Financial Management Corp. ... 1,700 124,312
First USA, Inc. .................... 3,400 144,500
First Data Corporation ............. 5,130 288,563
Finova Group Corp. ................. 3,400 114,750
MBNA Corp. ......................... 10,700 323,675
---------
1,301,250
---------
Funeral Services (1.32%)
Loewen Group, Inc. ................. 4,500 126,914
---------
Gaming (1.14%)
*Circus Circus Enterprises, Inc. .... 3,300 109,312
---------
(Right Column)
Shares Value
------ -----
Health Maintenance (6.92%)
*Humana, Inc. ....................... 7,300 $ 142,350
U.S. Healthcare, Inc. .............. 6,975 186,581
United Healthcare Corp. ............ 9,300 337,125
---------
666,056
---------
Insurance (3.15%)
American International Group Inc. .. 800 85,400
MGIC Investment Corp. .............. 4,000 169,500
PMI Group .......................... 1,300 48,425
---------
303,325
---------
Medical Services (3.32%)
Cardinal Health, Inc. .............. 1,600 73,800
Medtronic, Inc. .................... 2,500 185,937
Sun Healthcare Group, Inc. ......... 2,500 60,313
---------
320,050
---------
Natural Gas Products & Pipe (3.64%)
Enron Corp. ........................ 10,300 350,200
---------
Office & Business Equipment (3.38%)
Alco Standard Corporaion ........... 1,200 85,050
*Office Depot, Inc. ................. 7,550 171,763
Pittson Services Group ............. 2,900 68,875
---------
325,688
---------
Pharmaceuticals (.79%)
*Scherer R P Corp. .................. 1,600 76,400
---------
Real Estate (1.53%)
Equity Residential Prop. Trust ..... 5,500 147,125
---------
Restaurants (1.27%)
McDonalds Corp. .................... 3,500 122,500
---------
Retail (5.77%)
Lowe's Cos. ........................ 3,100 89,513
Talbots Inc. ....................... 1,600 48,600
Tyco International ................. 2,300 120,750
Wal-Mart Stores, Inc. .............. 12,500 296,875
---------
555,738
---------
Telecommunications (7.29%)
*ALC Communications Corp. ........... 2,600 99,125
*Andrew Corp. ....................... 1,900 94,050
Ericsson L M Tel Co. Cl. B (ADR) ... 5,500 368,844
*General Instrument Corp. ........... 4,100 139,912
---------
701,931
---------
TOTAL EQUITY SECURITIES
(IDENTIFIED COST $7,973,450) ........ 9,354,161
---------
TOTAL INVESTMENTS
(IDENTIFIED COST
$7,973,450)(a)(97.15%) ............ 9,354,161
---------
CASH AND OTHER ASSETS
IN EXCESS OF LIABILITIES
(2.85%) ........................... 274,182
---------
NET ASSETS (100%) ................... $9,628,343
==========
(a)The aggregate cost for federal income tax purposes is $8,041,793; the
aggregate gross unrealized appreciation is $1,627,094; and the gross
depreciation is $314,726; resulting in net unrealized appreciation of
$1,312,368.
*Non-income producing.
See notes to financial statements.
3
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Statement of Assets and Liabilities
April 30, 1995
Assets:
Investments in securities, at value
(Identified Cost $7,973,450) (note 1) ......................... $9,354,161
Cash ............................................................ 28,264
Receivables for:
Investments sold .............................................. 296,726
Shares of beneficial interest sold ............................ 30,345
Dividends ..................................................... 3,074
Reimbursement from Manager .................................... 6,000
Deferred organizational costs (note 1) .......................... 66,484
----------
Total assets ............................................. 9,785,054
----------
Liabilities:
Payables for:
Investments purchased ......................................... 47,767
Shares of beneficial interest repurchased ..................... 74,217
Accrued expenses and other liabilities .......................... 34,727
----------
Total liabilities ........................................ 156,711
----------
Net assets ............................................... $9,628,343
==========
Net assets are comprised of:
Paid in capital (unlimited authorized shares of beneficial interest,
$.01 par value, 1,000,269 shares outstanding) ................. $9,219,364
Accumulated realized loss ....................................... (959,867)
Accumulated net investment loss ................................. (11,865)
Unrealized net appreciation on investments ...................... 1,380,711
----------
Net assets ............................................... $9,628,343
==========
Net asset value per share ................................ $9.63
=====
See notes to financial statements.
4
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Statement of Operations
For the Year Ended April 30, 1995
Investment income:
Dividends $107,980
Interest 30,332
--------
Total income 138,312
--------
Expenses:
Investment management fee (note 2) ................. $ 128,735
Transfer agent fees (note 5) ....................... 60,949
Plan of distribution fee (note 3) .................. 58,516
Accounting fees (note 5) ........................... 53,300
Professional fees .................................. 40,465
Organizational expenses ............................ 26,588
Custodian fees ..................................... 24,508
Shareholder reports and notices .................... 19,700
Registration fees .................................. 19,400
Trustees' fees, retirement plan curtailment and
other expenses (note 5) .......................... 16,782
Other .............................................. 747
---------
Total expenses ........................... 449,690
Less: Expenses waived by Manager (note 2) .......... (92,524)
---------
Net expenses ....................................... 357,166
--------
Investment loss-net ................................ (218,854)
--------
Realized and unrealized gain (loss)-net (note 1):
Realized loss on investments in securities-net ....... (304,036)
Change in unrealized appreciation on investments ..... 1,056,341
----------
Net realized and unrealized gain .............................. 752,305
--------
Net increase in net assets resulting from operations ........... $533,451
========
See notes to financial statements.
5
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment loss-net .............................................. $ (218,854) $ (467,930)
Realized gain (loss)-net ......................................... (304,036) 601,197
Change in unrealized appreciation or depreciation-net ............ 1,056,341 1,663,800
----------- -----------
Net increase in net assets resulting from operations ............. 533,451 1,797,067
----------- -----------
Dividends and distributions to shareholders from:
Tax return of capital ............................................ (259,191) -
Transactions in shares of beneficial interest-
net decrease (note 6) ............................................ (4,616,259) (18,975,186)
----------- -----------
Net decrease in net assets ..................................... (4,341,999) (17,178,119)
Net assets:
Beginning of year .................................................. 13,970,342 31,148,461
----------- -----------
End of year (including accumulated net investment loss of
$11,865 and $0, respectively) .................................... $ 9,628,343 $13,970,342
=========== ===========
</TABLE>
See notes to financial statements.
6
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Notes To Financial Statements
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard American Equity Fund (the "Fund") is a series of Blanchard Funds
which was organized as a Massachusetts business trust on January 24, 1986. The
Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940 ("the Act"). The Fund had no operations
before November 9, 1992 other than the sale of 10,000 shares of beneficial
interest for $100,000 to Sheffield Management Company (the "Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on a domestic
exchange are valued at the 4 PM EST price on that exchange, and if no sale is
made on that day, at the closing bid price (or the mean price in cases where a
mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less, or by amortizing
their value on the 61st day prior to maturity if their term to maturity at the
date of purchase exceeded 60 days. All other securities and other assets of the
Fund are valued at fair value as determined in good faith by the Trustees.
B. Accounting for Investments-Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined on the identified cost method.
Interest income is accrued daily. Dividend income and other distributions are
recorded on the ex-dividend date.
C. Federal Income Tax Status-It is Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. Dividends and Distribution to Shareholders-The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains is
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income or net realized gains for financial reporting
purposes but not for tax purposes are reported as dividends or distributions in
excess of net investment income or net realized gains for tax purposes. To the
extent they exceed net investment income or net realized gains for tax purposes
they are reported as distributions of paid-in capital.
E. Organizational Expenses-The Manager paid the organizational expenses of
the Fund incurred prior to the public offering of its shares amounting to
approximately $132,941. The Fund has reimbursed the Manager for such expenses
and has deferred and is amortizing such expenses over five years from the date
of commencement of the Fund's operations.
7
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Notes To Financial Statements (continued)
April 30, 1995
F. Other-Certain expenses for the Blanchard Group of Funds are allocated
among the funds based upon their relative average net assets.
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser as noted below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of 1.1% of the Fund's
average daily net assets.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses,
are subject to the expense limitation imposed by one of the states in which
shares of the Fund are offered for sale. For the year ended April 30, 1995, the
Fund's expenses exceeded the above limitation by $92,524 which was borne by the
Manager through a fee waiver.
Certain officers and/or Trustees of the Fund are officers/directors of the
Manager.
The Manager has a sub-advisory agreement with Provident Investment Counsel,
Inc. (the "Portfolio Adviser"). All fees for such services are paid by the
Manager. The Manager has advised the Fund that the fees paid to the Portfolio
Adviser were $45,521 for the year ended April 30, 1995.
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor") an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .50%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor on or
after November 9, 1992, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$419,809. If the Plan is terminated or discontinued in accordance with its
terms, the obligation of the Fund to make payments to the Distributor pursuant
to the Plan will cease and the Fund will not be required to make any payments
past the date the Plan is terminated.
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation
8
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Notes To Financial Statements (continued)
April 30, 1995
and two of its subsidiaries ("Signet"), dated February 15, 1995, pursuant to
which Sheffield will sell to Signet the assets relating to, and the ability to
succeed to contracts with, the Blanchard Funds, including Blanchard American
Equity Fund (collectively, the "Funds"). The transactions contemplated by the
Acquisition Agreement which have been approved by the Board of Trustees of the
Funds are conditioned upon the approval of the shareholders of each Fund, of (1)
a new investment management agreement with Signet, (2)a new distribution
agreement with Federated Securities Corp., and (3)certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales portfolio securities for the year ended April 30, 1995,
excluding short-term investments, aggregated $4,819,865 and $8,716,371,
respectively. The Distributor has advised the Fund that it received $188 from
shareholders as account opening fees for the year ended April 30, 1995. The
Manager has advised the Fund that, for the same period, it incurred costs, which
were reimbursed by the Fund, amounting to $13,143 for performing internal
accounting and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustees' fees, retirement
plan curtailment and other expenses in the Statement of Operations for the year
ended April 30, 1995 was $2,615. As indicated in Note4, the Manager has entered
into an agreement which provides for the acquistion of the Manager by Signet.
Following the acquisition, the independent directors/trustees of the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $9,250 was recorded to reflect the previously unrecognized
prior service costs of the independent directors/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $11,865 of accrued pension
expense.
NOTE 6 - Shares of Beneficial Interest:
For the Year Ended For the Year Ended
April 30, 1995 April 30, 1994
------------------------ ---------------------------
Shares Amount Shares Amount
------ ------ ------ ------
Sold ................. 417,825 $3,983,359 487,125 $ 4,708,461
Reinvestment of
dividends and
distributions ...... 27,994 253,349 - -
-------- ----------- ---------- ------------
445,819 4,236,708 487,125 4,708,461
Repurchased .......... (928,616) (8,852,967) (2,428,717) (23,683,647)
-------- ----------- ---------- ------------
Net decrease ......... (482,797) $(4,616,259) (1,941,592) $(18,975,186)
======== =========== ========== ============
9
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
Notes To Financial Statements (continued)
April 30, 1995
NOTE 7 - Federal Income Taxes:
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to wash sale loss deferrals. The Fund had permanent book/tax
differences primarily attributable to net operating losses. To reflect
reclassifications arising from permanent book/tax differences for the year ended
April 30, 1995, paid-in-capital was charged $466,180, accumulated realized
loss-net was credited $33,889 and accumulated distributions in excess of
investment income-net was credited $432,291.
At April 30, 1995 the Fund had a net capital loss carryover of $891,524 of
which $584,268 and $307,256 are available through April 30, 2002 and April 30,
2003, respectively, to offset future capital gains. To the extent that these
carryover losses are used to offset future capital gains, it is probable that
the gains so offset will not be distributed to shareholders.
NOTE 8 - Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the Period
November 9, 1992
For the Year Ended (commencement
April 30, of operations) to
---------------------- April 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ................... $9.42 $9.10 $10.00
Income from investment operations:
Net investment loss .................................. (.01)(DD) (.20)(DD) (.03)(DD)
Net gains or losses on securities (both realized and
unrealized) ........................................ .45 .52 (.87)
Net income (loss) from investment operations ....... .44 .32 (.90)
Less dividends and distributions from:
Tax return of capital ................................ (.23) .00 .00
Change in net asset value ............................ .21 .32 (.90)
Net asset value, end of period ......................... $9.63 $9.42 $ 9.10
Total return .......................................... 4.83% 3.52% (9.00%)(3)
Ratios/Supplemental Data:
Net assets end of period ($ Million) ................. $10 $14 $31
Ratio of expenses to average net assets .............. 3.05%(1) 3.00%(1) 3.13%(1)(2)
Ratio of net investment loss to average net assets ... (1.87%)(1) (2.04%)(1) (1.66%)(1)(2)
Portfolio turnover ..................................... 45% 97% 49%
</TABLE>
(1) The ratios of expenses to average net assets and net investment loss to
average net assets would have been 3.79% and (2.61%), respectively, for the
year ended April 30, 1995, and 3.01% and (2.05%), respectively, for the year
ended April 30, 1994, and 3.73% and (2.26%), respectively, for the period
ended April 30, 1993, if a portion of the Fund's expenses had not been
voluntarily reimbursed by the Manager.
(2) Annualized.
(3) Not annualized.
10
<PAGE>
BLANCHARD AMERICAN EQUITY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard American Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard American Equity Fund (the
"Fund") at April30, 1995, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the two years in the period then ended
and for the period November 9, 1992 (commencement of operations) through April
30, 1993, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 1995 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
11
<PAGE>
(Left Column)
Portfolio Adviser
Provident Investment
Counsel, Inc.
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard American
Equity Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
American
Equity Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Flexible Income Fund (the "FUND") is offered. Please retain this
document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History ............................................ 2
Investment Objective and Policies .......................................... 2
Investment Restrictions ................................................... 16
Portfolio Transactions ..................................................... 18
Computation of Net Asset Value ............................................. 19
Performance Information .................................................... 20
Additional Purchase and Redemption Information ............................. 21
Tax Matters ................................................................ 22
The Management of the FUND ................................................. 27
Management Services ........................................................ 31
The Sub-Advisory Agreement ................................................. 32
Administrative Services .................................................... 33
Purchasing Shares .......................................................... 26
Distribution Plan ......................................................... 34
Description of the FUND .................................................... 35
Shareholder Reports ........................................................ 35
Financial Statements ....................................................... 35
Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide high current income while seeking
opportunities for capital appreciation. There is no assurance that the FUND will
achieve its investment objective. This objective is a fundamental policy and may
not be changed except by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies" and "Certain Investment Strategies and Policies."
The FUND intends to invest in the following fixed income securities
markets:
U.S. Government Securities. This consists of debt obligations of the
U.S. Government and its agencies and instrumentalities and related options,
futures and repurchase agreements.
Investment Grade Fixed Income Securities. This consists of investment
grade fixed income securities, including mortgage related and asset backed
securities.
High Yield Securities. This consists of higher yielding (and,
therefore, higher risk), lower rated U.S. corporate fixed income
securities.
International Fixed Income Securities. This consists of obligations of
foreign governments, their agencies and instrumentalities and other fixed
income securities denominated in foreign currencies or composite
currencies.
OFFITBANK, the FUND's portfolio adviser, believes that the ability to
invest the FUND's assets among these markets, as opposed to investing in any
one, may enable the FUND to enhance current income and increase opportunities
for capital appreciation while taking risk to principal into consideration. The
Fund may invest up to 35% of its assets in lower quality fixed income
securities. There is no limit on the percentage of FUND assets invested in any
of the fixed income markets except for High Yield Securities which is limited to
35%, and further limited to the extent of any lower quality fixed income
securities held in the International Fixed Income Securities portfolio. See
"Risk Factors - Lower Rated Fixed Income Securities" in the FUND's Prospectus.
At least 65% of the FUND's total assets generally will be invested in
income-producing securities; however, the FUND expects that substantially all of
its total assets will be invested in income-producing securities, together with
certain futures, options and foreign currency contracts and other investments
described below.
The investment objective of providing high current income while seeking
opportunities for capital appreciation is a fundamental policy and may not be
changed without the authorization of the holders of a majority of the
outstanding shares of the FUND, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"). The other investment policies may be changed
with the approval of the FUND's Board of Trustees, except as set forth under
"Investment Restrictions" in this Statement of Additional Information.
U.S. Government Securities
FUND assets invested in this market will be invested exclusively in
U.S. Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. As used in this Prospectus, the
term "U.S. Government Securities" refers to debt securities denominated in U.S.
dollars issued or guaranteed by the U.S. government, by various of its agencies,
or by various instrumentalities established or sponsored by the U.S. government.
Certain of these obligations including U.S. Treasury bills, notes and bonds,
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mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA"), and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
Government Securities issued or guaranteed by federal agencies or government
sponsored enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by the right of
the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home
Loan Banks, and obligations supported only by the credit of the instrumentality,
such as Federal National Mortgage Association Bonds. When purchasing securities
in the U.S. Government market, OFFITBANK may take full advantage of the entire
range of maturities of U.S. Government Securities and may adjust the average
maturity of the investments held in the portfolio from time to time, depending
on its assessment of relative yields of securities of different maturities and
its expectations of future changes in interest rates. To the extent that the
FUND invests in the mortgage market, OFFITBANK usually will evaluate, among
other things, relevant economic, environmental and security-specific variables
such as housing starts, coupon and age trends. To determine relative value among
markets OFFITBANK may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.
The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. Government
Securities held in its portfolio. In addition, the FUND may at times, through
the writing and purchase of options on U.S. Government Securities, and the
purchase and sale of futures contracts and related options with respect to U.S.
Government Securities, seek to reduce fluctuations in net asset value by hedging
against a decline in the value of U.S. Government Securities owned by the FUND
or an increase in the price of such Securities which the FUND plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities and futures and related
options are not considered U.S. Government Securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described in "Certain Investment Strategies and Policies" in the FUND's
Prospectus and in "Investment Objective and Policies" in this Statement of
Additional Information.
Description of Certain U.S. Government Mortgage-Related Securities
GNMA Certificates
Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the FUND will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
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<PAGE>
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common type
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather
than at par.
2. After issuance, Certificates usually trade in the secondary market
at a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising
the effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the
Certificate. If mortgagors prepay their mortgages, the principal
returned to Certificate holders may be reinvested at higher or lower
rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
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<PAGE>
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in conventional
residential mortgages. The FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"): mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on Pcs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
Special Considerations
U.S. Government Securities are considered among the most creditworthy
of fixed income investments. Because of this added safety, the yields available
from U.S. Government Securities are generally lower than the yields available
from corporate debt securities. The values of U.S. Government Securities (like
those of fixed income securities generally) will change as interest rates
fluctuate. During periods of falling U.S. interest rates, the values of
outstanding long term U.S. Government Securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the FUND expects that its portfolio of
U.S. Government Securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although changes
in the value of U.S. Government securities will not affect investment income
from those securities, they will affect the FUND's net asset value.
Investment Grade Fixed Income Securities
The FUND may invest in other investment grade U.S. fixed income
securities. Such investments may include mortgage related securities that are
not U.S. Government Securities, asset backed securities and fixed income
securities rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
BBB by Standard & Poor's Corporation ("Standard & Poor's"). Fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade obligations which lack outstanding investment characteristics
and may have speculative characteristics as well. See Appendix A in the FUND's
Prospectus for the rating securities descriptions of these rating categories.
Mortgage Related Securities
Mortgage-related securities issued by financial institutions (or
separate trusts or affiliates of such institutions), even where backed by U.S.
Government securities, are not considered U.S. Government Securities.
The mortgage pass-through market is marked by high liquidity and credit
quality. The primary risk that exists for mortgage pass-through securities is
interest rate risk. Changes in market yields will affect the value of these
securities as the price of fixed income securities generally increases when
interest rates decline and decreases when interest rates rise. Prices of longer
term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of
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<PAGE>
principal on mortgage pass-through securities may make it difficult to lock in
interest rates for a fixed period of time. To the extent that mortgage
securities are purchased at prices that differ from par, these prepayments
(which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
treasury securities of the same average life.
Collateralized Mortgage Obligations
Collateralized mortgage obligations are debt obligations issued
generally by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates, the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure collateralized mortgage
obligations may be guaranteed by GNMA, FHLMC or FNMA, the collateralized
mortgage obligations represent obligations solely of their issuers and are not
insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency or
instrumentality, or by any other person or entity. The issuers of collateralized
mortgage obligations typically have no significant assets other than those
pledged as collateral for the obligations.
Asset Backed Securities.
In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. The FUND will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The FUND anticipates that a
substantial portion of the asset backed securities in which it invests will
consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually
five years) than most conventional mortgage-backed securities and historically
have been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
asset-backed securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as mortgage-backed securities. The
yield characteristics of asset-backed securities differ from more traditional
debt securities in that interest and principal payments are paid more
frequently, usually monthly, and principal may be prepaid at any time. As a
result, if the FUND purchases an asset-backed security at a discount, similar to
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conventional mortgage-backed securities, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium, faster
than expected prepayments will reduce, while slower than expected prepayments
will increase, yield to maturity. Prepayments may result from a number of
factors, including trade-ins and liquidations due to default, as well as the
receipt of proceeds from physical damage, credit, life and disability insurance
policies. The rate of prepayments on asset-backed securities may also be
influenced by a variety of economic and social factors, including general
measures of consumer confidence; accordingly, from time to time, substantial
amounts of prepayments may be available for reinvestment by the FUND and will be
subject to the prevailing interest rates at the time of prepayment.
Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely payments
on underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installment loans
which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The FUND will not pay any additional fees for such credit support.
However, the existence of credit support may increase the market price of the
security.
As with Mortgage-Related Securities, Asset-Backed Securities are often
backed by a pool of assets representing the obligations of a number of different
parties and use similar credit enhancement techniques.
Asset-Backed Securities do not have the benefit of the same security
interest in the related collateral as do Mortgage-Related Securities. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
perfected security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
High Yield Securities
The FUND may invest up to (but not including) 35% (further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio) of its assets in higher
yielding (and, therefore, higher risk), lower rated U.S. corporate fixed income
securities, including debt securities, (commonly referred to as "junk bonds")
convertible securities and preferred stocks and unrated corporate fixed income
securities. Investments in high-yield securities entail greater risks than those
involved in higher-rated securities.
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. The FUND may continue to hold securities obtained as a
result of the conversion of convertible securities held by the FUND when
OFFITBANK believes retaining such securities is consistent with the FUND's
investment objective.
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Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. The FUND may invest in any security which is rated
by Moody's or by Standard & Poor's, or in any unrated security which OFFITBANK
determines is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the time
of rating. The medium to lower-rated securities in which the FUND may invest
tend to offer higher yields than higher-rated securities with the same
maturities because the historical financial condition of the issuers of such
securities may not be as strong as that of other issuers. The rating assigned to
any particular security, however, is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. Although OFFITBANK will consider security ratings when
making investment decisions in the High Yield market, it will perform its own
investment analysis and will not rely principally on the ratings assigned by the
rating services. OFFITBANK's analysis generally may include, among other things,
consideration of the issuer's experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules, and its
responsiveness to changes in business conditions and interest rates. It also
considers relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
High Yield Securities - Risk Factors. High Yield Securities are subject to
certain risks that may not be present with investments in higher grade
securities. See the FUND's Prospectus for more information.
Effect of Interest Rate and Economic Changes. The prices of High Yield
Securities tend to be less sensitive to interest rate changes than higher-rated
investments, but may be more sensitive to adverse economic changes or individual
corporate developments. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of High Yield
Securities and thus in the FUND's net asset value. A strong economic downturn or
a substantial period of rising interest rates could severely affect the market
for High Yield Securities. In these circumstances, highly leveraged companies
might have greater difficulty in making principal and interest payments, meeting
projected business goals, and obtaining additional financing. Thus, there could
be a higher incidence of default. This would affect the value of such securities
and thus the FUND's net asset value. Further, if the issuer of a security owned
by the FUND defaults, the FUND might incur additional expenses to seek recovery.
The High Yield Securities Market. The market for High Yield Securities has
expanded in recent years and is relatively new. This expanded market has not yet
completely weathered an economic downturn. A further economic downturn or an
increase in interest rates could have a negative effect on the High Yield
Securities market and on the market value of the High Yield Securities held by
the FUND, as well as on the ability of the issuers of such securities to repay
principal and interest on their borrowings.
Credit Ratings. The credit ratings issued by credit rating services may not
fully reflect the true risks of an investment. For example, credit ratings
typically evaluate the safety of principal and interest payments, not market
value risk, of High Yield Securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value.
Liquidity and Valuation. Lower-rated bonds are typically traded among a smaller
number of broker-dealers than in a broad secondary market. Purchasers of High
Yield Securities tend to be institutions, rather than individuals, which is a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many High Yield Securities may not
be as liquid as higher-grade bonds. A less active and thinner market for High
Yield Securities than that available for higher quality securities may result in
more volatile valuations of the FUND's holding and more difficulty in executing
trades at favorable prices during unsettled market conditions.
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The ability of the FUND to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective information
available and thus the responsibility of the FUND's Board of Trustees to value
High Yield Securities becomes more difficult, with judgment playing a greater
role. Further, adverse publicity about the economy or a particular issuer may
adversely affect the public's perception of the value, and thus liquidity, of a
High Yield Security, whether or not such perceptions are based on a fundamental
analysis.
Legislation. Provisions of the Revenue Reconciliation Act of 1989 limit a
corporate issuer's deduction for a portion of the original issue discount on
"high yield discount" obligations (including certain pay-in-kind securities).
This limitation could have a materially adverse impact on the market for certain
High Yield Securities. In addition, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 requires savings associations to divest their
holdings of High Yield Securities before July 1, 1994. This requirement also
could have a materially adverse impact on the market for High Yield Securities.
From time to time, legislators and regulators have proposed other legislation
that would limit the use of high yield debt securities in leveraged buyouts,
mergers and acquisitions. It is not certain whether such proposals, which also
could adversely affect High Yield Securities, will be enacted into law.
International Fixed Income Securities
FUND assets invested in International Fixed Income Securities will be
invested in debt obligations and other fixed income securities, in each case
denominated in non-U.S. currencies or composite currencies including:
debt obligations issued or guaranteed by foreign national, provincial,
state, municipal or other governments with taxing authority or by their
agencies or instrumentalities;
debt obligations or supranational entities (described below);
debt obligations of the U.S. Government issued in non-dollar
securities; and
debt obligations and other fixed income securities of foreign and U.S.
corporate issuers (non-dollar denominated).
When investing in International Fixed Income Securities, the FUND is
not limited to purchasing debt securities rated at the time of purchase by
Moody's or Standard & Poor's. However, the FUND is limited to the extent that it
may not invest more than 35% of its assets in all lower quality fixed income
securities held by the FUND (by aggregating the value of all such securities
held in the High Yield Securities and the International Fixed Income Securities
portfolios). In making international fixed income securities investments,
OFFITBANK may consider, among other things, the relative growth and inflation
rates of different countries. OFFITBANK may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. OFFITBANK may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar denominated
securities of issuers in the industrialized Western European countries; in
Canada, Japan, Australia and New Zealand; and in Latin America. The FUND may
also invest up to 15% of its assets in the fixed income securities of issuers in
emerging market countries. See the Fund's Prospectus for more information.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
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Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to making additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income.
Risk Factors
See "Risk Factors - Lower Rated Fixed Income Securities" and Appendix A
in the FUND's Prospectus for more information concerning the risks of investing
in lower quality fixed income securities.
Foreign investments involve certain risks that are not present in
domestic securities. Because the FUND intends to purchase securities denominated
in foreign currencies, a change in the value of any such currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the FUND's assets and the FUND's income available for distribution. In addition,
although a portion of the FUND's investment income may be received or realized
in such currencies, the Internal Revenue Code of 1986 (the "Code") requires that
the FUND compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for any such currency declines after the FUND's income has been
earned and translated into U.S. dollars but before payment, the FUND could be
required to liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate depreciates between the time the FUND incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. Under the Code,
changes in an exchange rate which occur between the time the FUND accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the FUND actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount which is higher or lower than the FUND's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. OFFITBANK does not expect to invest
the FUND's assets in countries where it believes such events are likely to
occur.
Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by timing of
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transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by the FUND will reduce its net income
available for distribution to shareholders.
The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. However, the FUND intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which
will relieve the FUND of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Distributions and Taxes." To so
qualify, among other requirements, the FUND will limit its investments so that,
at the close of each calendar quarter, (i) not more than 25% of the market value
of the FUND's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the FUND will not own more than 10% of the
outstanding voting securities of a single issuer. For purposes of the FUND's
requirements to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where the FUND does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the FUND and the borrower will be deemed
issuers of the loan participation for tax diversification purposes. The FUND's
investments in U.S. Government Securities are not subject to these limitations.
Since the FUND as a non-diversified investment company may invest in a smaller
number of individual issuers than a diversified investment company, an
investment in the FUND may, under certain circumstances, present greater risk to
an investor than an investment in a diversified company.
Futures Contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a specified
price, date, time and place. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND'S total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 1% to 10% of the contract amount (this
amount is subject to change by the exchange on which the contract is traded and
brokers may charge a higher amount). This amount is known as
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"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the FUND upon termination of the
futures contract, assuming all contractual obligations have been satisfied. The
broker will have access to amounts in the margin account if the FUND fails to
meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the price of the currency
or securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, the FUND may elect to close the position by taking an opposite
position, which will operate to terminate the FUND's existing position in the
contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
FUND intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting the FUND to substantial losses. In such event, and in the event
of adverse price movements, the FUND would be required to make daily cash
payments of variation margin.
Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, and may enter
into closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures contracts
on foreign currencies, or forward contracts, will be utilized.
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The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with its Custodian or with a designated
sub-custodian. As a writer of a covered put option, the FUND incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and over-the-counter put options written by
the FUND will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the FUND maintains, in a segregated account
maintained on its behalf at the FUND's custodian, cash, U.S. Government
securities or other high grade obligations in an amount equal to at least the
exercise price of the option, at all times during the option period. Similarly,
a short put position could be covered by the FUND by its purchase of a put
option on the same security (currency) as the underlying security of the written
option, where the exercise price of the purchased option is equal to or more
than the exercise price of the put written or less than the exercise price of
the put written if the marked to market difference is maintained by the FUND in
cash, U.S. Government securities or other high grade debt obligations which the
FUND holds in a segregated account maintained at its custodian.
Forward Currency Contracts
The FUND may engage in currency exchange transactions as a portfolio
management technique. The FUND will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or sell
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year.
Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, the FUND may purchase and sell options in the over-the-counter market
("OTC Options"). A call option gives the purchaser of the option the right to
buy the underlying security from the writer at the exercise price at any time
prior to the expiration of the contract, regardless of the market price of the
security during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter options and the assets used
as cover for written over-the-counter options are illiquid securities. The FUND
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards
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for the creditworthiness of the primary and non-primary dealers with which it
may enter into OTC Option contracts and those standards, as modified from time
to time, will be implemented and monitored by the Manager. Under these special
arrangements, the FUND will enter into contracts with primary and non-primary
dealers which provide that the FUND has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary and non-primary dealers, the
formula will generally be based on a multiple of the premium received by the
FUND for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, and with
respect to OTC Options written with primary dealers only, the FUND will treat as
illiquid that amount of the "cover" assets equal to the amount by which the
formula price for the repurchase of the option is greater than the amount by
which the market value of the security subject to the option exceeds the
exercise price of the option (the amount by which the option is "in-the-money").
Although each agreement will provide that the FUND's repurchase price shall be
determined in good faith (and that it shall not exceed the maximum determined
pursuant to the formula) the formula price will not necessarily reflect the
market value of the option written, therefore, the FUND might pay more to
repurchase the OTC Option contract than the FUND would pay to close out a
similar exchange traded option.
In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
Additional Risks of Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
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procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, future contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Pursuant to the sub-advisory agreement, OFFITBANK, where permitted by
law, will purchase and sell foreign exchange in the interbank dealer market for
a fee on behalf of the FUND, subject to certain procedures and reporting
requirements adopted by the Board of Trustees.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the Investment Company Act of 1940, as amended (the "1940
Act"), collateralized by the underlying securities. The return on the collateral
may be more or less than that from the repurchase agreement. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest earned. In evaluating whether to enter into a
repurchase agreement, OFFITBANK will carefully consider the creditworthiness of
the seller. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the FUND may incur a loss.
Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or OFFITBANK. The
borrower at all times during the loan must maintain with the FUND cash or cash
equivalent collateral or provide to the FUND an irrevocable letter of credit
equal in value at all times to at least 100% of the value of the securities
loaned. During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. Loans are subject to termination at the option
of the FUND or the borrower at any time. The FUND may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this
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purpose, illiquid securities include (a) securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by the
FUND over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
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FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND may not invest more than 25% of the market value
of its total assets in a single issuer (except the securities of the U.S.
Government, its agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having securities of as few as
twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within any one industry other than the banking
industry (except that this restriction does not apply to U.S. Government
Securities); or (d) more than 5% of net assets would be invested in warrants or
rights. (Included within that amount, but not to exceed 2% of the value of the
FUND's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the market
value of its total assets). This does not preclude the FUND from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities. The FUND will not purchase additional securities
while the amount of any borrowings is in excess of 5% of the market value of its
total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and (iii)
through the lending of its portfolio securities as described in "Lending of
Portfolio Securities" in the Prospectus and in this Statement.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired as part
of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM or OFFITBANK, who
individually own beneficially more than 1/2 of 1% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities.
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11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which invest in
real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and OFFITBANK. In selecting such brokers or dealers, OFFITBANK will consider
various relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character of the
markets for the security to be purchased or sold, the execution efficiency,
settlement capability, financial condition of the broker-dealer firm, the
broker-dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to OFFITBANK for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to OFFITBANK. Such allocation shall be
in such amounts as VCM or OFFITBANK shall determine and OFFITBANK shall report
regularly to VCM who will in turn report to the Trustees on the allocation of
brokerage for such services.
The receipt of research from broker-dealers may be useful to OFFITBANK
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of OFFITBANK's other clients may be useful to OFFITBANK in
carrying out its obligations to the FUND. The receipt of such research may not
reduce OFFITBANK's normal independent research activities.
OFFITBANK is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and OFFITBANK or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market. Any profits resulting from portfolio
transactions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are also
shareholders of VCM. The Investment Advisory Contract does not provide for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between VCM and OFFITBANK does not provide for any reduction in
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the advisory fees as a result of profits resulting from portfolio transactions
effected through OFFITBANK or an affiliated brokerage firm.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid the Distributor or to OFFITBANK or an affiliated broker-dealer
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." The Rule and the procedures also contain review requirements and
require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of OFFITBANK. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.
For the fiscal years ended April 30, 1995 and 1994, the FUND's annual
rate of portfolio turnover was approximately 455% and 346%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The FUND may invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
Portfolio securities of the FUND which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
normally 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities
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for which reliable quotations are not readily available and all other assets
will be valued at their respective fair market value as determined in good faith
by, or under procedures established by, the Trustees of the FUND.
Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 p.m. (New York time) will be
confirmed at the previous offering price computed as of the close of trading on
the options exchanges (normally 4:15 p.m., New York time), provided the order is
received by the FUND's Transfer Agent prior to 4:15 p.m. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted timely to
the FUND. Orders received by dealers after 4:15 p.m. will be confirmed at the
next computed offering price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula: n P(1 + T) = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10
year periods (or fractional portion
thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
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The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
fiscal year ended April 30, 1995 was 3.74% and for the life of fund (November 2,
1992 through April 30, 1995) was 5.64%.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee which was in effect from November 2, 1992 to December
1994, from the initial value invested. The FUND will, however, disclose the pro
rata share of the account opening fee and will disclose that the performance
data does not reflect such non-recurring charge and that inclusion of such
charge would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
6
YIELD 2[(a-b +1)-1)
===
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing
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performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The FUND's yield as of April 30, 1995, based on a 30-day period, was
6.36%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or
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other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the FUND may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received for this purpose by the FUND at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a forward foreign
currency contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Section 1256, will generally be treated as ordinary income or
loss. At April 30, 1995, the FUND had a net capital loss carryover of
$13,824,044, which is available through April 30, 2003, to the extent provided
by regulations.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contract have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is combined with any other
gain or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year (including gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss (except for Section 1256 forward
foreign currency contracts, which are subject to Section 988 Rules). The
Internal Revenue Service has held in several private
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rulings (not necessarily applicable to the FUND) that gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256. The FUND may
elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the FUND that are
not Section 1256 contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss, or any net foreign currency loss
incurred after October 31 as if they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
year, at least 50% of the value of the FUND's assets must consist of cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the FUND has not
invested more than 5% of the value of the FUND's total assets in securities of
such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) unless it has
made a taxable year election, exclude foreign currency gains and losses incurred
after October 31 of any year in determining the amount of ordinary taxable
income for the current calendar year (and, instead, include such gains and
losses in determining ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
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The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by the FUND prior to the date on which the shareholder acquired his
shares.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, its pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid its pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against Federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income its pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Shareholders should consult their own tax advisors concerning the
application of the foreign tax credit to them.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid by January 31 of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
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<PAGE>
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the
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<PAGE>
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
</TABLE>
-27-
<PAGE>
<TABLE>
<S> <C>
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh
Medical Center-Downtown, member, Board of
Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Trustee
and Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
</TABLE>
-28-
<PAGE>
<TABLE>
<S> <C>
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and
Director, Federated Securities Corp.;
Trustee, Federated Services Company and
Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director
of some of the Funds; Vice President and
Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner,
Henny, Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
<FN>
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</FN>
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
-30-
<PAGE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
<FN>
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
</FN>
</TABLE>
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
-31-
<PAGE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the period from November 2, 1992 (commencement of
operations) to April 30, 1993, the FUND's investment management fee paid to the
prior manager was $433,589 less voluntary expense reimbursement of $433,589. For
the fiscal year ended April 30, 1994 the FUND'S investment management fee paid
to the prior manager was $4,285,213 less voluntary expense reimbursement of
$1,252,529. For the fiscal year ended April 30, 1995, the FUND's investment
management fee paid to the prior manager was $2,723,672, less voluntary expense
reimbursement of $43,422.
THE SUB-ADVISORY AGREEMENT
OFFITBANK furnishes investment advisory services to the FUND pursuant
to a Sub-Advisory Agreement between VCM and OFFITBANK. Pursuant to the
Sub-Advisory Agreement, OFFITBANK supervises the investment and reinvestment of
the cash, securities or other properties comprising the FUND's portfolio,
subject at all times to the direction of VCM and the policies and control of the
Trust's Board of Trustees. OFFITBANK gives the FUND the benefit of its best
judgment, efforts and facilities in rendering its services as Sub-Adviser.
In carrying out its obligations, OFFITBANK:
(a) uses the same skill and care in providing such service as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities; (b) obtains and evaluates pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally or the
FUND's portfolio and whether concerning the individual issuers whose securities
are included in the FUND's portfolio or the activities in which the issuers
engage, or with respect to securities which it considers desirable for inclusion
in the FUND's portfolio; (c) determines which issuers and securities shall be
represented in the FUND's portfolio and regularly reports thereon to the Trust's
Board of Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give instructions
to the custodian and/or sub-custodian of the FUND appointed by the Trust's Board
of Trustees, as to deliveries of securities, transfers of currencies and
payments of cash for the account of the FUND, in relation to the matters
contemplated by this Agreement; and (f) takes, on behalf of the FUND, all
actions which appear to the Trust and VCM necessary to carry into effect such
purchase and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the FUND and the
prompt reporting to VCM of such purchases and sales.
OFFITBANK is responsible for decisions to buy and sell securities for
the FUND's portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. OFFITBANK's primary consideration
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<PAGE>
in effecting a security transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction,
OFFITBANK will take the following into consideration: the best net price
available, the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the FUND on a continuing basis. Accordingly, the price to the FUND in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of Trustees
may determine, OFFITBANK shall not be deemed to have acted unlawfully or to have
breached any duty created under the Sub-Advisory Agreement or otherwise solely
by reason of its having caused the FUND to pay a broker or dealer for effecting
a portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if OFFITBANK
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to such policies
as the Board of Trustees may determine, OFFITBANK will purchase and sell foreign
currency and futures contracts and other securities for the FUND. OFFITBANK is
further authorized to allocate the orders placed by it on behalf of the FUND to
any affiliated broker-dealer of the FUND or to such brokers and dealers who also
provide research or statistical material, or other services to the FUND, VCM or
OFFITBANK. Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the Board
of Trustees of the Trust indicating the brokers to whom such allocations have
been made and the basis therefor.
Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by OFFITBANK
on behalf of the FUND pursuant thereto, is at all times subject to any
directives of the Board of Trustees of the Trust. VCM provides OFFITBANK with
written notice of all such directives, so long as the Sub-Advisory Agreement
remains in effect.
Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at its
expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.
Pursuant to the Sub-Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, OFFITBANK may perform services on
behalf of the FUND which are not required by the Sub-Advisory Agreement. Such
services will be performed on behalf of the FUND and OFFITBANK's cost in
rendering such services may be billed monthly to VCM, subject to examination by
VCM's independent accountants. Payment or assumption by OFFITBANK of any FUND
expense that OFFITBANK is not required to pay or assume under the Sub-Advisory
Agreement shall not relieve VCM or OFFITBANK of any of their obligations to the
FUND or obligate OFFITBANK to pay or assume any similar FUND expense on any
subsequent occasions.
Pursuant to the Sub-Advisory Agreement, for the services to be rendered
and the facilities furnished hereunder, VCM pays OFFITBANK a monthly fee at the
annual rate of .30% of the FUND's first $25 million of average daily net assets;
plus .25% of the FUND's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the FUND's average daily net assets in
excess of $50 million. Compensation under the Sub-Advisory Agreement is
calculated and accrued daily and the amounts of the daily accruals are paid
monthly. The fee paid to OFFITBANK by the prior manager for the fiscal year
ended April 30, 1995 was $763,516, for the fiscal year ended April 30, 1994 was
$1,100,253 and $124,403 for the period November 2, 1992 to April 30, 1993. The
compensation paid to OFFITBANK will not be reduced by the amount of brokerage
commissions received by OFFITBANK or its affiliated broker-dealer pursuant to
Section 17(e)(2) of the 1940 Act.
Pursuant to the Sub-Advisory Agreement, OFFITBANK agrees that it will
not render advisory or sub-advisory services to any other similar publicly
offered no-load or low-load open-end investment company registered with the SEC
while the Sub-Advisory Agreement is in effect.
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<PAGE>
The Sub-Advisory Agreement was approved by the then Trustees on March
24, 1995. The Sub-Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from year to
year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a majority of
the FUND's outstanding voting securities (as defined in Section 2(a)(42) of the
1940 Act), and (b) by the affirmative vote of a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons of a party to
the Sub-Advisory Agreement (other than as a Trustee of the Trust), by votes cast
in person at a meeting specifically called for such purpose.
The Sub-Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60) days' written notice
to the other party. The Sub-Advisory Agreement automatically terminates: (a) in
the event of its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Contract between the FUND and VCM shall terminate.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for the
fees set forth in the prospectus.
PURCHASING SHARES
Shares of the Fund are sold at their net asset value without a sales
charge on days the New York Stock Exchange is open for business. The procedure
for purchasing Shares of the Fund is explained in the prospectus under
"Investing in Shares."
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Fund; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended April 30, 1995, the Fund accrued payments under the
Plan amounting to $907,891.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
-34-
<PAGE>
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the Trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
-35-
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements of the FUND for the fiscal year ended
April 30, 1995 are attached hereto.
-36-
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Income
Fund for the fiscal year ending April 30, 1995.
While 1994 was a very difficult year for virtually every investment market,
it was particularly challenging for U.S. bonds, which suffered one of the worst
setbacks of the century. Underlying the downturn in bonds was an aggressive
series of interest rate hikes by the Federal Reserve.
During the fiscal year, the Blanchard Flexible Income Fund's diversified
portfolio proved to be both a help and a hindrance. Early on, we correctly
anticipated that U.S. rates would almost certainly continue to rise. As a
consequence, we used the Fund's flexible portfolio to shift a higher percentage
of the Fund's assets out of the U.S. and into high-quality foreign issues.
Unexpectedly and unfortunately, overseas markets were also dragged into the
U.S. bond debacle, causing our portfolio additional losses. In short, there were
almost no safe havens available for bond investors.
In the last quarter of 1994, our analysis told us that rates had moved too
far, too fast. As a result, we began to extend the average maturity and
effective duration of the portfolio in an attempt to regain lost ground. This
strategy paid off handsomely through April 30, 1995, the
(over, please)
The following information was represented as a line graph
- --------------------------------------------------------------------------------
The Value of a $10,000 Investment in the
Blanchard Flexible Income Fund
inception 11/2/92 through 4/30/95 as compared to
the Merrill Lynch Aggregate Bond Index for the same period
---------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Flexible Income Fund*
---------------------------------------
1 year 3.74%
---------------------------------------
since inception 5.64%
---------------------------------------
FYE 4/30/93 FYE 4/30/94 FYE 4/30/95
FIF 6.17% 4.11% 3.74%
MERRILL LYNCH 6.52% 1.04% 7.34%
$9,925 $10,537 $10,970 $11,381
$10,000 $10,652 $10.763 $11,553
Reflects deduction of $75 acct opening fee
Blanchard Merrill Lynch
Flexible Income Aggregate Bond
Fund^ Index(D)
*The average annual returns quoted reflect reinvestment of distributions, but do
not reflect the deduction of the one-time account opening fee. If reflected, the
returns would be lower. The total return includes changes in principal value.
The average annual return is total return annualized and compounded. Past
performance is no guarantee of future results.
(D)Source: Merrill Lynch Aggregate Bond Index is an unmanaged index of
government, investment grade, corporate and mortgaged-backed bonds.
^Reflects deduction of one-time account opening fee of $75.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the index or the BFIF.
- --------------------------------------------------------------------------------
<PAGE>
end of the fiscal year, with the Fund showing a positive return of 3.74%.
Of course, past performance is no guarantee of future results. As with any
investment, the Fund's yield and principal value will vary so that shares, when
redeemed, may be worth more or less than their original purchase price.
As the fiscal year came to a close, the Fund's portfolio was allocated
across four sectors: 63% U.S. fixed-income securities, 30% U.S. high-yield, 4%
high-quality foreign and 3% U.S. cash equivalents. Throughout the period, we
maintained our commitment to high quality securities, reflected in the Fund's
"A" rated average portfolio quality.
Looking Ahead
Due to the strong rebound in bond prices in the first part of 1995, we have
become somewhat cautious on a short-term basis. As a result, the Fund's
portfolio remains invested in the intermediate-term range of the bond spectrum.
This allows us to earn higher yields than short-term instruments, without the
same degree of risk entailed by longer-term bond investments.
Longer-term, however, we believe that interest rates have settled in a lower
range than they have been in several years. While inflation may move somewhat
higher, we do not believe it will do so to any significant degree.
In essence, we are currently enjoying what a number of analysts have come to
call a "soft landing." In simple terms, this means that while U.S. economic
activity will most likely regain some momentum, helped along by the recent
decline in interest rates and by a decline in the value of the dollar, any such
expansion should not accelerate to a worrisome level in the foreseeable future.
We thank you for your continued patronage and look forward to serving you in
the months and years ahead.
Sincerely,
JB:ml Jack Burks
Managing Director of OFFITBANK
Portfolio Managers of the Blanchard Flexible Income Fund
Distributed by Sheffield Investments, Inc. (1551) 01ARSL0695
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Principal Value
--------- -----
U.S. FIXED INCOME SECURITIES SECTOR (67.59%)
CORPORATE BONDS (5.43%)
Airlines (.49%)
Delta Airlines Inc.
Series 1992 D
8.54%, 1/2/07 ........................... $ 1,267,404 $ 1,274,067
------------
Banking (.46%)
(D)Buenos Aires
Embottelladora
8.50%, 12/29/00 ......................... 1,500,000 1,215,000
------------
Financial Services (1.66%)
Leucadia National Corp.
10.375%, 6/15/02 ........................ 4,050,000 4,353,750
------------
Healthcare (.88%)
Omega Healthcare
Investors Inc.
7.11%, 7/15/00 .......................... 2,394,385 2,310,199
------------
Industrial Related (1.56%)
PDV America Inc.
7.25%, 8/1/98 ........................... 2,250,000 2,051,287
Stone Consolidated Corp.
10.25%, 12/15/00 ........................ 2,000,000 2,050,000
------------
4,101,287
------------
Real Estate (.38%)
Kearny Street
Real Estate LP Cl. D
9.56%, 7/15/03 .......................... 1,000,000 999,687
------------
TOTAL CORPORATE
BONDS ............................... 14,253,990
------------
U.S. GOVERNMENT AND AGENCY ISSUES (62.16%)
Federal National
Mortgage Association
8.20%, 8/10/98 .......................... 5,000,000 5,035,065
*Federal National
Mortgage Association
8.625%, 4/10/01 ......................... 10,000,000 10,206,550
Government National
Mortgage Association
8%, 11/15/19 ............................ 373,708 373,474
Government National
Mortgage Association
8%, 1/15/20 ............................. 317,317 317,119
Government National
Mortgage Association
8%, 8/15/21 ............................. 130,496 130,415
Government National
Mortgage Association
8%, 2022 ................................ 24,225,691 24,210,549
Government National
Mortgage Association
8%, 2023 ................................ 2,282,196 2,280,768
(Right Column)
Principal Value
--------- -----
Government National
Mortgage Association
8%, 6/15/24 ............................. $ 2,373,713 $ 2,372,229
Government National
Mortgage Association II
8%, 7/20/21 ............................. 2,390,630 2,380,171
Government National
Mortgage Association II
8%, 5/20/22 ............................. 2,077,866 2,068,775
Government National
Mortgage Association II
8%, 2023 ................................ 5,215,589 5,192,771
(D)Resolution Trust Corp.
10.50%, 10/15/03 ........................ 2,000,000 1,999,375
(D)Resolution Trust Corp.
6%, 1/15/04 ............................. 750,000 749,063
(D)Resolution Trust Corp.
10.50%, 1/15/04 ......................... 1,250,000 1,253,125
(c)(D)Resolution Trust Corp.
10%, 12/15/04 ........................... 1,500,000 1,499,531
Resolution Trust Corp.
7.10%, 12/25/24 ......................... 2,639,001 2,325,620
U.S. Treasury Note
7.50%, 2/29/96 .......................... 25,000,000 25,234,375
U.S. Treasury Note
6.875%, 10/31/96 ........................ 25,000,000 25,125,000
U.S. Treasury Note
6.875%, 8/31/99 ......................... 25,000,000 25,031,250
U.S. Treasury Note
7.25%, 5/15/04 25,000,000 25,320,300
------------
TOTAL U.S. GOVERNMENT
AND AGENCY ISSUES ....................... 163,105,525
------------
TOTAL U.S. FIXED INCOME
SECURITIES SECTOR
(IDENTIFIED COST
$179,212,597) ............................... 177,359,515
------------
FOREIGN FIXED INCOME SECURITIES SECTOR (1.87%)
GOVERNMENT/AGENCY (1.87%)
GERMANY (1.87%)
Bundesrepublic
8.25%, 9/20/01 .......................... Dm 6,330,000 4,911,624
------------
TOTAL FOREIGN FIXED
INCOME SECURITIES
SECTOR (IDENTIFIED
COST $4,796,617) ...................... 4,911,624
------------
3
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
(Left Column)
Principal Value
--------- -----
HIGH YIELD SECTOR (27.67%)
CANADA (.95%)
Telecommunications (.95%)
Rogers Cable Systems
9.65%, 1/15/14 .......................... C$ 4,000,000 $ 2,485,750
------------
U.S. CORPORATE BONDS (26.72%)
Airlines (1.03%)
Piedmont Aviation Inc.
9.90%, 1/15/01 .......................... $ 852,000 760,410
Piedmont Aviation Inc.
10.15%, 3/28/03 ......................... 1,389,000 1,152,870
U.S. Air Inc. Series B
9.90%, 1/15/01 .......................... 896,000 799,680
------------
2,712,960
------------
Basic Materials (2.92%)
Bethlehem Steel Corp.
10.375%, 9/01/03 ........................ 1,500,000 1,552,500
Doman Industries, Ltd.
8.75%, 3/15/04 .......................... 1,500,000 1,406,250
Jorgensen Earle M. Co.
10.75%, 3/01/00 ......................... 1,500,000 1,447,500
Maxxam Group Inc.
11.25%, 8/01/03 ......................... 1,500,000 1,417,500
Northwestern Steel & Wire
9.50%, 6/15/01 .......................... 2,000,000 1,840,000
------------
7,663,750
------------
Consumer Related (3.43%)
Bradlees, Inc.
9.25%, 3/01/03 .......................... 1,500,000 1,218,750
Levitz Furniture Corp.
9.625%, 7/15/03 ......................... 1,500,000 1,117,500
Pathmark Stores Inc.
9.625%, 5/01/03 ......................... 1,800,000 1,737,000
Penn Traffic Co.
10.25%, 2/15/02 ......................... 1,750,000 1,785,000
Revlon Consumer
Products Corp.
9.375%, 4/01/01 ......................... 1,000,000 960,000
Revlon Inc.
10.875%, 7/15/10 ........................ 960,000 926,400
U.S. Leather Inc.
10.25%, 7/31/03 ......................... 1,500,000 1,252,500
------------
8,997,150
------------
Electronics (.56%)
Bell & Howell Co.
9.25%, 7/15/00 .......................... 1,500,000 1,466,250
------------
(Right Column)
Principal Value
--------- -----
Energy & Oil Related (3.19%)
CTC Mansfield
Funding Inc.
10.25%, 3/30/03 ......................... $ 2,000,000 $ 1,966,910
Maxus Energy Corp.
11.02%, 5/15/01 ......................... 2,000,000 1,915,000
Triton Energy Corp.
0% until 12/15/96, 9.75%
until maturity, 12/15/00 ................ 1,500,000 1,263,750
Triton Energy Corp.
10.45%(e), 11/1/97 ...................... 1,500,000 1,196,250
(b)Tucson Electric Power
10.21%, 1/01/09 ......................... 2,218,808 2,019,116
------------
8,361,026
------------
Financial Services (4.03%)
American Annuity Group Inc.
11.125%, 2/01/03 ........................ 1,000,000 1,037,500
Americo Life Inc.
9.25%, 6/01/05 .......................... 2,000,000 1,790,000
(b)Granite Development Partners
10.83%, 11/15/03 ........................ 1,750,000 1,596,875
Lomas Mortgage USA Inc.
10.25%, 10/01/02 ........................ 1,000,000 745,000
Navistar Financial Group
8.875%, 11/15/98 ........................ 1,500,000 1,477,500
Phoenix Re Corp.
9.75%, 8/15/03 .......................... 1,250,000 1,300,000
Presidential Life
9.50%, 12/15/00 ......................... 1,500,000 1,447,500
Reliance Group Holdings Inc.
9%, 11/15/00 ............................ 1,250,000 1,192,188
------------
10,586,563
------------
Industrial Related (8.68%)
(b)ACF Industries Inc.
12.50%, 2/01/98 ......................... 800,333 800,333
ADT Operations Inc.
9.25%, 8/01/03 .......................... 1,500,000 1,507,500
Armco Inc.
9.375%, 11/01/00 ........................ 2,000,000 1,895,000
CMI Industries, Inc.
9.50%, 10/01/03 ......................... 1,500,000 1,308,750
Eletson Holdings Inc.
9.25%, 11/15/03 ......................... 1,500,000 1,428,750
EnviroSource, Inc.
9.75%, 6/15/03 .......................... 1,500,000 1,346,250
Freeport-McMoran Resources Partners
8.75%, 2/15/04 .......................... 1,500,000 1,436,250
Owens-Illinois, Inc.
10%, 8/01/02 ............................ 3,000,000 3,063,750
Riverwood Int'l Corp.
10.75%, 6/15/00 ......................... 1,250,000 1,325,000
Sequa Corp.
8.75%, 12/15/01 ......................... 3,000,000 2,823,750
4
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
(Left Column)
Principal Value
--------- -----
Stone Container Corp.
9.875%, 2/01/01 ......................... $ 2,500,000 $ 2,496,875
Tracor, Inc.
10.875%, 8/15/01 ........................ 1,500,000 1,541,250
UNC Inc.
9.125%, 7/15/03 ......................... 2,000,000 1,810,000
------------
22,783,458
------------
Telecommunications (2.23%)
Cablevision Industries Corp.
10.75%, 1/30/02 ......................... 1,200,000 1,285,500
Cablevision Systems
Sr. Deb. Notes
10.75%, 4/01/04 ......................... 1,500,000 1,573,125
MFS Communications
0% until 1/15/99, 9.375%
until maturity, 1/15/04 ................. 2,500,000 1,656,250
Paging Network Inc.
8.875%, 2/01/06 ......................... 1,500,000 1,336,875
------------
5,851,750
------------
Transportation (.65%)
Sea Containers Ltd.
9.50%, 7/01/03 .......................... 1,800,000 1,703,250
------------
TOTAL HIGH YIELD SECTOR
(IDENTIFIED COST
$77,128,463) .......................... 72,611,907
------------
(Right Column)
Principal Value
--------- -----
SHORT-TERM SECURITIES (1.14%)
Associates Corp. of N.A.
5.80%, 5/01/95 .......................... $ 3,000,000 $ 3,000,000
------------
TOTAL SHORT-TERM SECURITIES
(IDENTIFIED COST
$3,000,000) ........................... 3,000,000
------------
TOTAL INVESTMENTS
(IDENTIFIED COST
$264,137,677) (a)
(98.27%) .............................. 257,883,046
EXCESS OF CASH AND
OTHER ASSETS OVER
LIABILITIES (1.73%) ................... 4,540,038
------------
NET ASSETS (100%) ....................... $262,423,084
============
(a) The aggregate cost for federal income tax purposes is $264,139,976; the
gross unrealized appreciation is $820,451; and the gross unrealized
depreciation is $7,077,381; resulting in net unrealized depreciation of
$6,256,930.
(b) Private placement, resale restricted as to accredited buyers; represents
1.68% of net assets.
(c) Variable rate security. Interest rate shown reflects current interest rate
as of 4/30/95.
* Portion of security segregated to collateralize forward currency contracts.
Total market value segregated is $173,511.
(D) Registered under SEC rule 144-A, resale restricted as to qualified
institutional buyers; represents 2.56% of net assets.
5
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
SCHEDULE OF OPEN FORWARD CURRENCY CONTRACTS AS OF APRIL 30, 1995
<TABLE>
<CAPTION>
Unrealized
Currency Currency Appreciation
Sold Amount Purchased Amount Delivery Date (Depreciation)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deutsche
Marks 7,140,000 USD 5,250,000 May 22, 1995 $ 95,286
--------
Total Unrealized Appreciation $ 95,286
========
Canadian
Dollars 3,450,000 USD 2,448,893 May 31, 1995 $(84,333)
--------
Total Unrealized Depreciation $(84,333)
========
</TABLE>
See notes to financial statements.
6
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
Statement of Assets and Liabilities
April 30, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (Identified Cost $264,137,677)(note 1) ................. $257,883,046
Cash ....................................................................................... 302,813
Receivables for:
Interest ................................................................................. 5,354,353
Investments sold ......................................................................... 333,750
Forward currency contracts ............................................................... 95,286
Shares of beneficial interest sold ....................................................... 92,438
Deferred organization expense (note 1) ..................................................... 75,862
------------
Total assets ......................................................................... 264,137,548
------------
Liabilities:
Payables for:
Shares of beneficial interest repurchased ................................................ 888,268
Dividends ................................................................................ 253,984
Forward currency contracts ............................................................... 84,333
Accrued expenses and other liabilities ....................................................... 487,879
------------
Total liabilities .................................................................... 1,714,464
------------
Net assets ........................................................................... $262,423,084
============
Net assets are comprised of:
Paid in capital (unlimited authorized shares of beneficial interest, $.01 par value,
55,757,152 shares outstanding) ............................................................. $287,964,673
Accumulated overdistributed net investment income ............................................ (742,594)
Accumulated realized loss .................................................................... (18,559,663)
Unrealized net depreciation of investments, forward currency contracts
and net currency translation adjustments ................................................... (6,239,332)
------------
Net assets ................................................................................... $262,423,084
============
Net asset value per share .................................................................... $4.71
=====
</TABLE>
See notes to financial statements.
7
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
Statement of Operations
For the Year Ended April 30, 1995
<TABLE>
<S> <C>
Investment Income:
Interest .................................................................................. $ 29,159,495
Dividends ................................................................................. 235,141
------------
Total income .............................................................................. 29,394,636
Expenses:
Investment management fee (note 2) ........................................................ 2,723,672
Transfer agent fees (note 5) .............................................................. 1,007,226
Plan of distribution fees (note 3) ........................................................ 907,891
Trustees' fees, retirement plan curtailment and other expenses (note 5) ................... 414,054
Accounting fees (note 5) .................................................................. 245,131
Professional fees ......................................................................... 161,461
Custodian fees ............................................................................ 134,387
Shareholder reports and notices ........................................................... 126,400
Organizational expenses ................................................................... 30,343
Registration fees ......................................................................... 6,006
Other ..................................................................................... 14,394
------------
Total expenses ........................................................................ 5,770,965
Less: Fund expenses voluntarily waived by the Manager (note 2) ........................ (43,422)
------------
Net expenses .......................................................................... 5,727,543
------------
Investment income-net ................................................................. 23,667,093
------------
Realized and unrealized gain (loss)-net (note 1):
Realized gain (loss) on:
Investments in securities-net ........................................... $(16,882,946)
Forward currency contracts
and foreign exchange transactions-net ................................... (8,767,481) (25,650,427)
------------
Change in unrealized appreciation or depreciation on:
Investments-net ......................................................... 6,551,880
Forward currency contracts and translation of other assets
and liabilities denominated in foreign currencies-net ................... 2,485,477 9,037,357
------------- ------------
Net realized and unrealized losses ..................................... (16,613,070)
------------
Net increase in net assets resulting from operations ................... $ 7,054,023
============
</TABLE>
See notes to financial statements.
8
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income-net ........................................................ $ 23,667,093 $ 40,572,006
Realized loss-net ............................................................ (25,650,427) (7,041,662)
Change in unrealized appreciation or depreciation-net ........................ 9,037,357 (19,567,492)
------------ ------------
Net increase in net assets resulting from operations ......................... 7,054,023 13,962,852
------------ ------------
Dividends and distributions to shareholders:
Investment income-net ........................................................ (178,445) (39,977,383)
Realized gain on investments and foreign exchange transactions-
net ........................................................................ - (8,430,223)
Tax return of capital ........................................................ (23,736,224) (2,919,905)
------------ ------------
(23,914,669) (51,327,511)
------------ ------------
Transactions in shares of beneficial interest-net increase
(note 6) ..................................................................... (270,970,395) 271,774,153
------------ ------------
Net increase (decrease) in net assets .......................................... (287,831,041) 234,409,494
Net assets:
Beginning of year .............................................................. 550,254,125 315,844,631
------------ ------------
End of period (including overdistribution of investment income - net of
$742,594 and $15,600,252, respectively) ...................................... $262,423,084 $550,254,125
============ ============
<FN>
- ----------
*Commencement of operations.
</FN>
</TABLE>
See notes to financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard Flexible Income Fund (the "Fund") is a series of Blanchard Funds
which was organized as a Massachusetts business trust on January 24, 1986. The
Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940, as amended (the "Act"). The Fund had
no operations before November 2, 1992 other than the sale of 500,000 and 100,000
shares of beneficial interest for $2,500,000 and $500,000 to Sheffield
Management Company (the "Manager") and OFFITBANK (the "Portfolio Adviser"),
respectively. Approximately 104,300 shares were held by OFFITBANK at April 30,
1995. The Manager redeemed its shares of the Fund prior to April 30, 1993.
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sale
is made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. All other
securities and other assets of the Fund are valued at fair value as determined
in good faith by the Trustees. Foreign currency exchange rates are determined
when such rates are made available to the Fund at times prior to the close of
the New York Stock Exchange.
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic or political developments in a
particular country, industry or region.
The Fund invests a portion of its assets in high yield securities, which may
be subject to a greater degree of credit risk, greater market fluctuations and
risk of loss of income and principal, and may be more sensitive to economic
conditions than lower yielding, higher rated fixed income securities.
B. Accounting for Investments and Security Income Transactions-Security
transactions are accounted for on the trade date (date the order to buy or sell
is executed). Realized gains and losses on security transactions are determined
on the identified cost method. Dividend income and other distributions are
recorded on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the Fund is informed after the ex-dividend
date. Interest income is accrued daily. Premiums or discounts on debt securities
are amortized or accreted as adjustments to interest income over the lives of
such securities.
C. Foreign Currency Contracts & Translation-The books and records of the
Fund are maintained in U.S. dollars as follows: (1) the foreign currency market
value of investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rates at the end of the period; and (2) purchases, sales, income and expenses
are translated at the exchange rates prevailing on the respective dates of such
transactions. The Fund does not separately identify that portion of the results
of operations of the Fund that arise as a result of changes in the exchange
rates from the fluctuations that arise from changes in market prices of equity
investments during the period.
10
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
However, in accordance with the requirements of the Internal Revenue Code, the
Fund isolates the effect of changes in foreign exchange rates from the
fluctuations arising from changes in market prices of foreign debt obligations
sold, and such net foreign exchange gains, which amounted to $913,641, are
included in ordinary income for federal income tax purposes and have been
reclassified from realized gain (loss) on investments in securities-net to
realized gain (loss) on forward currency contracts and foreign exchange
transactions-net in the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future exchange rates. Forward currency contracts are valued based upon the
current forward rates. Fluctuations in the value of such contracts are recorded
as unrealized gains or losses; realized gains or losses include net gains or
losses on contracts which have settled. The Fund generally enters into a forward
currency contract as a hedge against foreign exchange rate fluctuation upon the
purchase or sale of a security denominated in a foreign currency. The Fund
maintains, as collateral, U.S. Government debt obligations in an amount equal to
or greater than its net obligation for forward currency contracts. Risks may
arise as a result of the potential inability of the counterparties to meet the
terms of their contracts.
D. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
F. Organizational Expenses-The Fund's Manager paid the organizational
expenses of the Fund incurred prior to the public offering of its shares
amounting to approximately $151,712. The Fund has reimbursed the Manager for
such expenses and has deferred and is amortizing such expenses over five years
from the date of commencement of the Fund's operations.
G. Other-Certain expenses of the Blanchard Group of Funds are allocated
among the funds based upon their relative average net assets.
11
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of .75% of the Fund's
average daily net assets.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses,
are subject to the expenses limitation imposed by one of the states in which
shares of the Fund are offered for sale. For the year ended April 30, 1995, the
Fund's expenses did not exceed the above limitation.
Certain officers and/or Trustees of the Fund are officers and/or directors
of the Manager.
The Manager has a sub-advisory agreement with OFFITBANK (the "Portfolio
Adviser"). The Manager has advised the Fund that fees paid to the Portfolio
Adviser were $763,516 for the year ended April 30, 1995.
The Manager voluntarily waived a portion of its advisory fee, which amounted
to $43,422, for the year ended April 30, 1995.
Although not required to do so pursuant to the Management Agreement and
Distribution plan in effect between the Fund and its Manager and Sheffield
Investments, Inc. (the "Distributor"), respectively, the Manager and the
Distributor voluntarily agreed that they will defer receipt of all fees payable
to them and absorb a portion of other expenses until further notice. Such
deferred fees and expense absorptions are subject to later reimbursement. The
Manager and the Distributor have conditioned their right to receive a portion of
any earned but deferred fees and to receive reimbursement for absorbed expenses
(measured on a rolling two-year period, starting from the date the portion of
the fees is deferred and/or the expenses are absorbed) upon the Fund reaching
and maintaining the following specified levels of net assets for a period of 30
continuous days (excluding assets exchanged into the Fund from other Funds in
the Blanchard Group of Funds) provided that such reimbursement would not cause
the Fund's expenses in such year to exceed 1.75% of average daily net assets.
Specified Level of Conditional Portion of Earned
Fund's Net Assets But Deferred Fees to be Received
------------------ --------------------------------
$600 million 20%
$630 million 20%
$660 million 20%
$690 million 20%
$720 million 20%
---
100%
===
Subject to this agreement, $812,466 was deferred in fiscal 1993; of this
amount $626,264 was subsequently paid to the Manager and Distributor and $92,992
was permanently waived in fiscal 1994. The remaining $93,210 of deferred fees
were permanently waived in fiscal 1995.
12
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, the Distributor, an affiliated company
of the Manager, acts as principal distributor of the Fund's shares. The
Distributor has the exclusive right to distribute Fund shares directly or
through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .25%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor on or
after November 2, 1992, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$1,226,849. If the Plan is terminated or discontinued in accordance with its
terms, the obligation of the Fund to make payments to the Distributor pursuant
to the Plan will cease and the Fund will not be required to make any payments
past the date the Plan is terminated.
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Flexible Income Fund
(collectively, the "Funds"). The transactions contemplated by the Acquisition
Agreement which have been approved by the Board of Trustees of the Funds are
conditioned upon the approval of the shareholders of each Fund, of (1) a new
investment management agreement with Signet, (2)a new distribution agreement
with Federated Securities Corp., and (3)certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments, aggregated $1,540,462,073 and
$1,793,389,386, respectively, including purchases and sales of U.S. Government
obligations of $1,496,807,306 and $1,478,281,217, respectively. The Distributor
has advised the Fund that it received $23,400 from shareholders as account
opening fees for the year ended April 30, 1995. The Manager has advised the Fund
that, for the year ended April 30, 1995, it incurred costs, amounting to
$398,607, which were reimbursed by the Fund, for performing internal accounting
and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to
13
<PAGE>
75% of the director/trustee fee at the time of retirement, plus 5% for each year
of service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustees' fees, retirement
plan curtailment and other expenses in the Statement of Operations for the year
ended April 30, 1995 was $75,829. As indicated in Note 4, the Manager has
entered into an agreement which provides for the acquisition of the Manager by
Signet. Following the acquisition, the independent directors/trustees of the
Funds will not stand for re-election. As a result, the Plan was curtailed and
additional pension expense of $286,788 was recorded to reflect the previously
unrecognized prior service costs of the independent director/trustees. Included
in accrued expenses and other liabilities at April 30, 1995 is $362,617 of
accrued pension expense.
<TABLE>
<CAPTION>
NOTE 6 - Shares of Beneficial Interest: For the Year Ended For the Year Ended
April 30, 1995 April 30, 1994
----------------------- -----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold ............................. 22,941,483 $ 107,867,527 149,630,745 $ 770,376,313
Reinvestment of dividends and
distributions .................. 4,034,188 18,885,949 8,398,329 42,998,080
----------- ------------- ----------- -------------
26,975,671 126,753,476 158,029,074 813,374,393
Repurchased ...................... (84,785,272) (397,723,871) (106,481,507) (541,600,240)
----------- ------------- ----------- -------------
Net increase (decrease) .......... (57,809,601) $(270,970,395) 51,547,567 $ 271,774,153
=========== ============= =========== =============
</TABLE>
NOTE 7 - Federal Income Tax:
Any capital loss incurred after October 31 through the end of the Fund's
taxable year is deemed to arise on the first day of the Fund's next taxable
year, if so elected. The Fund elected to defer a net capital loss of $4,733,320
incurred during such period in fiscal 1995.
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to wash sales and post-October capital loss deferrals. To reflect
reclassifications arising from permanent book/tax differences for the year ended
April 30, 1995, paid-in-capital was charged $23,882,654, accumulated realized
loss-net was debited $8,777,420 and accumulated distributions in excess of
investment income-net was debited $15,105,234.
At April 30, 1995, the Fund had a net capital loss carryover of $13,824,044,
which is available through April 30, 2003 to offset future capital gains. To the
extent that these carryover losses are used to offset future capital gains, it
is probable that the gains so offset will not be distirbuted to shareholders.
14
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 8 - Financial Highlights:
<TABLE>
<CAPTION>
Selected ratios and per share data for a share of For the period
beneficial interest outstanding: November 2, 1992
(commencement of
For the Year Ended operations) to
April 30, April 30,
------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ........... $4.85 $5.09 $5.00
----- ----- -----
Income from investment operations:
Net investment income ........................ .30(4) .40 .21
Net gains or losses on securities
(both realized and unrealized) ............. (.13) (.17) .09
----- ----- -----
Net income from investment
operations ........................... .17 .23 .30
----- ----- -----
Less dividends and distributions:
Dividends from investment income ............. (.00)(5) (.36) (.21)
Distributions from realized gains on
investments and foreign exchange
transactions-net ........................... .00 (.08) .00
Tax return of capital ........................ (.31) (.03) .00
----- ----- -----
Change in net asset value .............. (.14) (.24) .09
Net asset value, end of period ................. $4.71 $4.85 $5.09
===== ===== =====
Total return ................................... 3.74% 4.11% 6.17%(3)
Ratios/Supplemental Data:
Net assets, end of period ($ Million) ........ 262 550 316
Ratio of expenses to average net assets(2) ... 1.58% 1.30% .20%
Ratio of net investment income to
average net assets(2) ...................... 6.52% 7.10% 9.02%
Portfolio turnover ............................. 455% 346% 129%
<FN>
- ----------
(1) Annualized.
(2) The ratios of expenses to average net assets and net investment income to
average net assets would have been 1.59% and 6.51%, respectively, for the
year ended April 30, 1995, and 1.41% and 6.99%, respectively, for the year
ended April 30, 1994 and 1.59% and 7.62%, respectively, for the period ended
April 30, 1993, if a portion of the Fund's expenses had not been voluntarily
deferred and absorbed by the Manager (See note 2).
(3) Not annualized.
(4) Calculated based on average shares outstanding.
(5) Less than one cent per share.
</FN>
</TABLE>
15
<PAGE>
BLANCHARD FLEXIBLE INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Flexible Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Flexible Income Fund (the
"Fund") at April30, 1995, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the two years in the period then ended
and for the period November 2, 1992 (commencement of operations) through April
30, 1993, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as "
financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
16
<PAGE>
(Left Column)
Portfolio Adviser
OFFITBANK
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Flexible
Income Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Flexible
Income Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD SHORT-TERM BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Short-Term Bond Fund (the "FUND") is offered. Please retain this
document for future reference.
To obtain the Prospectus please call the FUND at 1-800-829-3863
TABLE OF CONTENTS Page
General Information and History ............................................ 2
Investment Objective and Policies .......................................... 2
Securities in Which the FUND May Invest .................................... 3
Investment Restrictions .................................................... 16
Portfolio Transactions ..................................................... 18
Computation of Net Asset Value ............................................. 19
Performance Information .................................................... 20
Additional Purchase and Redemption Information ............................. 22
Tax Matters ................................................................ 22
The Management of the FUND ................................................. 27
Management Services ........................................................ 32
The Sub-Advisory Agreement ................................................. 33
Administrative Services .................................................... 35
Distrtibution Plan ......................................................... 35
Description of the FUND .................................................... 35
Shareholder Reports ........................................................ 36
Financial Statements ....................................................... 36
Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Services Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide a high level of current income
consistent with preservation of capital by investing primarily in a broad range
of short-term debt securities. There is no assurance that the FUND will achieve
its investment objective. This objective is a fundamental policy and may not be
changed except by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Certain Portfolio Securities" and "Certain Investment
Strategies and Policies."
Under normal market conditions, the FUND will invest at least 80% of
its assets in a broad range of U.S. debt securities of all types. The FUND may
invest up to 20% of the value of its assets in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States.
At least 65% of the value of the FUND's assets will be invested in
investment-grade debt securities, which are considered to be those rated at
least Baa by Moody's Investors Service, Inc. ("Moody's") or at least BBB by
Standard & Poor's Corporation ("Standard & Poor's") or, if unrated, deemed to be
of comparable quality by OFFITBANK. The FUND may invest up to 35% of its assets
in lower-quality debt securities if OFFITBANK deems that such securities present
attractive investment opportunities. The FUND will not invest in debt securities
rated lower than Caa by Moody's and CCC by Standard & Poor's, or, if unrated,
are of comparable quality in OFFITBANK's opinion. Debt securities rated Baa by
Moody's and BBB by Standard & Poor's are considered investment grade obligations
which lack outstanding investment characteristics and may have speculative
characteristics as well. Debt securities rated Caa by Moody's and CCC by
Standard & Poor's are considered to have predominantly speculative
characteristics with respect to capacity to pay interest and repay principal and
to be of poor standing. See "Risk Factors -- Lower Quality Securities" and
Appendix A in the FUND's Prospectus.
Normally, the dollar-weighted average maturity of the FUND's portfolio
will be less than three years, but will never exceed five years. However, the
FUND may invest in individual securities with terms to maturity of greater than
five years if the FUND's portfolio contains sufficient short-term securities so
that the weighted average maturity complies with the above-stated policy. As the
useful life of individual pools of assets underlying certain obligations in
which the Fund may invest may at times be of a shorter duration than the stated
maturity of the obligation itself, the Fund may consider the useful life of such
underlying assets as the maturity of the obligation owned by the Fund. Although
it is intended that the average maturity of the FUND's portfolio will be three
years or less, the FUND retains the flexibility to increase the average maturity
up to five years if OFFITBANK considers it appropriate or advantageous to
investors. Accordingly, the FUND's average maturity may vary, based on
OFFITBANK's analysis of interest rate trends and other data. In general, the
FUND's average maturity will tend to be shorter when OFFITBANK expects interest
rates to rise and longer when it expects interest rates to decline.
Under normal market conditions, the FUND does not expect to have a
substantial portion of its assets invested in money market instruments. However,
when OFFITBANK determines that adverse market conditions exist, the FUND may
adopt a temporary defensive posture and invest its entire portfolio in money
market instruments. To the extent the FUND is so invested, the FUND's investment
objective may not be achieved.
-2-
<PAGE>
SECURITIES IN WHICH THE FUND MAY INVEST
The FUND's portfolio may include, in any proportion, bonds, notes,
mortgage securities, asset-backed securities, government and government agency
obligations, zero coupon securities and convertible securities, and short-term
obligations such as bankers' acceptances, certificates of deposit, repurchase
agreements and commercial paper.
The FUND may invest in U.S. government securities and in options,
futures contracts and repurchase transactions with respect to such securities.
Certain of these obligations including U.S. Treasury bills, notes and bonds,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA"), and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
government securities issued or guaranteed by Federal agencies or government
sponsored enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by the right of
the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home
Loan Banks, and obligations supported only by the credit of the instrumentality,
such as Federal National Mortgage Association Bonds. When purchasing securities
in the U.S. government market, OFFITBANK may take full advantage of the entire
range of maturities of U.S. government securities and may adjust the average
maturity of the investments held in the portfolio from time to time, depending
on its assessment of relative yields of securities of different maturities and
its expectations of future changes in interest rates. To the extent that the
FUND invests in the mortgage market, OFFITBANK usually will evaluate, among
other things, relevant economic, environmental and security-specific variables
such as housing starts, coupon and age trends. To determine relative value among
markets OFFITBANK may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.
The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. government
securities held in its portfolio. In addition, the FUND may at times, through
the writing and purchase of options on U.S. government securities, and the
purchase and sale of futures contracts and related options with respect to U.S.
government securities, seek to reduce fluctuations in net asset value by hedging
against a decline in the value of U.S. government securities owned by the FUND
or an increase in the price of such securities which the FUND plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. government
securities. Options on U.S. government securities and futures and related
options are not considered U.S. government securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described below.
U.S. government securities are considered among the most creditworthy
of fixed-income investments. Because of this added safety, the yields available
from U.S. government securities are generally lower than the yields available
from corporate debt securities. The values of U.S. government securities (like
those of fixed-income securities generally) will change as interest rates
fluctuate. During periods of falling U.S. interest rates, the values of
outstanding long term U.S. government securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the FUND expects that its portfolio of
U.S. government securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although changes
in the value of U.S. government securities will not affect investment income
from those securities, they will affect the FUND's net asset value.
The FUND may invest up to 35% of its assets in higher- yielding (and,
therefore, higher risk), lower rated bonds and other debt securities and
securities with debt-like characteristics, including U.S. corporate fixed-income
securities, convertible securities and preferred stocks and unrated corporate
fixed-income securities. Lower quality debt securities, commonly referred to as
"junk bonds," are considered speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness than higher
quality debt securities. See "Risk Factors-Lower Quality Debt Securities" below
for a discussion of certain risks.
-3-
<PAGE>
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. The FUND may continue to hold securities obtained as a
result of the conversion of convertible securities held by the FUND when
OFFITBANK believes retaining such securities is consistent with the FUND's
investment objective.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. The FUND may invest in any security which is rated
by Moody's or by Standard & Poor's, or in any unrated security which OFFITBANK
determines is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the time
of rating. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate. Although OFFITBANK will
consider security ratings when making investment decisions in the high yield
market, it will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services. OFFITBANK's analysis
generally may include, among other things, consideration of the issuer's
experience and managerial strength, changing financial condition, borrowing
requirements or debt maturity schedules, and its responsiveness to changes in
business conditions and interest rates. It also considers relative values based
on anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects.
The FUND may invest up to 20% of its assets in international securities
consisting of debt obligations and other fixed-income securities, in each case
denominated in non-U.S. currencies or composite currencies, including: debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (described below);
debt obligations of the U.S. Government issued in non-dollar securities; and
debt obligations and other fixed-income securities of foreign and U.S. corporate
issuers (non-dollar denominated).
When investing in international securities, the FUND is not limited to
purchasing debt securities rated at the time of purchase by Moody's or Standard
& Poor's. However, the FUND is limited to the extent that it may not invest more
than 35% of its assets in lower quality debt securities. In making international
securities investments, OFFITBANK may consider, among other things, the relative
growth and inflation rates of different countries. OFFITBANK may also consider
expected changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of securities
denominated in foreign currencies. OFFITBANK may further evaluate, among other
things, foreign yield curves and regulatory and political factors, including the
fiscal and monetary policies of such countries.
The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar denominated
securities of issuers in the industrialized Western European countries; in
Canada, Japan, Australia and New Zealand; and in Latin America. The FUND may
invest up to 10% of its assets in the debt securities of issuers in emerging
market countries.
The FUND may invest, without limitation, in unrated debt securities
issued by foreign governments, their agencies and instrumentalities, where the
foreign government, its agency or instrumentality is rated less than Baa by
Moody's or less than BBB by Standard & Poor's, provided, however, that OFFITBANK
has
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determined through its own credit analysis that the credit characteristics of
any such unrated security are equivalent to those of a security rated at least
Baa by Moody's or BBB by Standard & Poor's. To the extent that OFFITBANK has not
made any such determination, such unrated debt securities will be deemed to have
the rating assigned by Moody's or Standard & Poor's to the governmental entity.
To the extent that such securities are deemed to be rated less than Baa by
Moody's or less than BBB by Standard & Poor's, investment in such securities
will be subject to the overall 35% limitation on investment in lower quality
debt securities.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to making additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. The FUND does not have a
policy of concentrating investments in supranational entities.
Risk Factors
Lower Quality Debt Securities. The lower quality debt securities that
may comprise up to 35% of the FUND's investments generally produce a higher
current yield than do debt securities of higher quality. However, these debt
securities are considered speculative because they involve greater price
volatility and risk than do higher quality debt securities and yields on these
debt securities will tend to fluctuate over time. Although the market value of
all debt securities varies as a result of changes in prevailing interest rates
(e.g., when interest rates rise, the market value of debt securities can be
expected to decline), values of lower quality debt securities tend to react
differently than the values of higher quality debt securities. The prices of
lower quality debt securities are less sensitive to changes in interest rates
than higher quality debt securities. Conversely, lower quality debt securities
also involve a greater risk of default by the issuer in the payment of principal
and income and are more sensitive to economic downturns and recessions than
higher quality debt securities. The financial stress resulting from an economic
downturn could have a greater negative effect on the ability of issuers of lower
quality debt securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other debt securities in the
FUND's portfolio, the net asset value of the FUND will be negatively affected.
Moreover, as the market for lower quality debt securities is a relatively new
one, a severe economic downturn might increase the number of defaults, thereby
adversely affecting the value of all outstanding lower quality debt securities
and disrupting the market for such securities. Debt securities purchased by the
FUND as part of an initial underwriting present an additional risk due to their
lack of market history. These risks are exacerbated with respect to debt
securities rated Caa by Moody's or CCC by Standard & Poor's. Unrated debt
securities generally carry the same risks as do lower rated debt securities.
Lower quality debt securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower quality debt securities tend to be institutions, rather than individuals,
a factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower quality debt securities
may not be as liquid as Treasury and investment grade bonds. The ability of the
FUND to sell lower quality debt securities will be adversely affected to the
extent that such
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securities are thinly traded or illiquid. Moreover, the ability of the FUND to
value lower quality debt securities becomes more difficult, and judgment plays a
greater role in valuation, as there is less reliable, objective data available
with respect to such securities that are thinly traded or illiquid. Unrated debt
securities are not necessarily of lower quality than rated debt securities, but
they may not be attractive to as many buyers.
Because investors may perceive that there are greater risks associated
with the lower quality debt securities of the type in which the FUND may invest,
the yields and prices of such securities may tend to fluctuate more than those
for lower quality debt securities. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the debt securities market than do changes in
higher quality segments of the debt securities market, resulting in greater
yield and price volatility. The speculative characteristics of lower rated debt
securities are set forth in Appendix A in the FUND's Prospectus.
OFFITBANK believes that the risks of investing in such high yielding,
debt securities may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and Standard &
Poor's is considered in selecting portfolio securities, they evaluate the safety
of the principal and the interest payments of the security, not their market
value risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. OFFITBANK relies, primarily, on its
own credit analysis (see above). This may suggest, however, that the achievement
of the FUND's investment objective is more dependent on OFFITBANK's proprietary
credit analysis, than is otherwise the case for a fund that invests exclusively
in higher quality debt securities.
Once the rating of a portfolio security or the quality determination
ascribed by OFFITBANK to an unrated debt security has been downgraded, OFFITBANK
will consider all circumstances deemed relevant in determining whether to
continue to hold the security, but in no event will the FUND retain such
securities if it would cause the FUND to have more than 35% of the value of its
assets invested in debt securities rated lower than Baa by Moody's or BBB or
Standard & Poor's, or if unrated, are judged by OFFITBANK to be of comparable
quality.
Foreign Investments. Foreign investments involve certain risks that are
not present in domestic securities. Because the FUND intends to purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of the FUND's assets and the FUND's income available for
distribution. In addition, although a portion of the FUND's investment income
may be received or realized in such currencies, the Internal Revenue Code of
1986 (the "Code") requires that the FUND compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such currency declines
after the FUND's income has been earned and translated into a U.S. dollar
equivalent, but before payment of the foreign currency denominated gain, the
FUND could be required to liquidate portfolio securities to make such
distributions. Similarly, if an exchange rate depreciates between the time the
FUND incurs expenses in U.S. dollars and the time such expenses are paid, the
amount of such currency required to be converted into U.S. dollars in order to
pay such expenses in U.S. dollars will be greater than the equivalent amount in
any such currency of such expenses at the time they were incurred. Under the
Code, changes in an exchange rate which occur between the time the FUND accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the FUND actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount which is higher or lower than the FUND's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal
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restriction at the time of investment, there is no assurance that currency
controls will not be imposed subsequently. In addition, the values of foreign
fixed-income investments will fluctuate in response to changes in U.S. and
foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. OFFITBANK does not expect to invest
the FUND's assets in countries where it believes such events are likely to
occur.
Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by the FUND will reduce its net income
available for distribution to shareholders.
Investors should recognize that investing in debt obligations and other
fixed-income securities of issuers in emerging countries involves certain
special considerations and risk factors, including those set forth below, which
are not typically associated with investing in debt obligations and other
fixed-income securities of U.S. issuers.
Trading volume in emerging country securities markets is substantially
less than that in the United States. Further, securities of some emerging
country issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Commissions for trading on emerging country stock exchanges are
generally higher than commissions for trading on U.S. exchanges, although the
FUND will endeavor to achieve the most favorable net results on its portfolio
transactions and may, in certain instances, be able to purchase its portfolio
investments on other stock exchanges where commissions are negotiable.
Issuers in emerging countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. issuers. Consequently, there
may be less publicly available information about an emerging country issuer than
about a U.S. issuer. Further, there is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed issuers than in the
United States.
The FUND may invest in unlisted emerging country debt obligations and
other fixed-income securities, including investments in new and early stage
issuers, which may involve a high degree of business and financial risk that can
result in substantial losses. Because of the absence of any trading market for
these investments, the FUND may take longer to liquidate these positions than
would be the case for publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices realized on these
sales could be less than those originally paid by the FUND. Further, issuers
whose securities are not publicly traded may not be subject to public disclosure
and other investor protection requirements applicable to publicly traded
securities.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values
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and other protectionist measures imposed or negotiated by the countries with
which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of the FUND's investments in those countries. In addition, it may be difficult
to obtain and enforce a judgment in a court outside of the United States.
Mortgage-Related Securities. The FUND may invest in mortgage-related
securities. The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes in market yields will affect the value
of these securities as the price of fixed-income securities generally increases
when interest rates decline and decreases when interest rates rise. Prices of
longer term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of principal on mortgage pass-through securities may make it
difficult to lock in interest rates for a fixed period of time. To the extent
that mortgage securities are purchased at prices that differ from par, these
prepayments (which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
Treasury securities of the same average life.
Asset-Backed Securities. The FUND may invest in asset-backed
securities. In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. The FUND will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The FUND anticipates that a
substantial portion of the asset backed securities in which it invests will
consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually
five years) than most conventional mortgage-backed securities and historically
have been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
asset-backed securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as mortgage-backed securities. The
yield characteristics of asset-backed securities differ from more traditional
debt securities in that interest and principal payments are paid more
frequently, usually monthly, and principal may be prepaid at any time. As a
result, if the FUND purchases an asset-backed security at a discount, similar to
conventional mortgage-backed securities, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium, faster
than expected prepayments will reduce, while slower than expected prepayments
will increase, yield to maturity. Prepayments may result from a number of
factors, including trade-ins and liquidations due to default, as well as the
receipt of proceeds from physical damage, credit, life and disability insurance
policies. The rate of prepayments on asset-backed securities may also be
influenced by a variety of economic and social factors, including general
measures of consumer confidence; accordingly, from time to time, substantial
amounts of prepayments may be available for reinvestment by the FUND and will be
subject to the prevailing interest rates at the time of prepayment.
Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely payments
on underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the
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underlying asset. Liquidity protection ensures that the pass through of payments
due on the installment sales contracts and installment loans which comprise the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties; through various means of
structuring the transaction, or through a combination of such approaches. The
FUND will not pay any additional fees for such credit support. However, the
existence of credit support may increase the market price of the security.
Description of Certain Mortgage-Related Securities
GNMA Certificates
Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities backed
by pools of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the FUND will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common type
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an
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annual servicing fee of 0.44 of one percent for assembling the mortgage pool and
for passing through monthly payments of interest and principal to Certificate
holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather
than at par.
2. After issuance, Certificates usually trade in the secondary market
at a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of raising
the effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the
Certificate. If mortgagors prepay their mortgages, the principal
returned to Certificate holders may be reinvested at higher or lower
rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in conventional
residential mortgages. The FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"): mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and
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return principal once a year in guaranteed minimum payments. The expected
average life of these securities is approximately ten years. The FHLMC guarantee
is not backed by the full faith and credit of the United States.
Futures contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a specified
price, date, time and place. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND'S total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the FUND upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the FUND fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the price of the currency or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
At any time prior to the expiration of a futures contract, the FUND may elect to
close the position by taking an opposite position, which will operate to
terminate the FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such
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contracts exists. Although the FUND intends to enter into futures contracts only
if there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most futures
exchanges limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting the FUND to
substantial losses. In such event, and in the event of adverse price movements,
the FUND would be required to make daily cash payments of variation margin.
Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, and may enter
into closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures contracts
on foreign currencies, or forward contracts, will be utilized.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with its Custodian or with a designated
sub-custodian. As a writer of a covered put option, the FUND incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and over-the-counter put options written by
the FUND will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the FUND maintains, in a segregated account
maintained on its behalf at the FUND's custodian, cash, U.S. Government
securities or other high grade obligations in an amount equal to at least the
exercise price of the option, at all times during the option period. Similarly,
a short put position could be covered by the FUND
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by its purchase of a put option on the same security (currency) as the
underlying security of the written option, where the exercise price of the
purchased option is equal to or more than the exercise price of the put written
or less than the exercise price of the put written if the marked to market
difference is maintained by the FUND in cash, U.S. Government securities or
other high grade debt obligations which the FUND holds in a segregated account
maintained at its custodian.
Forward Currency Contracts
The FUND may engage in currency exchange transactions as a portfolio
management technique. The FUND will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or sell
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year.
Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, the FUND may purchase and sell options in the over-the-counter market
("OTC Options"). A call option gives the purchaser of the option the right to
buy the underlying security from the writer at the exercise price at any time
prior to the expiration of the contract, regardless of the market price of the
security during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter options and the assets used
as cover for written over-the-counter options are illiquid securities. The FUND
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may enter
into OTC Option contracts and those standards, as modified from time to time,
will be implemented and monitored by the Manager. Under these special
arrangements, the FUND will enter into contracts with primary and non-primary
dealers which provide that the FUND has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary and non-primary dealers, the
formula will generally be based on a multiple of the premium received by the
FUND for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, and with
respect to OTC Options written with primary dealers only, the FUND will treat as
illiquid that amount of the "cover" assets equal to the amount by which the
formula price for the repurchase of the option is greater than the amount by
which the market value of the security subject to the option exceeds the
exercise price of the option (the amount by which
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the option is "in-the-money"). Although each agreement will provide that the
FUND's repurchase price shall be determined in good faith (and that it shall not
exceed the maximum determined pursuant to the formula) the formula price will
not necessarily reflect the market value of the option written, therefore, the
FUND might pay more to repurchase the OTC Option contract than the FUND would
pay to close out a similar exchange traded option.
In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
Risks of Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, future contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
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Pursuant to the sub-advisory agreement, OFFITBANK, where permitted by
law, will purchase and sell foreign exchange in the interbank dealer market for
a fee on behalf of the FUND, subject to certain procedures and reporting
requirements adopted by the Board of Trustees.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the Investment Company Act of 1940, as amended (the "1940
Act"), collateralized by the underlying securities. The return on the collateral
may be more or less than that from the repurchase agreement. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest earned. In evaluating whether to enter into a
repurchase agreement, OFFITBANK will carefully consider the creditworthiness of
the seller. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the FUND may incur a loss.
Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with ^ VCM or OFFITBANK. The
borrower at all times during the loan must maintain with the FUND cash or cash
equivalent collateral or provide to the FUND an irrevocable letter of credit
equal in value at all times to at least 100% of the value of the securities
loaned. During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. Loans are subject to termination at the option
of the FUND or the borrower at any time. The FUND may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid
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securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, has the
following restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of the
FUND's total assets, the FUND
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may not invest more than 25% of the market value of its total assets in a single
issuer (except the securities of the U.S. Government, its agencies and
instrumentalities). These two restrictions, hypothetically, could give rise to
the FUND having securities, other than U.S. government securities, of as few as
twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within any one industry (except that this restriction
does not apply to U.S. government securities); or (d) more than 5% of net assets
would be invested in warrants or rights. (Included within that amount, but not
to exceed 2% of the value of the FUND's net assets, may be warrants which are
not listed on the New York or American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the market
value of its total assets). This does not preclude the FUND from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities. The FUND will not purchase additional securities
while the amount of any borrowings is in excess of 5% of the market value of its
total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and (iii)
through the lending of its portfolio securities as described in "Lending of
Portfolio Securities" in the Prospectus and in this Statement.
5. The FUND may not invest more than 5% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired as part
of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets.
7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance of
transactions) or engage in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM or OFFITBANK, who
individually own beneficially more than 1/2 of 1% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies which invest in
real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
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13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and OFFITBANK. In selecting such brokers or dealers, OFFITBANK will consider
various relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character of the
markets for the security to be purchased or sold, the execution efficiency,
settlement capability, financial condition of the broker-dealer firm, the
broker-dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to OFFITBANK for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to OFFITBANK. Such allocation shall be
in such amounts as VCM or OFFITBANK shall determine and OFFITBANK shall report
regularly to VCM who will in turn report to the Trustees on the allocation of
brokerage for such services.
The receipt of research from broker-dealers may be useful to OFFITBANK
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of OFFITBANK's other clients may be useful to OFFITBANK in
carrying out its obligations to the FUND. The receipt of such research may not
reduce OFFITBANK's normal independent research activities.
OFFITBANK is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and OFFITBANK or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market. Any profits resulting from portfolio
transactions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are also
shareholders of VCM. The Investment Advisory Contract does not provide for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between ^ VCM and OFFITBANK does not provide for any reduction in the
advisory fees as a result of profits resulting from portfolio transactions
effected through OFFITBANK or an affiliated brokerage firm.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid the Distributor or to OFFITBANK or an affiliated
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broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of OFFITBANK. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.
For the fiscal years ended April 30, 1994 and 1995, the FUND's rate of
portfolio turnover was approximately 212% and 84%, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
The FUND may invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
Portfolio securities of the FUND which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
normally 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the FUND.
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Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 p.m. (New York time) will be
confirmed at the previous offering price computed as of the close of trading on
the options exchanges (normally 4:15 p.m., New York time), provided the order is
received by the FUND's Transfer Agent prior to 4:15 p.m. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted timely to
the FUND. Orders received by dealers after 4:15 p.m. will be confirmed at the
next computed offering price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods or at the end of the 1, 5 or 1 year
periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value. The
FUND's aggregate annualized total rate of return, reflecting the initial
investment and reinvestment of all dividends and distributions for the one year
period ended April 30, 1995 and for the life of the FUND (April 16, 1993 to
April 30, 1995) was 5.34% and 4.51% respectively.
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The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December 1994, from the
initial value invested. The FUND will, however, disclose the pro rata share of
the account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would reduce
the performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula: ^
YIELD = 2[(a-b+1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that wer entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing
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performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
For the 30-day period ended April 30, 1995, the FUND's yield was 5.55%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its "investment company taxable income"
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by the FUND made during the taxable year or,
under specified circumstances, within twelve months after the close of the
taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated
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hedging transactions that are offset by realized or unrealized losses on
offsetting positions) from the sale or other disposition of stock, securities or
foreign currencies (or options, futures or forward contracts thereon) held for
less than three months (the "Short-Short Gain Test"). However, foreign currency
gains, including those derived from options, futures and forwards, will not in
any event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the FUND may
have to limit the sale of appreciated securities that it has held for less than
three months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose. At April 30,
1995, the FUND had a net capital loss carryover of $401,749 which is avaiable
through April 30, 2003 to offset future capital gains.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code Section 1256, will generally be
treated as ordinary income or loss.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contract have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a
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consequence of the year-end deemed sale of such contracts) is generally treated
as 60% long-term capital gain or loss and 40% short-term capital gain or loss
(except for Section 1256 forward foreign currency contracts, which are subject
to Section 988 Rules). The FUND may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service has held in several private rulings that gains arising from
Section 1256 contracts will be treated for purposes of the Short-Short Gain Test
as being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss, or any net foreign currency loss
incurred after October 31 as if they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option. However, with regard to forward
currency contracts, there does not appear to be any formal or informal authority
which identifies the issuer of such instrument.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the
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excise tax. However, investors should note that the FUND may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations
(which is not likely), the FUND may elect to "pass through" to the FUND's
shareholders the amount of foreign taxes paid by the FUND. If the FUND so
elects, each shareholder would be required to include in gross income, even
though not actually received, his pro rata share of the foreign taxes paid by
the FUND, but would be treated as having paid his pro rata share of such foreign
taxes and would therefore be allowed to either deduct such amount in computing
taxable income or use such amount (subject to various Code limitations) as a
foreign tax credit against Federal income tax (but not both). For purposes of
the foreign tax credit limitation rules of the Code, each shareholder would
treat as foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the FUND representing income derived from
foreign sources. No deduction for foreign taxes could be claimed by an
individual shareholder who does not itemize deductions. Each shareholder should
consult his own tax adviser regarding the potential application of foreign tax
credits.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
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Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign
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shareholder would generally be exempt from U.S. Federal income tax on gains
realized on the sale of shares of the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund;
Chairman and Director of Blanchard Precious
Metals Fund, Inc.; Chairman and Trustee of
The Virtus Funds; Chairman and Trustee,
Federated Investors, Federated Advisers,
Federated Management, and Federated
Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research,
Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director,
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Trustee, or Managing General Partner of the
Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors;
President, Northgate Village Development
Corporation; Partner or Trustee in private
real estate ventures in Southwest Florida;
Director, Trustee, or Managing General Partner
of the Funds; formerly, President, Naples
Property Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp.
and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
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Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and member,
Board of Trustees, University of Pittsburgh;
Medical Director, Unviersity of Pittsburgh
Medical Center-Downtown, member, Board of
Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Trustee
and Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director
of some of the Funds; Vice President and
Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State
Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner
of the Funds; formerly, President, State
Street Bank and Trust Company and State Street
Boston Corporation and Trustee, Lahey Clinic
Foundation, Inc.
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Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr.,
J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh,PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
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(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
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<PAGE>
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
-31-
<PAGE>
Officers and Trustees Compensation
<TABLE>
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
</TABLE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
-32-
<PAGE>
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the period from April 16, 1993 (commencement of operations)
to April 30, 1993 and for the fiscal year ended April 30, 1994, the FUND's
investment management fees paid to the prior manager were $486 and $192,383,
respectively, all of which were deferred by the prior manager. For the fiscal
year ended April 30, 1995, the FUND's investment management fee paid to the
prior manager was $235,737, of which $181,185 was voluntarily waived by the
prior manager.
THE SUB-ADVISORY AGREEMENT
OFFITBANK furnishes investment advisory services to the FUND pursuant
to a Sub-Advisory Agreement between VCM and OFFITBANK. Pursuant to the
Sub-Advisory Agreement, OFFITBANK supervises the investment and reinvestment of
the cash, securities or other properties comprising the FUND's portfolio,
subject at all times to the direction of VCM and the policies and control of the
Trust's Board of Trustees. OFFITBANK gives the FUND the benefit of its best
judgment, efforts and facilities in rendering its services as Sub-Adviser.
In carrying out its obligations, OFFITBANK:
(a) uses the same skill and care in providing such service as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities; (b) obtains and evaluates pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally or the
FUND's portfolio and whether concerning the individual issuers whose securities
are included in the FUND's portfolio or the activities in which the issuers
engage, or with respect to securities which it considers desirable for inclusion
in the FUND's portfolio; (c) determines which issuers and securities shall be
represented in the FUND's portfolio and regularly reports thereon to the Trust's
Board of Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give instructions
to the custodian and/or sub-custodian of the FUND appointed by the Trust's Board
of Trustees, as to deliveries of securities, transfers of currencies and
payments of cash for the account of the FUND, in relation to the matters
contemplated by this Agreement; and (f) takes, on behalf of the FUND, all
actions which appear to the Trust and VCM necessary to carry into effect such
purchase and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the FUND and the
prompt reporting to VCM of such purchases and sales.
OFFITBANK is responsible for decisions to buy and sell securities for
the FUND's portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. OFFITBANK's primary consideration in effecting a security
transaction will be execution at the most favorable price. In selecting a
broker-dealer to execute each particular transaction, OFFITBANK will take the
following into consideration: the best net price available, the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the FUND on a continuing
basis. Accordingly, the price to the FUND in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Trustees may determine,
OFFITBANK shall not be deemed to have acted unlawfully or to have breached any
duty created under the Sub-Advisory Agreement or otherwise solely by reason of
its having caused the FUND to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
-33-
<PAGE>
broker or dealer would have charged for effecting that transaction, if OFFITBANK
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to such policies
as the Board of Trustees may determine, OFFITBANK will purchase and sell foreign
currency and futures contracts and other securities for the FUND. OFFITBANK is
further authorized to allocate the orders placed by it on behalf of the FUND to
any affiliated broker-dealer of the FUND or to such brokers and dealers who also
provide research or statistical material, or other services to the FUND, VCM or
OFFITBANK. Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the Board
of Trustees of the Trust indicating the brokers to whom such allocations have
been made and the basis therefor.
Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by OFFITBANK
on behalf of the FUND pursuant thereto, is at all times subject to any
directives of the Board of Trustees of the Trust. VCM provides OFFITBANK with
written notice of all such directives, so long as the Sub-Advisory Agreement
remains in effect.
Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at its
expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.
Pursuant to the Sub-Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, OFFITBANK may perform services on
behalf of the FUND which are not required by the Sub-Advisory Agreement. Such
services will be performed on behalf of the FUND and OFFITBANK's cost in
rendering such services may be billed monthly to VCM, subject to examination by
VCM's independent accountants. Payment or assumption by OFFITBANK of any FUND
expense that OFFITBANK is not required to pay or assume under the Sub-Advisory
Agreement shall not relieve VCM or OFFITBANK of any of their obligations to the
FUND or obligate OFFITBANK to pay or assume any similar FUND expense on any
subsequent occasions.
Pursuant to the Sub-Advisory Agreement, for the services to be rendered
and the facilities furnished hereunder, VCM pays OFFITBANK a monthly fee at the
annual rate of .30% of the FUND's first $25 million of average daily net assets;
plus .25% of the FUND's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the FUND's average daily net assets in
excess of $50 million. The prior manager has advised the FUND that the fees paid
to OFFITBANK were $195 for the period ended April 30, 1993, $45,697 for the
fiscal year ended April 30, 1994 and $27,254 for the fiscal year ended April 30,
1995. Compensation under the Sub-Advisory Agreement is calculated and accrued
daily and the amounts of the daily accruals are paid monthly. The compensation
paid to OFFITBANK will not be reduced by the amount of brokerage commissions
received by OFFITBANK or its affiliated broker-dealer pursuant to Section
17(e)(2) of the 1940 Act.
Pursuant to the Sub-Advisory Agreement, OFFITBANK agrees that it will
not render advisory or sub-advisory services to any other similar publicly
offered no-load or low-load open-end investment company registered with the SEC
while the Sub-Advisory Agreement is in effect.
The Sub-Advisory Agreement was approved by the then Trustees on March
24, 1995. The Sub-Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from year to
year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a majority of
the FUND's outstanding voting securities (as defined in Section 2(a)(42) of the
1940 Act), and (b) by the affirmative vote of a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons of a party to
the Sub-Advisory Agreement (other than as a Trustee of the Trust), by votes cast
in person at a meeting specifically called for such purpose.
-34-
<PAGE>
The Sub-Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60) days' written notice
to the other party. The Sub-Advisory Agreement automatically terminates: (a) in
the event of its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Contract between the FUND and VCM shall terminate.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended April 30, 1995, the FUND accrued payments under the
Plan amouting to $78,579.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by
-35-
<PAGE>
the FUND or the Trustees. The Declaration of Trust provides for indemnification
out of the FUND property of any shareholder held personally liable for the
obligations of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
FINANCIAL STATEMENTS
Audited financial statements of the FUND for the fiscal year ended
April 30, 1995, are attached hereto.
-36-
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Short-Term Bond
Fund for the fiscal year ending April 30, 1995. As the head of the team
responsible for the portfolio management of your Fund, it is my pleasure to
report on the Fund's progress during the fiscal year.
Thanks to an unprecedented series of interest rate hikes by Alan Greenspan
and the Federal Reserve, 1994 was a very difficult year for bond markets. Even
so, your Blanchard Short-Term Bond Fund was able to produce a positive total
return of 1.02% for the 12 months ending 12/31/94, and 5.34% for the 12 months
ending 4/30/95.
This was no small feat, as only a total of 192 bond funds were able to claim
a positive total return in 1994. That's out of a total universe of 2,959 bond
funds tracked by Morningstar, Inc.
Of course, past performance is no guarantee of future results. As with any
fixed income investment, the Fund's yield, investment return and principal value
will vary so that shares, when redeemed, may be worth more or less than their
original pur- chase price.
As you might surmise, we are very pleased with the result, as the overriding
objective of your Fund is to provide a solid level of steady income while making
every effort to preserve capital.
We were able to produce such a
The following information was reprint as a line graph.
- --------------------------------------------------------------------------------
The Value of a $10,000 Investment in the
Blanchard Short-Term Bond Fund
inception 4/16/93 through 4/30/95 as compared to the
Merrill Lynch Short-Term Treasuries Index for the same period
-------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Short-Term Bond Fund*
-------------------------------------
1 year 5.34%
since inception 4.51%
-------------------------------------
FYE 4/30/93 FYE 4/30/94 FYE 4/30/95
STBF 0.15% 3.72% 5.34%
MERRILL LYNCH 0.30% 1.62% 5.77%
M.L. Corp & Govt 0.20% 1.34% 6.12%
$10,000.00 $10,015 $10,388 $10,942
$10,000.00 $10,030 $10,192 $10,781
$10,000.00 $10,020 $10,154 $10,776
Blanchard Merrill Lynch Merrill Lynch
Short-Term Short-Term Short-Term Govt.
Bond Fund Treasuries Index(D) Corporate Index^
*The average annual and total returns quoted above and the chart shown above do
not reflect the deduction of management fees and some expenses which have been
waived. If reflected, the returns, which also reflect reinvestment of
distributions, would be lower. The total return includes changes in principal
value. Average annual return is total return annualized and compounded. Past
performance is no guarantee of future results.
(D)Source: Merrill Lynch Short-Term Treasury Index is an unmanaged index of U.S.
Treasury bonds with maturities from 1 to 2.999 years. Unlike the BSTBF, Treasury
bonds are guaranteed by the U.S. government.
^Source: Merrill Lynch Short-Term Government Corporate Index is an unmanaged
index of corporate and government issues with maturities from 1 to 4.99 years.
This chart is for comparative purposes only and is not intended to reflect
future performance of the BSTBF, the indices, or Treasury bonds.
- --------------------------------------------------------------------------------
(over, please)
<PAGE>
result by investing the portfolio in high-quality bonds, and keeping its average
portfolio maturity very short. We avoided the mistake of some short-term bond
funds, which may have been imprudent in their exposure to riskier alternative
markets, including even emerging market debt.
So far, 1995 has been a far more positive environment for bond investors,
allowing us to add a satisfactory level of capital gains to our income. Over the
two years since its inception, your Fund has continued to provide a relatively
stable share price and solid monthly income. As shown in the chart at the
beginning of this letter, its performance compares favorably with the Merrill
Lynch Short-Term Treasuries Index, an unmanaged index of U.S. Treasury Bonds
which cannot be invested in directly. We have also compared performance to the
Merrill Lynch Short-Term Government Corporate Index. We believe that, going
forward, this index more closely approximates the portfolio make-up of your
Blanchard Short-Term Bond Fund. Naturally, past performance is no guarantee of
future results.
Looking Ahead
Following the strong bond rally early in 1995, we have become somewhat more
cautious on a short-term basis. As a result, the Fund's conservative portfolio
mandate should serve you well.
Longer-term, however, we believe that interest rates have now settled in a
lower range than they have been in several years. While inflation may move
somewhat higher, we don't believe it will increase to any significant degree.
In essence, we are currently enjoying what a number of analysts have come to
call a "soft landing." In simple terms, this means that while economic activity
will most likely regain some momentum, helped along by the recent decline in
interest rates and by the decline in the value of the dollar, any such expansion
should not accelerate to a worrisome level in the foreseeable future.
We thank you for your continued support and look forward to serving you in
the months and years ahead.
Sincerely,
JB:ml Jack Burks
Managing Director of OFFITBANK
Portfolio Managers of the Blanchard Short-Term Bond Fund
Distributed by Sheffield Investments, Inc. (1551) 06ARSL0695
<PAGE>
BLANCHARD SHORT-TERM BOND FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Principal Value
--------- -----
U.S. FIXED INCOME (70.2%)
CORPORATE BONDS (4.1%)
Consumer Related (2.2%)
RJR Nabisco Inc.
8.30%, 4/15/99 ...................... $ 500,000 $ 509,828
-----------
Industrial Related (1.9%)
PDV America Inc.
7.25%, 8/01/98 ...................... 500,000 455,841
-----------
TOTAL CORPORATE BONDS ............. 965,669
-----------
U.S. GOVERNMENT AND AGENCY ISSUES (66.1%)
Federal National Mortgage
Association 8.20%, 8/10/98 .......... 1,000,000 1,005,763
Government National Mortgage
Association II 10%, 6/20/16 209,064 221,673
Resolution Trust Corp. 6%, 1/15/04 ... 250,000 249,688
U.S. Treasury Notes
6.88%, 10/31/96 ..................... 4,500,000 4,523,904
U.S. Treasury Notes 7.50%, 2/29/96 ... 2,500,000 2,523,438
U.S. Treasury Notes 7.50%, 1/31/96 ... 2,000,000 2,016,874
U.S. Treasury Notes 5.50%, 4/30/96 ... 5,000,000 4,959,375
-----------
TOTAL U.S. GOVERNMENT
AND AGENCY ISSUES 15,500,715
TOTAL U.S. FIXED INCOME
(IDENTIFIED COST
$16,521,040) ..................... 16,466,384
-----------
U.S. HIGH YIELD SECURITIES (24.5%)
U.S. CORPORATE BONDS (24.5%)
Airlines (0.7%)
U.S. Air Inc. Series D
9.8%, 1/15/00 ....................... 200,000 173,250
-----------
Basic Materials (2.1%)
Owens Illinois Inc. 10.25%, 4/01/99 .. 500,000 511,250
Consumer Related (3.0%)
MacAndrews & Forbes Group Inc.
12.25%, 7/01/96 ..................... 200,000 201,500
Revlon Consumer Products Corp.
9.50%, 6/01/99 ...................... 500,000 491,250
-----------
692,750
-----------
(Right Column)
Principal Value
--------- -----
Energy & Oil Related (3.4%)
Texas New Mexico Power Co.
9.25%, 9/15/00 ...................... $400,000 $ 399,584
Triton Energy Corp. 0%, 11/01/97 ..... 500,000 398,750
-----------
798,334
-----------
Financial Services (8.0%)
Great American Holding Corp.
11%, 8/15/98 ........................ 500,000 501,875
Navistar Financial Group Corp.
8.88%, 11/15/98 ..................... 500,000 492,500
Presidential Life Corp.
9.50%, 12/15/00 ..................... 400,000 386,000
Reliance Group Holdings Inc.
9.0%, 11/15/00 ...................... 500,000 476,875
-----------
1,857,250
-----------
Industrial Related (5.1%)
Armco, Inc. 9.38%, 11/01/00 .......... 350,000 331,625
Sequa Corp. 8.75%, 12/15/01 .......... 350,000 329,437
Unisys Corp. 10.63%, 10/01/99 ........ 500,000 527,197
-----------
1,188,259
-----------
Medical Services (1.5%)
Healthsouth Rehabilitation Corp.
9.50%, 4/01/01 ...................... 350,000 357,875
-----------
Telecommunications (0.7%)
SCI Television Inc. 7.50%, 6/30/98 ... 168,800 167,112
-----------
TOTAL U.S. HIGH YIELD
SECURITIES (IDENTIFIED
COST $5,880,640) ............... 5,746,080
-----------
SHORT-TERM SECURITIES (3.2%)
Associates Corp. of N.A.
5.80%, 5/01/95 ...................... 740,000 740,000
-----------
TOTAL SHORT-TERM
SECURITIES (IDENTIFIED
COST $740,000) .................. 740,000
-----------
TOTAL INVESTMENTS (97.9%)(a)
(IDENTIFIED COST
$23,141,680) .................... 22,952,464
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES (2.1%) .... 492,043
-----------
NET ASSETS (100%) ................ $23,444,507
-----------
- ---------------
(a) The aggregate cost for federal income tax purposes is $23,141,680; the gross
unrealized appreciation is $12,801; and the gross unrealized depreciation is
$202,017; resulting in net unrealized depreciation of $189,216.
See notes to financial statements.
3
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
Assets:
Investments in securities, at value
(Identified Cost $23,141,680)
(note 1) .......................... $22,952,464
Cash .................................. 47,520
Receivables for:
Interest ............................ 543,053
Shares of beneficial interest sold .. 501
Deferred organizational expenses
(note 1) ............................ 48,680
-----------
Total assets ...................... 23,592,218
-----------
Liabilities:
Payables for:
Shares of beneficial interest
repurchased ....................... 106,165
Dividends ............................. 7,015
Accrued expenses and other
liabilities ......................... 34,531
Total liabilities ................. 147,711
-----------
Net assets ........................ $23,444,507
===========
Net assets are comprised of:
Paid in capital (unlimited authorized
shares of beneficial interest,
$.01 par value, 7,985,358 shares
outstanding) ........................ $24,355,402
Accumulated overdistributed
investment income - net ............. (58,696)
Accumulated realized loss - net ....... (662,983)
Unrealized net depreciation of
investments ......................... (189,216)
-----------
Net assets ........................ $23,444,507
===========
Net asset value per share ......... $2.94
=====
(Right Column)
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
Investment income:
Interest .............................. $1,934,317
----------
Expenses
Investment management
fee (note 2) .............. $235,737
Accounting fees ............. 96,176
Plan of distribution
(note 3) .................. 78,579
Transfer agent fees ......... 75,999
Trustees' fees, retirement
plan curtailment and
other expenses (note 5) ... 36,894
Custodian fees .............. 36,080
Professional fees ........... 34,282
Registration fees ........... 27,500
Shareholder reports and
notices ................... 24,950
Organizational expenses ..... 15,429
Other ....................... 4,474
--------
Total expenses ............ 666,100
Less: Fund expenses
voluntarily waived by
Manager and
Distributor (note 2) .... (234,663)
--------
Net expenses .......................... 431,437
----------
Investment income - net ............... 1,502,880
----------
Realized and unrealized gain
(loss) - net (note 1):
Realized gain (loss) on:
Investments - net (541,619)
Forward currency contracts
and foreign exchange
transactions - net (30,645) (572,264)
--------
Change in unrealized appreciation or
depreciation on investments - net ..... 443,090
----------
Net realized and unrealized losses ...... (129,174)
----------
Net increase in net assets
resulting from operations ............. $1,373,706
==========
See notes to financial statements.
4
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income - net .......................................................... $ 1,502,880 $ 1,441,173
Realized loss - net .............................................................. (572,264) (214,464)
Change in unrealized appreciation or depreciation - net .......................... 443,090 (631,753)
----------- -----------
Net increase in net assets resulting from operations ............................. 1,373,706 594,956
----------- -----------
Dividends and distributions to shareholders from:
Investment income - net .......................................................... (1,502,880) (1,440,603)
Dividends in excess of investment income - net ................................... (18,912) --
Realized gains - net ............................................................. - (102,660)
----------- -----------
..................................................................................... (1,521,792) (1,543,263)
----------- -----------
Transactions in shares of beneficial interest - net increase (decrease) (note 6) ..... (18,788,567) 41,131,587
----------- -----------
Net increase (decrease) in net assets ............................................ (18,936,653) 40,183,280
Net assets:
Beginning of year ................................................................ 42,381,160 2,197,880
----------- -----------
End of year (including accumulated overdistributed investment
income - net of $58,696 and $189,258, respectively) ............................ $23,444,507 $42,381,160
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard Short-Term Bond Fund (the "Fund") is a series of Blanchard Funds
which was organized as a Massachusetts business trust on January 24, 1986. The
Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940, as amended (the "Act"). The Fund had
no operations before April 16, 1993 other than the sale of shares of beneficial
interest to Sheffield Management Company (the "Manager") and OFFITBANK (the
"Portfolio Adviser").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sales
are made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. All other
securities and other assets of the Fund are valued at fair value as determined
in good faith by the Trustees. Foreign currency exchange rates are determined
when such rates are made available to the Fund at times prior to the close of
the New York Stock Exchange.
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic or political developments in a
particular country, industry or region.
The Fund invests a portion of its assets in high yield securities, which may
be subject to a greater degree of credit risk, greater market fluctuations and
risks of loss of income and principal, and may be more sensitive to economic
conditions than lower yielding, higher rated fixed income securities.
B. Accounting for Investments and Investment Income-Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Realized gains and losses on security transactions are determined on the
identified cost method. Interest income is accrued daily. Premiums or discounts
on debt securities are amortized or accreted as adjustments to interest income
over the lives of such securities.
C. Foreign Currency Translation-The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rate at the end of the period, and (2) purchases, sales, income and expenses are
translated at rates of exchange prevailing on the respective dates of such
transactions. The Fund does not separately identify that portion of the results
of operations of the Fund that arise as a result of changes in the exchange
rates from the fluctuations that arise from changes in market prices of equity
investments during the period. However, in accordance with the requirements of
the Internal Revenue Code, the Fund isolates the effect of changes in foreign
exchange rates from the fluctuations arising from changes in market prices of
foreign debt obligations sold, and such foreign exchange losses, which amounted
to $24,650, are included in ordinary income for federal
6
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
income tax purposes and have been reclassified from realized gain (loss) on
investments to realized gain (loss) on forward currency contracts and foreign
exchange transactions - net in the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future foreign exchange rates. Forward currency contracts are valued based
upon the current forward rates. Fluctuations in the value of such contracts are
recorded as unrealized gains or losses; realized gains or losses include net
gains or losses on contracts which have settled. The Fund generally enters into
a forward currency contract as a hedge against foreign exchange rate
fluctuations upon the purchase or sale of a security denominated in a foreign
currency. The Fund maintains, as collateral, U.S. Government or other highly
liquid debt obligations in an amount equal to or greater than its net obligation
for forward currency contracts. Risks may arise as a result of the potential
inability of the counterparties to meet the terms of their contracts.
D. Federal Income Tax Status-It is Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. Dividends and Distribution to Shareholders-The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in capital.
F. Organizational Expenses-The Fund's Manager paid the organizational
expenses of the Fund incurred prior to the public offering of its shares
amounting to $77,143. The Fund reimbursed the Manager for these expenses and has
deferred and is amortizing such expenses on the straight-line method over five
years from the date of commencement of the Fund's operations.
G. Other-Certain expenses for the Blanchard Funds are allocated among the
Funds based upon their relative average net assets.
7
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of .75% of the Fund's
average daily net assets.
For the year ended April 30, 1995, the Manager and Distributor voluntarily
waived the advisory and distribution fee, which amounted to $181,185 and $5,944,
respectively, and absorbed $47,534 of other expenses of the Fund.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses,
are subject to the expense limitation imposed by one of the states in which
shares of the Fund are offered for sale. For the year ended April 30, 1995, the
Fund's expenses did not exceed such limitation.
Certain officers and/or Trustees of the Fund are officers/directors of the
Manager.
The Manager has sub-advisory agreements with the Portfolio Adviser. The
Manager has advised the Fund that fees paid to the Portfolio Adviser were
$27,254 for the year ended April 30, 1995.
Although not required to do so pursuant to the Management Agreement and
Distribution Plan in effect between the Fund and its Manager and Sheffield
Investments, Inc. (the "Distributor"), respectively, the Manager and the
Distributor voluntarily agreed that they will defer all or a portion of fees
payable to them and absorb a portion of other expenses until further notice.
Such deferred fees and expense absorptions are subject to later reimbursement.
The Manager and the Distributor have conditioned their right to receive a
portion of any earned but deferred fees and to receive reimbursement for
absorbed expenses (measured on a rolling two-year period, starting from the date
the portion of the fee is deferred and/or the expenses are absorbed) upon the
Fund reaching and maintaining the following specified levels of net assets for
30 continuous days (excluding assets exchanged into the Fund from other funds in
the Blanchard Group of Funds) provided that such reimbursement would not cause
the Fund's expenses in such a year to exceed 1.75% of average daily net assets.
Conditional Portion of
Specified Level of Earned but Deferred
Fund's Net Assets Fees to be Received
$50 Million 25%
60 Million 25%
70 Million 25%
80 Million 25%
---
100%
===
Subject to this agreement, $360,855 which was deferred in fiscal 1994 was
permanently waived by the Manager and Distributor in fiscal 1995.
8
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, the Distributor, an affiliated company
of the Manager, acts as principal distributor of the Fund's shares. The
Distributor has the exclusive right to distribute Fund shares directly or
through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the Plan, the Fund may pay distribution fees not to exceed .25%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor on or
after April 16, 1993, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$486,173. If the Plan is terminated or discontinued in accordance with its
terms, the obligation of the Fund to make payments to the Distributor pursuant
to the Plan will cease and the Fund will not be required to make any payments
past the date the Plan is terminated.
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Short-Term Bond Fund
(collectively, the "Funds"). The transactions contemplated by the Acquisition
Agreement which have been approved by the Board of Trustees of the Funds are
conditioned upon the approval of the shareholders of each Fund, of (1) a new
investment management agreement with Signet, (2) a new distribution agreement
with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
9
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments, aggregated $33,808,339 and $24,658,325,
respectively, including purchases and sales of U.S. Government obligations of
$32,814,578 and $18,848,241, respectively. The Manager has advised the Fund
that, for the year ended April 30, 1995, it incurred costs, which were
reimbursed by the Fund, amounting to $36,438 for performing internal accounting
and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustees' fees, retirement
plan curtailment and other fees in the Statement of Operations for the year
ended April 30, 1995 was $5,230. As indicated in Note 4, the Manager has entered
into an agreement which provides for the acquisition of the Manager by Signet.
Following the acquisition, the independent directors/trustees of the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $24,679 was recorded to reflect the previously unrecognized
prior service costs of the independent directors/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $29,909 of accrued pension
expense.
NOTE 6 - Shares of Beneficial Interest:
For the For the
Year Ended Year Ended
April 30, 1995 April 30, 1994
-------------- --------------
Shares Amount Shares Amount
------ ------ ------ ------
Sold ..................... 7,207,260 $21,020,411 28,775,937 $86,052,474
Reinvestment of dividends
and distributions ...... 460,620 1,341,339 456,142 1,364,050
----------- ----------- ----------- -----------
7,667,880 22,361,750 29,232,079 87,416,524
Repurchased .............. (14,143,317) (41,150,317) (15,504,618) (46,284,937)
----------- ------------ ----------- -----------
Net increase (decrease) .. (6,475,437) $(18,788,567) 13,727,461 $41,131,587
=========== ============ =========== ===========
NOTE 7 - Federal Income Taxes:
Capital and foreign currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Fund's next taxable year. The Fund incurred and will elect to defer net
capital and foreign currency losses of approximately $247,000 and $7,000,
respectively during fiscal 1995.
10
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
<TABLE>
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to post-October loss deferrals and non-deductible expenses. The
Fund had permanent book/tax differences primarily attributable to foreign
currency losses. To reflect reclassifications arising from permanent book/tax
differences for the year ended April 30, 1995, paid-in-capital was charged
$187,618, accumulated realized loss-net was credited $38,144 and accumulated
overdistributed investment income-net was credited $149,474.
At April 30, 1995 the Fund had a net capital carryover of $401,749 which is
available through April 30, 2003 to offset future capital gains. To the extent
that these carryover losses are used to offset future capital gains, it is
probable that the gains so offset will not be distributed to shareholders.
NOTE 8 - Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
For the Period
April 16, 1993
For the Year Ended (commencement
April 30, of operations) to
------------------------- April 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ......................... $2.93 $3.00 $3.00
----- ----- -----
Income from investment operations:
Net investment income ...................................... .15 .17 .00(3)
Net gains or losses on securities (both realized and
unrealized) .............................................. .00(3) (.06) .00(3)
----- ----- -----
Net income from investment operations .................... .15 .11 .00(3)
----- ----- -----
Less dividends and distributions:
Dividends from net investment income ....................... (.14) (.17) .00(3)
Dividends in excess of net investment income................ (.00)(3) -- --
Distributions from realized gains - net .................... .00 (.01) .00(3)
----- ----- -----
Change in net asset value ................................ .01 (.07) .00(3)
----- ----- -----
Net asset value, end of period ............................... $2.94 $2.93 $3.00
===== ===== =====
Total return ................................................. 5.34% 3.72% .15%(4)
Ratios/Supplemental Data:
Net assets end of period ($ Million) ....................... $23 $42 $2
Ratio of expenses to average net assets .................... 1.38%(2) .63%(2) 3.03%(1)
Ratio of net investment income to average net assets ....... 4.80%(2) 5.64%(2) 3.89%(1)
Portfolio turnover ........................................... 84% 212% 36%
<FN>
- -------------
(1) Annualized.
(2) The ratios of expenses to average net assets and net investment income to average net assets would have
been 2.13% and 4.05%, respectively, for the year ended April 30, 1995 and 2.05% and 4.22%, respectively,
for the year ended April 30, 1994, if a portion of the Fund's expenses had not been voluntarily deferred and
absorbed by the Manager and Distributor.
(3) Less than one cent per share.
(4) Not annualized.
</FN>
</TABLE>
11
<PAGE>
BLANCHARD SHORT-TERM BOND FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Short-Term Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Short-Term Bond Fund (the
"Fund") at April30, 1995, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the two years in the period then ended
and for the period April 16, 1993 (commencement of operations) through April30,
1993, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
12
<PAGE>
(Left Column)
Portfolio Adviser
OFFITBANK
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Short-Term
Bond Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
Blanchard
Short-Term
Bond Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Flexible Tax-Free Bond Fund (the "FUND") is offered. Please retain
this document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History............................................. 2
Investment Objective and Policies........................................... 2
Securities in Which the FUND May Invest..................................... 3
Investment Restrictions..................................................... 9
Portfolio Transactions..................................................... 9
Computation of Net Asset Value.............................................. 10
Performance Information..................................................... 11
Additional Purchase and Redemption Information.............................. 13
Tax Matters................................................................. 13
The Management of the FUND.................................................. 18
Management Services......................................................... 23
The Advisory Agreement...................................................... 23
Administrative Services..................................................... 25
Distribution Plan.......................................................... 25
Description of the FUND..................................................... 26
Shareholder Reports......................................................... 26
Appendix A - Description of Bond Ratings.................................... A-1
Appendix B - Financial Statements........................................... B-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
United States Trust Company of New York
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND is a "no-load" fund which seeks to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The FUND invests primarily in obligations of varying maturities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest from which, in the opinion of
bond counsel for the issuer, is exempt from Federal income tax ("Municipal
Obligations"). There is no assurance that the FUND will achieve its investment
objective. This objective is a fundamental policy and may not be changed except
by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Securities in Which the Fund May Invest" and "Other
Investment Information."
The FUND's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the preservation
of principal. The FUND will invest at least 65% of its assets in Municipal
Obligations, except when maintaining a temporary defensive position.
The FUND invests in Municipal Obligations which are determined by U.S.
Trust to present minimal credit risks. As a matter of fundamental policy, except
during temporary defensive periods, the FUND will maintain at least 80% of its
assets in tax-exempt obligations. (This policy may not be changed without the
vote of the holders of a majority of the FUND's outstanding shares.) However,
from time to time on a temporary defensive basis due to market conditions, the
FUND may hold uninvested cash reserves or invest in taxable obligations in such
proportions as, in the opinion of U.S. Trust, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the FUND invest in taxable obligations, it would purchase: (i) obligations of
the U.S. Treasury; (ii) obligations of agencies and instrumentalities of the
U.S. Government; (iii) money market instruments, such as certificates of
deposit, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instruments;
(v) municipal bond index futures and interest rate futures contracts; or (vi)
securities issued by other investment companies that invest in high quality,
short-term securities. Interest income from certain short-term holdings may be
taxable to shareholders as ordinary income.
In seeking to achieve its investment objective, the FUND may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the Federal alternative
minimum tax. Investments in such securities, however, will not exceed, under
normal market conditions, 20% of the FUND's total assets when added together
with any taxable investments held by the FUND.
The Municipal Obligations purchased by the FUND will consist of: (1)
municipal bonds rated "A" or better by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Corporation ("S&P") or, in certain
instances, municipal bonds with lower ratings if they are deemed by U.S. Trust
to be comparable to A-rated issues; (2) municipal notes rated "MIG-2" or better
("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or
better by S&P; and (3) municipal commercial paper rated "Prime-2" or better by
Moody's or "A-2" or better by S&P. If not rated, securities purchased by the
FUND will be of comparable quality to the above ratings as determined by U.S.
Trust under the supervision of the FUND's Board of Trustees. A discussion of
Moody's and S&P's rating categories is contained in Appendix A.
-2-
<PAGE>
Although the FUND does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by U.S. Trust. To the extent that
the FUND's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the FUND will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the FUND's
assets were not so concentrated.
SECURITIES IN WHICH THE FUND MAY INVEST
Municipal Obligations. The two principal classifications of Municipal
Obligations which may be held by the FUND are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
FUND are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity revenue bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The FUND's portfolio may also include "moral obligation" securities,
which are normally issued by special-purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund the restoration of which is
a moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the FUND.
The FUND may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments
("stripped") or both with respect to specific underlying Municipal Obligations.
In general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from Federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The FUNDs intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
Federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the 10% limit described in "Investment Limitations" in the Statement
of Additional Information.
Futures Contracts. The FUND may purchase and sell municipal bond index
and interest rate futures contracts as a hedge against changes in market
conditions. A municipal bond index assigns values daily to the municipal bonds
included in the index based on the independent assessment of dealer-to-dealer
municipal bond brokers. A municipal bond index futures contract represents a
firm commitment by which two parties agree to take or make a delivery of an
amount equal to a specified dollar amount times the difference between the
municipal bond index value on the last trading date of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the underlying securities in the index is made.
The FUND may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to the municipal bond index futures
contracts except that, instead of a municipal bond index, the "underlying
commodity" is represented by various types of fixed-income securities.
The FUND will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which it holds or intends to purchase where the transactions are
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intended to reduce risks inherent in the management of the FUND. The FUND may
engage in futures contracts only to the extent permitted by the Commodity
Futures Trading Commission ("CFTC") and the Securities and Exchange Commission
("SEC").
When investing in futures contracts, the FUND must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the FUND takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When the FUND takes
a short position in a futures contract, the FUND must maintain a segregated
account containing cash and/or certain liquid assets equal to the market value
of the securities underlying such contract, less any margin or deposit, which
must be at least equal to the market price at which the short position was
established.
Transactions by the FUND in futures contracts may subject the FUND to a
number of risks. Successful use of futures by the FUND is subject to the ability
of U.S. Trust to anticipate correctly movements in the direction of the market.
In addition, there may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts and movements in the
price of the instruments being hedged. Further, there is no assurance that a
liquid market will exist for any particular futures contract at any particular
time. Consequently, the FUND may realize a loss on a futures transaction that is
not offset by a favorable movement in the price of securities which it holds or
intends to purchase, or it may be unable to close a futures position in the
event of adverse price movements. Any income from investments in futures
contracts will be taxable income of the FUND.
Money Market Instruments. Money market instruments that may be
purchased by the FUND in accordance with its investment objectives and policies
stated above include, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation.
Investments in time deposits are limited to no more than 5% of the value of the
FUND's total assets at time of purchase.
Investments by the FUND in commercial paper will consist of issues that
are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
the FUND may acquire unrated commercial paper that is determined by U.S. Trust
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by the FUND.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by the FUND, the FUND may, from time to time as specified
in the instrument, demand payment of the principal of the instrument or may
resell the instrument to a third party. The absence of an active secondary
market, however, could make it difficult for the FUND to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
that the FUND is not entitled to exercise its demand rights, and the FUND could,
for this or other reasons, suffer a loss with respect to such instrument.
Repurchase Agreements. As stated above, the FUND may agree to purchase
portfolio securities subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). The FUND will
enter into repurchase agreements only with financial institutions such as banks
or broker/dealers which are deemed to be creditworthy by U.S. Trust under
guidelines approved by the FUND's Board of Trustees. The FUND will not enter
into repurchase agreements with U.S. Trust or its
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affiliates. Repurchase agreements maturing in more than seven days will be
considered illiquid securities subject to the 10% limit described in "Investment
Restrictions."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose the
FUND to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
the repurchase agreements will be taxable.
Investment Company Securities. The FUND may also invest in securities
issued by other investment companies that invest in high-quality, short-term
securities and that determine their net asset value per share based on the
amortized cost or penny-rounding method. In addition to the advisory fees and
other expenses the FUND bears directly in connection with its own operations, as
a shareholder of another investment company, the FUND would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the FUND's shareholders would indirectly bear the expenses of the FUND and
the other investment company, some or all of which would be duplicative. Such
securities will be acquired by the FUND within the limits prescribed by the
Investment Company Act of 1940 (the "1940 Act").
When-Issued and Forward Transactions and Stand-By Commitments. The FUND
may purchase eligible securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by the FUND to purchase or sell particular securities with payment
and delivery taking place in the future, beyond the normal settlement date, at a
stated price and yield. Securities purchased on a "forward commitment" or "when
issued" basis are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. It is expected that forward
commitments and "when-issued" purchases will not exceed 25% of the value of the
FUND's total assets absent unusual market conditions, and that the length of
such commitments will not exceed 45 days. The FUND does not intend to engage in
"when-issued" purchases and forward commitments for speculative purposes, but
only in furtherance of its investment objectives.
In addition, the FUND may acquire "stand-by commitments" with respect
to Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the FUND's option, specified Municipal Obligations at a
specified price. The FUND will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the FUND
would be valued at zero in determining the FUND's net asset value.
Risk Factors:
Futures contracts. The FUND may enter into contracts for the purchase
or sale for future delivery of municipal bond indices or fixed-income securities
which otherwise meet the FUND's investment policies, to the extent permitted by
the Commodity Futures Trading Commission (the "CFTC"). U.S. futures contracts
have been designed by exchanges which have been designated "contract markets" by
the CFTC, and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of contract markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make a delivery of an amount equal to a
specified dollar amount times the difference between the municipal bond index
value on the last trading date of the contract and the price at which the
futures contract is originally struck. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specific, interest rate-sensitive financial instrument
(debt security) at a specified price, date, time and place.
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The FUND will not use leverage when it enters into long futures or
options contracts. For each such long position the FUND will deposit cash or
cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the FUND upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the FUND fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the price of the currency or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
At any time prior to the expiration of a futures contract, the FUND may elect to
close the position by taking an opposite position, which will operate to
terminate the FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No secondary
market for such contracts exists. Although the FUND intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting the FUND to substantial losses. In such event, and in the event of
adverse price movements, the FUND would be required to make daily cash payments
of variation margin.
Repurchase Agreements. The FUND may enter into repurchase agreements.
Under a repurchase agreement, the FUND acquires a debt instrument for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the FUND to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate effective for the period
of time during which the FUND's money is invested. The FUND's risk is limited to
the ability of the seller to pay the agreed-upon sum upon the delivery date.
When the FUND enters into a repurchase agreement, it obtains collateral having a
value at least equal to the amount of the purchase price. Repurchase agreements
can be considered loans, as defined by the 1940 Act, collateralized by the
underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement, the
Portfolio Adviser will carefully consider the creditworthiness of the seller. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss.
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Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or the Portfolio
Adviser. The borrower at all times during the loan must maintain with the FUND
cash or cash equivalent collateral or provide to the FUND an irrevocable letter
of credit equal in value at all times to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the FUND any dividends or interest paid on such securities, and
the FUND may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The FUND may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. The staff of the SEC defines an illiquid security as any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the company has valued the instrument.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional
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buyers. FUND management anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this new regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, at the
close of each quarter of the FUND's taxable year, has the following
restrictions: (a) with respect to 50% of the FUND's total assets, the FUND may
not invest more than 5% of its total assets, at market value, in the securities
of one issuer (except the securities of the U.S. Government, its agencies and
instrumentalities) and (b) with respect to the other 50% of the FUND's total
assets, the FUND may not invest more than 25% of the market value of its total
assets in a single issuer (except the securities of the U.S. Government, its
agencies and instrumentalities). These two restrictions, hypothetically, could
give rise to the FUND having securities, other than U.S.
Government securities, of as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities of any
single company; (b) more than 5% of its total assets would be invested in the
securities of companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets would be
concentrated in companies within any one industry (except that this restriction
does not apply to U.S. Government securities); or (d) more than 5% of net assets
would be invested in warrants or rights. (Included within that amount, but not
to exceed 2% of the value of the FUND's net assets, may be warrants which are
not listed on the New York or American Stock Exchanges.)
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the market
value of its total assets). This does not preclude the FUND from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities. The FUND will not purchase additional securities
while the amount of any borrowings is in excess of 5% of the market value of its
total assets.
4. The FUND will not make loans of money or securities except (i)
through repurchase agreements, (ii) through loan participations, and (iii)
through the lending of its portfolio securities as described in the Prospectus
and in this Statement of Additional Information.
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5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired as part
of a merger, consolidation or acquisition of assets.
6. The FUND may not pledge, mortgage or hypothecate its assets, except
that to secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of the market
value of the FUND's total assets. Collateral arrangements with respect to the
FUND's permissible futures transactions, including initial and variation margin,
are not considered to be a pledge of assets for purposes of this restriction.
7. The FUND may not buy any securities or other property on margin
(except for the deposit of initial or variation margin in connection with
hedging and risk management transactions and for such short term credits as are
necessary for the clearance of transactions) or engage in short sales.
8. The FUND may not invest in companies for the purpose of exercising
control or management.
9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or selling
portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers and
Trustees of the FUND and the officers and directors of VCM or the Portfolio
Adviser who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
11. The FUND may not purchase or sell real property (including limited
partnership interests, but excluding readily marketable securities of companies
which invest in real estate).
12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.
13. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Adviser subject to the supervision of ^
VCM and the Trustees and pursuant to authority contained in the Investment
Advisory Contract between the FUND and VCM, and the Sub-Advisory Agreement
between VCM and the Portfolio Adviser. In selecting such brokers or dealers, the
Portfolio Adviser will consider various relevant factors, including, but not
limited to the best net price available, the size and type of the transaction,
the nature and character of the markets for the security to be purchased or
sold, the execution efficiency, settlement capability, financial condition of
the broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
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In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Adviser for the
FUND's use, which in the opinion of the Trustees, are reasonable and necessary
to the FUND's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to the FUND or to the Portfolio Adviser. Such
allocation shall be in such amounts as VCM or the Portfolio Adviser shall
determine and the Portfolio Adviser shall report regularly to VCM who will in
turn report to the Trustees on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Adviser's other clients may be
useful to the Portfolio Adviser in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Adviser's normal
independent research activities.
The Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. ("the Distributor"), and the Portfolio Adviser
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Adviser does
not provide for any reduction in the advisory fees as a result of profits
resulting from portfolio transactions effected through the Portfolio Adviser or
an affiliated brokerage firm.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to the Portfolio Adviser or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Adviser. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
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COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Portfolio securities of the FUND for which market quotations are
readily available (other than debt securities maturing in 60 days or less) will
be valued at market value. Securities which are traded on the Over-the-Counter
market will be valued at the last available bid price or at the mean between the
bid and asked prices, as determined by the Trustees. As of the date of this
Statement of Additional Information, such securities will be valued by the
latter method. Securities for which reliable quotations are not readily
available and all other assets will be valued at their respective fair market
value as determined in good faith by, or under procedures established by, the
Trustees of the FUND.
Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 p.m. (New York time) will be
confirmed at the previous offering price computed as of the close of trading on
the options exchanges (normally 4:15 p.m., New York time), provided the order is
received by the FUND's Transfer Agent prior to 4:15 p.m. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted timely to
the FUND. Orders received by dealers after 4:15 p.m. will be confirmed at the
next computed offering price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains.
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Under the rules of the Commission, funds advertising performance must include
total return quotes calculated according to the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value. The
Fund's aggregate annualized total rate of return, reflecting the initial
investment and reinvestment of all dividends and distributions for the one year
period ended April 30, 1995 and for the life of the Fund (August 12, 1993 to
April 30, 1995) was 10.74% and 5.83%, respectively.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. and Morningstar, Inc., or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial net asset value of the investment from the ending net asset value and by
dividing the remainder by the beginning net asset value. The FUND does not, for
these purposes, deduct the pro rata share of the account opening fee, which was
in effect from August, 1993 to ___________ 1994, from the initial value
invested. The FUND will, however, disclose the pro rata share of the account
opening fee and will disclose that the performance data does not reflect such
non-recurring charge and that inclusion of such charge would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under the
Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per
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share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b
YIELD = 2[(----------+1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Under this formula, interest earned on debt obligations for purposes of
"all" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
For the 30-day period ended April 30, 1995 the FUND's yield was 4.22%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
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selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its "investment company taxable income"
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Distributions by the FUND made during the taxable year or,
under specified circumstances, within twelve months after the close of the
taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company with investment objectives, policies and restrictions similar
to the FUND must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities and other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock or securities (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized or
unrealized losses on offsetting positions) from the sale or other disposition of
stock, or securities or foreign currencies (or options, futures or forward
contracts thereon) held for less than three months (the "Short-Short Gain
Test"). Because of the Short-Short Gain Test, the FUND may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. At April 30, 1995, the FUND
had a net capital loss carryover of $748,924 which is available through April
30, 20003 to offset future capital gains.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified
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<PAGE>
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto) or (iii) the asset is stock and the FUND grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (i) above. In addition, the FUND
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contract have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is generally treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. The FUND may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed straddle"
with other investments of the FUND that are not Section 1256 contracts. The
Internal Revenue Service has held in several private rulings and Treasury
Regulations now provide that gains arising from Section 1256 contracts will be
treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, or any net long-term capital loss incurred after October 31 as if
they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the
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<PAGE>
FUND's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case of
corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment
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<PAGE>
income or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be taxable
to the shareholder as dividends in the manner described above, although such
distributions economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the
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FUND's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against this gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having been paid. Such a
foreign shareholder would generally be exempt from U.S. Federal income tax on
gains realized on the sale of shares of the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
THE MANAGEMENT OF THE FUND:
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The
Virtus Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman
and Director, Federated Research Corp.;
Chairman, Passport Research, Ltd.; Director,
AEtna Life and Casualty Company;
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<PAGE>
Chief Executive Officer and Director,
Trustee, or Managing General Partner of the
Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment
Properties Corporation; Senior
Vice-President, John R. Wood and Associates,
Inc., Realtors; President, Northgate Village
Development Corporation; Partner or Trustee
in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman
and Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
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Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of
Pittsburgh-Downtown; member, Board of
Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing
General Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner,
Henny, Kochuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee,
or Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of
Blanchard Precious Metals Fund, Inc.;
President, Trustee and Treasurer of The
Virtus Funds; Vice President, Treasurer, and
Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated
Research Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and
Director, Federated Securities Corp.;
Trustee, Federated Services Company and
Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director
of some of the Funds; Vice President and
Treasurer of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State
Representative, Commonwealth of
Massachusetts; Director, Trustee, or Managing
General Partner of the Funds; formerly,
President, State Street Bank and Trust
Company and State Street Boston Corporation
and Trustee, Lahey Clinic Foundation, Inc.
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Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner,
Henny, Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr.,
J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
-21-
<PAGE>
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
-22-
<PAGE>
Officers and Trustees Compensation
<TABLE>
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
</TABLE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
-23-
<PAGE>
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the period from August 12, 1993 (commencement of operations)
to April 30, 1994 and the fiscal year ended April 30, 1995 the FUND's investment
management fees to the prior manager were as $89,180.00 and $127,835,
respectively, all which was voluntarily waived. For the same periods, the prior
manager paid fees to the Portfolio Adviser of $9,758.00.
THE ADVISORY AGREEMENT
The Portfolio Adviser furnishes investment advisory services to the
FUND pursuant to an Advisory Agreement between VCM and the Portfolio Adviser.
Pursuant to the Advisory Agreement, the Portfolio Adviser supervises the
investment and reinvestment of the cash, securities or other properties
comprising the FUND's portfolio, subject at all times to the direction of VCM
and the policies and control of the Trust's Board of Trustees. The Portfolio
Adviser gives the FUND the benefit of its best judgment, efforts and facilities
in rendering its services as Portfolio Adviser.
In carrying out its obligations, the Portfolio Adviser: (a) uses the
same skill and care in providing such service as it uses in providing services
to fiduciary accounts for which it has investment responsibilities; (b) obtains
and evaluates pertinent information about significant developments and
economics, statistical and financial data, domestic, foreign or otherwise,
whether affecting the economy generally or the FUND's portfolio and whether
concerning the individual issuers whose securities are included in the FUND's
portfolio or the activities in which the issuers engage, or with respect to
securities which it considers desirable for inclusion in the FUND's portfolio;
(c) determines which issuers and securities shall be represented in the FUND's
portfolio and regularly reports thereon to the Trust's Board of Trustees; (d)
formulates and implements continuing programs for the purchases and sales of the
securities of such issuers and regularly reports thereon to the Trust's Board of
Trustees; (e) is authorized to give instructions to the custodian and/or
sub-custodian of the FUND appointed by the Trust's Board of Trustees, as to
deliveries of securities, transfers of currencies and payments of cash for the
account of the FUND, in relation to the matters contemplated by this Agreement;
and (f) takes, on behalf of the FUND, all actions which appear to the Trust and
VCM necessary to carry into effect such purchase and sale programs and
supervisory functions as aforesaid, including the placing of orders for the
purchase and sale of securities for the FUND and the prompt reporting to VCM of
such purchases and sales.
The Portfolio Adviser is responsible for decisions to buy and sell
securities for the FUND's portfolio, broker-dealer selection, and negotiation of
brokerage commission rates. The Portfolio Adviser's primary consideration in
effecting a security transaction will be execution at the most favorable price.
In selecting a broker-dealer to execute each particular transaction, the
Portfolio Adviser will take the following into consideration: the best net price
available, the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the FUND on a continuing basis. Accordingly, the price to the FUND in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of Trustees
may determine, the Portfolio Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created under the Advisory Agreement or
otherwise solely by reason of its having caused the FUND to pay a broker or
dealer for effecting a portfolio investment transaction in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction, if the Portfolio Adviser determines
-24-
<PAGE>
in good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Portfolio Adviser's
overall responsibilities with respect to the FUND and to its other clients as to
which it exercises investment discretion. Subject to such policies as the Board
of Trustees may determine, the Portfolio Adviser will purchase and sell foreign
currency and futures contracts and other securities for the FUND. The Portfolio
Adviser is further authorized to allocate the orders placed by it on behalf of
the FUND to any affiliated broker-dealer of the FUND or to such brokers and
dealers who also provide research or statistical material, or other services to
the FUND, VCM or the Portfolio Adviser. Such allocation is in such amounts and
proportions as the Portfolio Adviser shall determine and the Portfolio Adviser
will report on said allocations regularly to the Board of Trustees of the Trust
indicating the brokers to whom such allocations have been made and the basis
therefor.
Any investment program undertaken by the Portfolio Adviser pursuant to
the Advisory Agreement, as well as any other activities undertaken by the
Portfolio Adviser on behalf of the FUND pursuant thereto, is at all times
subject to any directives of the Board of Trustees of the Trust. VCM provides
the Portfolio Adviser with written notice of all such directives, so long as the
Advisory Agreement remains in effect.
Pursuant to the Advisory Agreement, the Portfolio Adviser maintains, at
its expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.
Pursuant to the Advisory Agreement, upon request of VCM and with the
approval of the Trust's Board of Trustees, the Portfolio Adviser may perform
services on behalf of the FUND which are not required by the Advisory Agreement.
Such services will be performed on behalf of the FUND and the Portfolio
Adviser's cost in rendering such services may be billed monthly to VCM subject
to examination by VCM's independent accountants. Payment or assumption by the
Portfolio Adviser of any FUND expense that the Portfolio Adviser is not required
to pay or assume under the Advisory Agreement shall not relieve VCM or the
Portfolio Adviser of any of their obligations to the FUND or obligate the
Portfolio Adviser to pay or assume any similar FUND expense on any subsequent
occasions.
Pursuant to the Advisory Agreement, for the services to be rendered and
the facilities furnished hereunder, VCM pays the Portfolio Adviser a monthly fee
at the annual rate of .20% of the FUND's average daily net assets. Compensation
under the Advisory Agreement is calculated and accrued daily and the amounts of
the daily accruals are paid monthly. The compensation paid to the Portfolio
Adviser will not be reduced by the amount of brokerage commissions received by
the Portfolio Adviser or its affiliated broker-dealer pursuant to Section
17(e)(2) of the 1940 Act. For the period August 12, 1993 (commencement of
operations) to April 30, 1994 and the fiscal year ended April 30, 1995 the fees
paid to the Portfolio Adviser by the prior manager were $9,758 and $34,662,
respectively.
The Advisory Agreement was approved by the Trustees on March 24, 1995.
The Advisory Agreement will remain in force and effect for an initial term of
two years, and shall remain in effect thereafter from year to year, provided
that such continuance is specifically approved at least annually: (a) (i) by the
Trust's Board of Trustees or (ii) by the vote of a majority of the FUND's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
and (b) by the affirmative vote of a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of a party to the
Advisory Agreement (other than as a Trustee of the Trust), by votes cast in
person at a meeting specifically called for such purpose.
The Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or the Portfolio Adviser on sixty (60) days'
written notice to the other party. The Advisory Agreement automatically
terminates: (a) in the event of its assignment, the term "assignment" having the
meaning defined in Section 2(a)(4) of the 1940 Act, or (b) in the event that the
Investment Advisory Contract between the FUND and VCM shall terminate.
-25-
<PAGE>
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the fiscal year ended April 30, 1995, the Fund accrued payments under the
Plan amounting to $50,537.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
-26-
<PAGE>
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
>
FINANCIAL STATEMENTS
Audited financial statements of the Fund for the fiscal year ended
April 30, 1995 are attached hereto.
-27-
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Aaa: Bonds which are rated Aaa judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in the generic
rating classifications Aa and A in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated Prime-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
Description of Standard and Poor's Corporation's
Bond Ratings:
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
Plus (+) or Minus (-): The ratings AA and A may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessment of the likelihood
of timely payment of debts having an original maturity of no more than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
Notes with Respect to All Ratings:
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal that are similar to the risks of
lower-rated bonds. The Fund is dependent on Fund management's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-2
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Flexible Tax-Free
Bond Fund for the fiscal year ending April 30, 1995.
Since its inception on August 12, 1993, your Fund has sought to provide
maximum return while seeking a high level of federally tax-free yields.*
While 1994 was a year that saw one of the worst bond markets in history, as
a result of the bond rally that ended this fiscal year, your Fund shows a strong
performance.
We are pleased to report that, as indicated in the chart at left, your Fund
has outperformed the Lehman Brothers Current Municipal Bond Index, an unmanaged
index of municipal bond performance. In addition, for the twelve months ended
April 30, 1995, Lipper Analytical Services has ranked the Fund #2 for total
return, based on total reinvested performance, out of 197 general municipal debt
funds.
For the 1-year which ended the preceding month, March 31, 1995, the Fund
also ranked #2 in that same general municipal bond fund category. But this time,
the category size was slightly smaller at 193 funds.
The Fund is waiving certain management fees that are not reflected in these
rankings from Lipper Analytical Services. If the fees were reflected then the
rankings would change. Please remember, too, that past performance is not a
guarantee of future performance.
The Year In Review
The most severe damage to the fixed-income markets occurred in early 1994,
fueled by the Federal Reserve Board's two increases in short-term rates to 3.5%.
With mounting evidence that the economy was growing faster than expected, the
Fed's action was looked upon as a preemptive strike against inflation.
Through most of the spring and summer of 1994, the fixed-income markets
drifted, suffering from pervasive fears of accelerating inflation _ despite the
string of additional Federal Reserve Board interest rate hikes intended to bring
about the "soft landing" for the U.S. economy. At the end of 1994, the market
dropped again, pro-
(over, please)
The following information was represented as a line graph
- --------------------------------------------------------------------------------
The Value of a $10,000 Investment in the
Blanchard Flexible Tax-Free Bond Fund
from inception 8/12/93 through 4/30/95 as
compared to the Lehman Brothers Current
Municipal Bond Index for the same period
---------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Flexible Tax-Free Bond Fund*
---------------------------------------
1 year 10.74%
---------------------------------------
since inception 5.83%
---------------------------------------
FYE 4/30/94 FYE 4/30/95
FTFBF -0.48% 10.74%
LEHMAN BROS -1.01% 5.30%
FTFBF $10,000 $9,952 $11,021
LEHMAN BROS $10,000 $9,899 $10,242
Reflects deduction of $75 acct opening fee
Blanchard Lehman Brothers
Flexible Tax-Free Current Municipal
Bond Fund* Bond Index (D)
*The Fund is waiving certain management fees and other expenses. If fees were
not waived, the returns quoted above and the chart values above would be lower.
Total return includes changes in principal value and reinvested distributions.
Past performance is no guarantee of future results.
(D)Source: The Lehman Brothers Current Municipal Bond Index is an unmanaged
index of long-term, investment-grade, tax-exempt municipal bonds.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the Blanchard Flexible Tax-Free Bond Fund or the index.
- --------------------------------------------------------------------------------
<PAGE>
pelled by rising rates, year-end tax considerations, and investors selling out
of mutual funds. Toward the end of the fourth quarter, the market began a
tentative recovery, due in large part to yields that were perceived to be too
high, the short supply of municipal bonds, and a general perception that we were
nearing the end of Federal Reserve interventions.
In early 1995, the market was anticipating another rate increase, and this
had been priced into the forward yield curve. The eventual .50% hike in February
(which was less than many expected), rumblings from Washington that this would
be the last intervention (at least for the near term), and widespread
perceptions that the economy was slowing and that rates had overshot on the
upside caused the fixed-income markets to take off. As with the precipitous
selloff of a year ago, most of the bond market activity occurred within the
ensuing five-week period; this time the Fund was positioned to gain.
Throughout the past fiscal year, the portfolio was invested in a diverse
number of high-quality "essential service" revenue bonds and high-quality state
general obligation bonds. At the start of the fiscal year, as interest rates
were already high, we adopted a defensive posture by shortening maturities and
maintaining up to 25% cash reserves. At the end of 1994, as discount bonds
continued to drop in value, we restructured _ deploying cash reserves to
purchase many of these deeply discounted, or "de-minimized," bonds. In the first
quarter of 1995, as rates dropped, our aggressive positioning paid off, and the
Fund reported a total return of 10.74% for the twelve months ended April 30,
1995.
Naturally, past performance is no guarantee of future results. The Fund's
yield, principal value and investment return will vary with market conditions so
that shares, when redeemed, may be worth more or less than their original cost.
A Look Ahead
For now, the market has priced in economic slowdown and moderate inflation.
Any indications to the contrary could startle the market into a correction. The
wild card is the severely depreciated U.S. dollar, which the market has so far
ignored in favor of focusing on positive news on the domestic front. If the
dollar declines much further, market attention will eventually have to shift,
likely sparking a selloff. Added to these concerns, prices are up sharply. As a
result, we have adopted a slightly more cautious approach _ generally shortening
portfolios _ pending resolution of these near-term concerns.
Shareholders can rest assured that we will continue our search for tax-free
yields and capital gains opportunities in the coming year, maintaining our
high-quality focus while closely monitoring the state of the economy.
Sincerely,
KM:ml Kenneth McAlley
Director of Fixed Income Investments, U.S. Trust Company
Portfolio Managers of the Blanchard Flexible Tax-Free Bond Fund
* Some income may be subject to state and local taxes or to the Federal
Alternative Minimum Tax. Consult your tax advisor as to the tax consequences,
if any, of this Fund.
Distributed by Sheffield Investments, Inc. (1551) 07ARSL0695
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Principal Value
--------- -----
TAX-EXEMPT SECURITIES (87.97%)
Alaska (4.50%)
Valdez Alaska Marine
Terminal 5.50%, 10/01/28 $1,000,000 $ 877,680
----------
Arizona (4.58%)
Salt River Project
Arizona Agriculture
5.00%, 01/01/13 1,000,000 893,870
----------
Florida (4.61%)
Orlando, Florida Utilities
Commission on Water &
Electricity 5.25%,
10/01/23 1,000,000 899,490
----------
Georgia (4.85%)
Fulton County, Georgia
School District 5.625%,
1/01/21 1,000,000 945,460
----------
Maryland (5.01%)
Maryland State Community
Development Admin.
5.80%, 04/01/09 1,000,000 975,720
----------
Massachusetts (5.11%)
Massachusetts Housing
Finance Authority,
6.30%, 10/01/13 1,000,000 995,630
----------
New York (30.44%)
New York State Power
Authority Revenue and
General 5.125%,
01/01/10 2,000,000 1,842,520
----------
New York State
Environmental 6.875%,
06/15/10 1,000,000 1,067,160
----------
New York State Medical Care
Facility Finance Agency
6.50%, 08/15/29 1,000,000 1,026,410
----------
New York State Mortgage
Agency Revenue Series
41-A 6.45%, 10/01/14 1,000,000 1,011,770
----------
Triborough Bridge & Tunnel
Authority Revenue
6.00%, 01/01/13 1,000,000 987,040
5,934,900
----------
(Right Column)
Principal Value
--------- -----
Ohio (5.13%)
(b)Ohio State University
General Receipts Series B
4.75%, 12/01/06 $1,000,000 $ 1,000,000
----------
Texas (4.58%)
San Antonio, Texas Electric
and Gas Refunding
5.00%, 2/01/14 1,000,000 892,360
----------
Utah (4.72%)
Intermountain Power
Agency, Utah Power
5.50%, 07/01/20 1,000,000 919,610
----------
Washington (9.86%)
Washington State Series A
5.75%, 09/01/19 1,000,000 949,750
----------
King County Washington
General Obligation
6.25%, 01/01/34 1,000,000 972,930
1,922,680
Wisconsin (4.58%)
Wisconsin State
Transportation 5.50%,
07/01/22 1,000,000 892,890
----------
TOTAL TAX-EXEMPT
SECURITIES
(IDENTIFIED COST
$16,796,907) 17,150,290
Shares
------
TAX-EXEMPT CASH EQUIVALENT SECURITIES (.54%)
Dreyfus Tax-Exempt Cash
Management Fund 105,885 105,885
-----------
TOTAL TAX-EXEMPT
CASH EQUIVALENT
SECURITIES
(IDENTIFIED COST
$105,885) 105,885
-----------
TOTAL INVESTMENTS
(IDENTIFIED COST
$16,902,792) (a)
(88.51%) 17,256,175
CASH AND OTHER
ASSETS IN
EXCESS OF
LIABILITIES (11.49%) 2,239,387
-----------
NET ASSETS (100%) $19,495,562
===========
(a) The aggregate cost for federal income tax purposes is $16,902,792 the gross
unrealized appreciation is $591,078, the gross unrealized depreciation is
$237,695, resulting in net unrealized appreciation of $353,383.
(b) Variable rate security. Rate shown reflects the current rate as of April 30,
1995.
See notes to financial statements.
3
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
(Left Column)
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
Assets:
Investments in securities, at value (Identified
Cost $16,902,792) (note 1) ................................... $17,256,175
-----------
Receivables for:
Investments sold ............................................ 1,925,101
Shares of beneficial interest sold .......................... 36,559
Interest .................................................... 253,429
Investment advisor .......................................... 11,369
Deferred organizational expenses (note 1) ..................... 61,211
-----------
Total assets ............................................ 19,543,844
-----------
Liabilities:
Payables for:
Dividends ................................................... 11,902
Accrued expenses and other liabilities ........................ 36,380
-----------
Total liabilities ........................................ 48,282
-----------
Net assets ............................................... $19,495,562
===========
Net assets are comprised of:
Paid in capital (unlimited authorized shares of
beneficial interest, $.01 par value, 3,877,709
shares outstanding) .......................................... $20,737,821
Accumulated overdistributed net investment
income ....................................................... (12,275)
Accumulated realized loss ..................................... (1,583,367)
Unrealized net appreciation of investments 353,383
-----------
Net assets $19,495,562
===========
Net asset value per share $5.03
=====
(Right Column)
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
Investment income:
Interest .................................................... $1,244,175
----------
Expenses:
Investment management fee
(note 2) ........................................ $151,593
Accounting fees ................................... 81,015
Plan of distribution (note 3) ..................... 50,537
Transfer agent fees ............................... 48,147
Trustees' fees, retirement plan
curtailment and other
expenses (note 5) ............................... 28,893
Professional fees ................................. 28,599
Registration fees ................................. 22,388
Shareholder reports and notices ................... 19,649
Organizational expenses
(note 1) ........................................ 17,890
Custodian fees .................................... 8,731
Other ............................................. 2,318
--------
Total expenses 459,760
Less: Fees voluntarily waived
and expenses absorbed by
Manager and Distributor
(note 2) (248,019)
--------
Net expenses ................................................. 211,741
----------
Net investment income 1,032,434
----------
Realized and unrealized gain
(loss)-net (note 1):
Realized gain (loss) on
investments in securities
-net ..............................................(1,143,934)
Change in unrealized
appreciation on investments
-net ............................................. 1,890,650
Net realized and unrealized gains ............................ 746,716
----------
Net increase in net assets resulting
from operations ............................................ $1,779,150
==========
See notes to financial statements.
4
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the period
August 12,1993*
For the (commencement
Year Ended of operations) to
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Investment income-net ............................................. $1,032,434 $ 616,713
---------- -----------
Realized loss-net ................................................. (1,143,934) (380,822)
Change in unrealized appreciation or (depreciation)-net ........... 1,890,650 1,537,267)
---------- -----------
Net increase (decrease) in net assets resulting from operations .... 1,779,150 (1,301,376)
---------- -----------
Dividends and distributions to shareholders:
Investment income-net ............................................. (1,032,434) (616,113)
Dividends in excess of investment income-net ...................... (12,875) --
Realized gain on investments-net .................................. - (58,611)
---------- -----------
(1,045,309) (674,724)
---------- -----------
Transactions in shares of beneficial interest-
net increase (decrease) (note 6) .................................. (4,505,338) 22,243,159
---------- -----------
Net increase (decrease) in net assets ............................ (3,771,497) 20,267,059
Net assets:
Beginning of year ................................................. 23,267,059 3,000,000
---------- -----------
End of year (including overdistributed net investment income of
$12,275 and undistributed net investment income of $600,
respectively) .................................................... $19,495,562 $23,267,059
=========== ===========
<FN>
- ----------
*Commencement of operations
</FN>
</TABLE>
See notes to financial statements.
5
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1 - Organization and Accounting Policies:
Blanchard Flexible Tax-Free Bond Fund (the "Fund") is a series of Blanchard
Funds which was organized as a Massachusetts business trust on January 24, 1986.
The Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940, as amended (the "Act"). The Fund had
no operations before August 12, 1993 other than the sale of 600,000 shares of
beneficial interest for $3,000,000 to Sheffield Management Company (the
"Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic
exchanges are valued at the 4 PM EST price on that date, or if no sale is made
on that day, at the closing bid price (or the mean price in cases where a mean
is reported instead of the closing bid). In cases where a security is traded on
more than one exchange, it is valued at the quotation on the exchange determined
to be the primary market for such security by the Trustees or the Manager. All
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest available bid prices. Short-term debt
securities which mature in 60 days or less are valued at amortized cost if their
original maturity was 60 days or less. Short-term debt securities having a
maturity date of more than sixty days at the time of purchase are valued on a
mark to market basis until sixty days prior to maturity and thereafter at
amortized cost based on the 61st day. All other securities and other assets of
the Fund are valued at fair value as determined in good faith by the Trustees.
B. Accounting for Investments and Investment Income-Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Realized gains and losses on security transactions are determined on the
identified cost method. Interest income is accrued daily. Premiums or discounts
on debt securities are amortized or accreted as adjustments to interest income
over the lives of such securities.
C. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and non-taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
E. Organizational Expenses-The Fund's Manager paid the organizational
expenses of the Fund incurred prior to the public offering of its shares
amounting to $89,448. The Fund reimbursed the Manager
6
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
for such expenses and has deferred and is amortizing such expenses on the
straight-line method over five years from the date of commencement of the Fund's
operations.
F. Other-Certain expenses of the Blanchard Funds are allocated among the
funds based upon their relative average net assets.
NOTE 2 - Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Adviser described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of .75% of the Fund's
average daily net assets.
For the year ended April 30, 1995, the Manager and Distributor voluntarily
waived the advisory fee and distribution fee, which amounted to $127,835 and
$50,537, respectively, and absorbed $69,647 of other expenses of the Fund.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses,
are subject to the expense limitations imposed by one of the states in which
shares of the Fund are offered for sale. For the year ended April 30, 1995, the
Fund's expenses did not exceed such limitation.
Certain officers and/or Trustees of the Fund are officers/directors of the
Manager.
The Manager has a sub-advisory agreements with U.S. Trust (the "Portfolio
Adviser"). All fees for such services are paid by the Manager. The Manager has
advised the Fund that the fees paid to the Portfolio Advisor were $34,662 for
the year ended April 30, 1995.
NOTE 3 - Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor"), an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act which provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares, including but not
limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the plan, the Fund may pay distribution fees not to exceed .25%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor on or
after August 12, 1993, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$508,529. If the Plan is terminated or discontinued in accordance with its
terms, the obligation of the Fund to make payments to the Distributor pursuant
to the Plan will cease and the Fund will not be required to make any payments
past the date the Plan is terminated.
7
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 4 - Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments, Inc.
(the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Flexible Tax-Free Bond
Fund (collectively, the "Funds"). The transactions contemplated by the
Acquisition Agreement which have been approved by the Board of Trustees of the
Funds are conditioned upon the approval of the shareholders of each Fund, of (1)
a new investment management agreement with Signet, (2)a new distribution
agreement with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
NOTE 5 - Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments, aggregated $35,861,393 and $39,179,733,
respectively. The Manager has advised the Fund that, for the year ended April
30, 1995, it incurred costs, which were absorbed by the Manager, amounting to
$23,624 for performing internal accounting and transfer agency functions for the
Fund.
The Funds have adopted an unfunded noncontributory pension plan (the "Plan")
covering all independent directors/trustees of the Funds who will have served as
an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustees fees, retirement plan
curtailment and other expenses in the Statement of Operations for the year ended
April 30, 1995 was $5,230. As indicated in Note4, the Manager has entered into
an agreement which provides for the acquisition of the Manager by Signet.
Following the acquisition, the independent directors/trustees of the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $18,499 was recorded to reflect the previously unrecognized
prior service cost of the independent director/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $23,729 of accrued pension
expense.
NOTE 6 - Shares of Beneficial Interest:
<TABLE>
<CAPTION>
For the For the Period
Year Ended August 12, 1993* to
April 30, 1995 April 30, 1994
------------------------ -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold .................................. 2,686,852 $12,962,463 7,344,374 $37,526,118
Reinvestment of dividends and
distributions ........................ 171,998 825,614 114,233 575,313
--------- ----------- --------- -----------
2,858,850 13,788,077 7,458,607 38,101,431
Repurchased ........................... (3,854,437) (18,293,415) (2,585,311) (12,858,272)
--------- ----------- --------- -----------
Net increase (decrease) ............... (995,587) (4,505,338) 4,873,296 $25,243,159
======== ========== ========= ===========
<FN>
- ------------
*Commencement of operations.
</FN>
</TABLE>
8
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1995
NOTE 7 - Federal Income Taxes:
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $822,000 during fiscal 1995.
At April 30, 1995, the Fund had a net capital loss carryover of $748,924
which is available through April 30, 2003 to offset future capital gains. To the
extent that these carryover losses are used to offset future capital gains, it
is probable that the gains so offset will not be distributed to shareholders.
NOTE 8 - Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the period
August 12, 1993
For the (commencement
Year Ended of operations) to
April 30, 1995 April 30, 1994
-------------- --------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ...................... $4.77 $5.00
----- -----
Income from investment operations:
Net investment income .................................... .24 .18
----- -----
Net gains or losses on securities
(both realized and unrealized) .26 (.20)
Net income (loss) from investment operations .......... .50 (.02)
----- ------
Less dividends and distributions:
Dividends from investment income-net ..................... (.23) (.18)
Dividends in excess of investment income-net ............. (.01) -
Distributions from realized gains-net .................... - (.03)
Change in net asset value ............................. .26 (.23)
----- -----
Net asset value, end of period ............................ $5.03 $4.77
===== =====
Total return (not annualized) ............................. 10.74% (.48%)
Ratios/Supplemental Data:
Net assets, end of period ($ Million) .................... $ 19 $ 23
Ratio of expenses to average net assets .................. 1.00%(2) 0%*(2)(1)
Ratio of net investment income to average net assets ..... .87%(2) 6.79%(2)(1)
Portfolio turnover ........................................ 170% 190%
<FN>
- -----------
(1) Annualized.
(2) The ratios of expenses to average net assets
and net investment income to average net assets would have been 2.17% and
6.04%, respectively, for the year ended April 30, 1995 and 2.22% and 4.57%
(annualized), respectively, for the period ended April 30, 1994, if the
Fund's expenses had not been voluntarily waived and absorbed by the Manager
and Distributor (see notes 2 and 3).
</FN>
</TABLE>
9
<PAGE>
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Flexible Tax-Free Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Flexible Tax-Free Bond
Fund (the "Fund") at April 30, 1995, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
the year ended April 30, 1995 and for the period August 12, 1993 (commencement
of operations) through April 30, 1994, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 1995 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
1995 FEDERAL TAX NOTICE (Unaudited)
In accordance with Federal tax law the Fund hereby designates all dividends
paid from investment income-net during the fiscal year ended April 30, 1995 as
"exempt-interest dividends" (not subject to regular Federal personal income
taxes).
10
<PAGE>
Portfolio Adviser
United States Trust Company
of New York
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Blanchard Flexible
Tax-Free Bond Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
Blanchard
Flexible Tax-Free
Bond Fund
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Worldwide Emerging Markets Fund (the "FUND") is offered. Please
retain this document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History ............................................ 2
Investment Objective and Policies .......................................... 2
Risk Factors and Special Considerations .................................... 17
Investment Restrictions .................................................... 21
Portfolio Transactions ..................................................... 22
Computation of Net Asset Value ............................................. 24
Performance Information .................................................... 25
Additional Purchase and Redemption Information ............................. 26
Tax Matters ................................................................ 27
The Management of the FUND ................................................. 34
Management Services ........................................................ 39
Portfolio Advisory Services ................................................ 39
Administrative Services .................................................... 40
Distribution Plan .......................................................... 40
Description of the FUND .................................................... 41
Shareholder Reports ........................................................ 42
Appendix A ................................................................. A-1
Financial Statements ....................................................... B-1
Manager
Virtus Capital Management, Inc.
Portfolio Advisers
Martin Currie Inc. (Equity sector)
OFFITBANK (Fixed Income sector)
Distributor
Federated Securities Corp.
Custodian
United States Trust Company of New York
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP
Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies". The FUND's investment objective is to provide capital
appreciation and current income by investing primarily in equity and fixed
income securities in emerging markets around the world. This objective is a
fundamental policy and may not be changed except by a majority vote of
shareholders.
The FUND, as a non-diversified management investment company, has the
following restriction at the close of each quarter of its taxable year: (a) with
respect to 50% of the FUND's total assets, the FUND may not invest more than 5%
of its total assets, at market value, in the securities of one issuer (except
the securities of the U.S. Government, its agencies and instrumentalities) and
(b) with respect to the other 50% of the FUND's total assets, the FUND may not
invest more than 25% of the market value of its total assets in a single issuer
(except the securities of the U.S. Government, its agencies and
instrumentalities). These two restrictions, hypothetically, could give rise to
the FUND having securities, other than U.S. Government securities, of as few as
twelve issuers.
The FUND will invest primarily in securities (i) of issuers for which
the principal securities trading market is in an emerging market country; (ii)
traded in any market, of issuers that alone or on a consolidated basis derive
50% or more of their revenue from either goods produced, sales made or services
performed in emerging market countries; or (iii) of issuers organized under the
laws of, and with a principal office in, an emerging market country (hereinafter
referred to as "Emerging Market Securities".) Determination as to eligibility
will be made by the Portfolio Advisers based on publicly available information
and inquiries made to the companies.
"Emerging Market Equity Securities" means common and preferred stock
(including convertible preferred stock), convertible bonds and notes, warrants
and rights, units, interests in trusts and partnerships and American, European,
Global or any other types of Depositary Receipts. Under normal conditions, the
Fund expects to maintain a minimum of 65% of its assets in Emerging Market
Equity Securities.
Currently, investing in many emerging market countries is not feasible
or may involve unacceptable political risks. The Portfolio Advisers will focus
their investments on those emerging market countries in which they believe the
economies are developing strongly and in which the markets are becoming more
sophisticated. As markets in other countries develop, the Portfolio Advisers
expect to expand and further diversify the emerging market countries in which
they invest. The Portfolio Advisers do not intend to invest in any security in a
country where the currency is not freely convertible to U.S. dollars, unless a
Portfolio Adviser has obtained the necessary governmental licensing to convert
such currency or other appropriately licensed or sanctioned contractual
guarantee to protect such investment against loss of that currency's external
value, or the Portfolio Adviser has a reasonable expectation at the time the
investment is made that such governmental licensing or other appropriately
licensed or sanctioned guarantee would be obtained or that the currency in which
the security is quoted would be freely convertible at the time of any proposed
sale of the security by the FUND.
The FUND'S definition of Emerging Market Securities includes securities
of companies that may have characteristics and business relationships common to
companies in a country or countries other than an emerging market country. As a
result, the value of the securities of such companies may reflect economic and
market forces applicable to other countries, as well as to an emerging market
country. The FUND believes, however, that investment in such companies will be
appropriate because the FUND will invest only in those companies which, in its
view, have sufficiently strong exposure to economic and market forces in an
emerging market country such that their value will tend to reflect developments
in such emerging market country to a greater extent than developments in another
country or countries. For example, a Portfolio Adviser
-2-
<PAGE>
may invest in companies organized and located in countries other than an
emerging market country, including companies having their entire production
facilities outside of an emerging market country, when securities of such
companies meet one or more elements of the FUND's definition of an Emerging
Market Security and so long as the Portfolio Adviser believes at the time of
investment that the value of the company's securities will reflect principally
conditions in such emerging market country.
The FUND may invest indirectly in securities of emerging market country
issuers through sponsored or unsponsored American Depositary Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other types of Depositary Receipts (which, together with ADRs, EDRs and GDRs,
are hereinafter referred to as "Depositary Receipts"). Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. EDRs
and ADRs are Depositary Receipts typically issued by a United States bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. GDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
either a foreign or a United States corporation. Generally, Depositary Receipts
in registered form are designed for use in the United States securities markets
and Depositary Receipts in bearer form are designed for use in securities
markets outside the United States. For purposes of the FUND's investment
policies, the FUND's investments in ADRs, GDRs and other types of Depositary
Receipts will be deemed to be investments in the underlying securities.
Depositary Receipts other than those denominated in U.S. dollars will be subject
to foreign currency exchange rate risk. Certain Depositary Receipts may not be
listed on an exchange and therefore may be illiquid securities.
"Emerging Market Fixed Income Securities" means fixed income securities
of both governmental and corporate issuers (other than convertibles) of any
quality or maturity. Emerging Market Fixed Income Securities often are
considered to be of a credit quality below investment grade. "Investment grade"
fixed income securities are those rated within the four highest ratings
categories of Standard & Poor's Corporation ("S&P") or Moody's Investors
Service, Inc. ("Moody's") or, if a security is unrated, determined to be of
comparable quality. Securities rated BBB by S&P and Baa by Moody's are
investment grade fixed income securities but may have speculative
characteristics. Many emerging market fixed income securities are not rated by
U.S. ratings agencies. Investment in non-investment grade fixed income
securities involves a high degree of risk and can be speculative.
"Money Market Instruments" means short-term (less than twelve months to
maturity) investments in (a) obligations of the United States or emerging market
country governments, their respective agencies or instrumentalities; (b) bank
deposits and bank obligations (including certificates of deposit, time deposits
and bankers' acceptances) of U.S. or emerging market country banks denominated
in any currency; (c) floating rate securities and other instruments denominated
in any currency issued by international development agencies; (d) finance
company and corporate commercial paper and other short-term corporate debt
obligations of U.S. and emerging market country corporations meeting the credit
quality standards set by the FUND's Board of Trustees; and (e) repurchase
agreements with banks and broker-dealers with respect to such securities. While
the FUND does not intend to limit the amount of its assets invested in Money
Market Instruments, except to the extent believed necessary to achieve its
investment objective, it does not expect under normal market conditions to have
a substantial portion of its assets invested in Money Market Instruments.
However, when VCM determines that adverse market conditions exist, the FUND may
adopt a temporary defensive posture and invest its entire portfolio in Money
Market Instruments. In addition, the FUND may
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invest in Money Market Instruments in anticipation of investing cash positions.
To the extent the FUND is so invested, the FUND's investment objective may not
be achieved.
Securities in which the FUND may invest include those that are neither
listed on a stock exchange nor traded over-the-counter. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the FUND or less than what may be considered
the fair value of such securities. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which may be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the FUND may
be required to bear the expenses of registration. The FUND does not intend to
invest more than 15% of its total assets in non-publicly traded or otherwise
illiquid securities.
The FUND, together with any of its "affiliated persons" (as defined in
the Investment Company Act of 1940, as amended) (the "1940 Act"), may only
purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when the FUND or such "affiliated persons" hold
shares of any of the underlying investment companies, the FUND's ability to
invest fully in shares of those investment companies is restricted, and each
Portfolio Adviser must then, in some instances, select alternative investments
that would not have been its first preference.
The 1940 Act also provides that an underlying investment company whose
shares are purchased by the FUND will be obligated to redeem shares held by the
FUND and its affiliates only in an amount up to 1% of the underlying investment
company's outstanding securities during any period of less than 30 days. Shares
held by the FUND and its affiliates in excess of 1% of an underlying investment
company's outstanding securities therefore will be considered not readily
marketable securities, which together with other such illiquid securities may
not exceed 15% of the FUND's net assets.
In certain circumstances, an underlying investment company may
determine to make payment of a redemption by the FUND wholly or partly by a
distribution in kind of securities from its portfolio, in lieu of cash, in
conformity with rules of the Securities and Exchange Commission. In such cases,
the FUND may hold securities distributed by an underlying investment company
until the Portfolio Adviser determines that it is appropriate to dispose of such
securities.
There can be no assurance that funds for investing in certain emerging
market countries will be available for investment. The FUND does not intend to
invest in such funds unless, in the judgment of a Portfolio Adviser, the
potential benefits of such investment justify the payment of any applicable
premium or sales charge.
To the extent that the FUND's assets are not invested in securities of
issuers whose principal activities are in emerging markets, the remainder of the
assets may be invested in: (i) equity or debt securities of corporate or
governmental issuers located in industrialized countries; and (ii) money market
securities of the type described above. The Portfolio Adviser for the Fixed
Income sector will not invest in fixed income securities rated lower than Caa by
Moody's and CCC by S&P, or, if unrated, of comparable quality in the Portfolio
Adviser's opinion. Fixed income securities rated Baa by Moody's and BBB by
Standard & Poor's are considered investment grade obligations which lack
outstanding investment characteristics and may have speculative characteristics
with respect to capacity to pay interest and repay principal and to be of poor
standing. In addition, for temporary defensive purposes, the Portfolio Advisers
may invest less than 65% of the Fund's
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assets in securities of issuers whose principal activities are in emerging
markets, in which case the Fund may invest in U.S. Treasury securities and high
quality fixed income securities.
The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. However, the FUND's Portfolio
Advisers typically invest in a large number of issuers spread among a large
number of countries. Furthermore, the FUND intends to comply with the
diversification requirements imposed by the U.S. Internal Revenue Code of 1986,
as amended, for qualification as a regulated investment company. See "Tax
Matters" in the Prospectus and in the FUND's Statement of Additional
Information.
The FUND intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the FUND of any liability for
Federal income tax to the extent its earnings are distributed to shareholders.
See "Tax Matters". To so qualify, among other requirements, the FUND will limit
its investments so that, at the close of each calendar quarter, (i) not more
than 25% of the market value of the FUND's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the FUND will not own
more than 10% of the outstanding voting securities of a single issuer. For
purposes of the FUND's requirements to maintain diversification for tax
purposes, the issuer of a loan participation will be the underlying borrower. In
cases where the FUND does not have recourse directly against the borrower, both
the borrower and each agent bank and co-lender interposed between the FUND and
the borrower will be deemed issuers of the loan participation for tax
diversification purposes. The FUND's investments in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities") are not subject to these limitations. Since the FUND, as
a non-diversified investment company may invest in a smaller number of
individual issuers than a diversified investment company, an investment in the
FUND may, under certain circumstances, present greater risk to an investor than
an investment in a diversified company.
Options and Futures Strategies
Through the writing and purchase of options and the purchase and sale
of stock index futures contracts, interest rate futures contracts, foreign
currency futures contracts and related options on such futures contracts, the
Portfolio Adviser may at times seek to hedge against a decline in the value of
securities included in the FUND's portfolio or an increase in the price of
securities which it plans to purchase for the FUND or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce the FUND's current
return.
The ability of the FUND to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices, U.S.
Government securities and foreign currencies are relatively new and still
developing. The FUND, however, will not enter into an option or futures position
unless a liquid secondary market for such option or futures contract is believed
by FUND management to exist. There is no assurance that the FUND will be able to
effect closing transactions at any particular time or at an acceptable price.
Reasons for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing
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Corporation ("OCC") may not at all times be adequate to handle current trading
volume; or (vi) one or more Exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market thereon would cease to exist, although outstanding options on that
Exchange that had been issued by the OCC as a result of trades on that Exchange
would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures position
and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent the FUND
purchases or sells futures contracts and options on futures contracts and
purchases and writes options on securities and securities indexes for hedging
purposes, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in the
value of securities held by the FUND or decreases in the prices of securities
the FUND intends to acquire. It is impossible to predict the amount of trading
interest that may exist in various types of options or futures. Therefore, no
assurance can be given that the FUND will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, the FUND's ability to
engage in options and futures transactions may be limited by tax considerations.
Although the FUND will only engage in options and futures transactions for
limited purposes, it will involve certain risks which are described in the
Prospectus. The FUND will not engage in options and futures transactions for
leveraging purposes.
When the FUND purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a segregated
account with the FUND's custodian so that the amount so segregated, plus the
initial deposit and variation margin held in the account of its broker, will at
all times equal the value of the futures contract, thereby assuring that the use
of such futures is unleveraged.
Writing Covered Options on Securities
The FUND may write covered call options and covered put options on
optionable securities (stocks, bonds, foreign exchange, related futures, options
and options on futures) of the types in which it is permitted to invest in
seeking to attain its objective. Call options written by the FUND give the
holder the right to buy the underlying securities from the FUND at a stated
exercise price; put options give the holder the right to sell the underlying
security to the FUND at a stated price.
The FUND may write only covered options, which means that, so long as
the FUND is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the FUND will
maintain, in a segregated account, cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities or will hold a purchased put option with a higher strike price than
the put written. The FUND may also write combinations of covered puts and calls
on the same underlying security.
The FUND will receive a premium from writing a put or call option,
which increases the FUND's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the FUND
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the FUND assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its market value at the
time it is exercised resulting in a potential capital loss if the purchase price
is greater than
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the underlying security's current market value minus the amount of the premium
received, unless the security subsequently appreciates in value.
The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The FUND will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option. In
the case of a put option, any loss so incurred may be partially or entirely
offset by the premium received from a simultaneous or subsequent sale of a
different put option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by unrealized appreciation of the underlying security owned
by the FUND.
Options written by the FUND will normally have expiration dates not
more than one year from the date written. The exercise price of the options may
be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. The FUND may engage in buy-and-write
transactions in which the FUND simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, the FUND's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
FUND for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, the FUND's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and the FUND may or may not realize a loss.
To the extent that a secondary market is available on the Exchanges,
the covered call option writer may liquidate his position prior to the
assignment of an exercise notice by entering a closing purchase transaction for
an option of the same series as the option previously written. The cost of such
a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
Purchasing Put and Call Options on Securities
The FUND may purchase put options to protect its portfolio holdings in
an underlying security against a decline in market value. Such hedge protection
is provided during the life of the put option since the FUND, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the FUND will reduce any
profit it might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
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The FUND may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the FUND, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the FUND will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Purchase and Sale of Options and Futures on Stock Indices
The FUND may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices. Options are also traded in certain industry or market segment indices
such as the Oil Index, the Computer Technology Index and the Transportation
Index.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Portfolio Adviser expects general stock market prices to rise,
it might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the FUND's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Portfolio Adviser expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in the FUND's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the FUND's
position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures
The FUND may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of
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hedging fixed income and interest sensitive securities against the adverse
effects of anticipated movements in interest rates.
The FUND may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The FUND
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
FUND will purchase securities upon termination of the futures contract.
The FUND may sell U.S. dollar and non-U.S. dollar interest rate futures
contracts in anticipation of an increase in the general level of interest rates.
Generally, as interest rates rise, the market value of the fixed income
securities held by the FUND will fall, thus reducing the net asset value of the
FUND. This interest rate risk can be reduced without employing futures as a
hedge by selling long-term fixed income securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the FUND in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of the FUND's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the FUND's investments which are being
hedged. While the FUND will incur commission expenses in entering and closing
out futures positions (which is done by taking an opposite position from the one
originally entered into, which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures Contracts
The FUND may purchase and write call and put options on stock index and
interest rate futures contracts. The FUND may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing and selling the underlying futures. For example, the FUND may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the FUND intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, the FUND may buy or sell foreign currencies or may deal in forward
currency contracts. The FUND may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, the FUND may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, the FUND may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the FUND intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the FUND
will be covered.
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A currency futures contract sale creates an obligation by the FUND, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the FUND, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The FUND will write (sell) only covered put and call options on
currency futures. This means that the FUND will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The FUND will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the FUND in cash, Treasury
bills, or other high-grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high-grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times the
number of options written by the FUND. In the case of put options on currency
futures written by the FUND, the FUND will hold the aggregate exercise price in
cash, Treasury bills, or other high-grade short-term obligations in a segregated
account with its custodian, or own put options on currency futures or short
currency futures, with the difference, if any, between the market value of the
put written and the market value of the puts purchased or the currency futures
sold maintained by the FUND in cash, Treasury bills or other high-grade
short-term obligations in a segregated account with its custodian. If at the
close of business on any day the market value of the put options purchased or
the currency futures sold by the FUND falls below 100% of the market value of
the put options written by the FUND, the FUND will so segregate an amount of
cash, Treasury bills or other high-grade short-term obligations equal in value
to the difference.
If other methods of providing appropriate cover are developed, the FUND
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the FUND will be required to deposit as "initial margin" an amount
of cash and short-term U.S. Government securities generally equal to from 5% to
10% of the contract amount. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
enhance investment performance and for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward contracts,
will be utilized as described above. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such
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securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the FUND may purchase put options on the foreign currency. If the value of the
currency does decline, the FUND will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the FUND may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the FUND deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the FUND could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Also, where the FUND anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the FUND
could write a put option on the relevant currency which, if the currency moves
in the manner projected, will expire unexercised and allow the FUND to hedge
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the FUND would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the FUND also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian, which acts as the FUND's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the FUND has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
or the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the FUND in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated account
with its custodian or with a designated sub-custodian.
Mortgage and Asset-Backed Securities
Subject to the approval of the Board of Trustees of the FUND, the FUND
may invest in foreign mortgage-backed and asset-backed securities. The FUND will
only purchase mortgage-backed and asset-backed securities which, in its opinion,
equate generally to U.S. standards of "investment grade" obligations.
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Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including pass-through securities and collateralized mortgage
obligations. The yield and credit characteristics of mortgage-backed securities
differ in a number of respects from traditional debt securities.
Asset-backed securities have similar structural characteristics to
mortgage-backed securities. However, the underlying assets are not mortgage
loans or interests in mortgage loans but include assets such as motor vehicle
installment sales or installment loan contracts, leases of various types of real
and personal property, and receivables from revolving credit (credit card)
agreements.
Forward Foreign Currency Exchange Contracts
The value of the FUND's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the FUND may incur costs in connection
with conversions between various currencies.
The FUND may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the FUND from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The FUND may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when the FUND believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the FUND's securities denominated in such foreign
currency, or when the FUND believes that the U.S. dollar may suffer a
substantial decline against foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation, the FUND may, in the alternative, enter
into a forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where it believes that the U.S. dollar value of the currency to be
sold pursuant to the forward contract will fall whenever there is a decline in
the U.S. dollar value of the currency in which portfolio securities of the
sector are denominated ("cross-hedge"). If the FUND enters into a position
hedging transaction, cash not available for investment or U.S. Government
Securities or other high quality debt securities will be placed in a segregated
account in an amount sufficient to cover the FUND's net liability under such
hedging transactions. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the FUND's commitment
with respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, the FUND may purchase a call
option permitting it to purchase the amount of foreign currency being hedged by
a forward sale contract at a price no higher than the forward contract price or
the FUND may purchase a put option permitting it to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices would
result in lower overall performance for the FUND than if it had not entered into
such contracts.
While the pursuit of foreign currency gain is not a primary objective
of the FUND, the FUND may, from time to time, hold foreign currency to realize
such gains. (These gains may constitute non-qualifying income that is subject to
the 10% limitation with respect to the "Income Requirements" of Subchapter M of
the Internal Revenue Code of 1986, as amended, which is discussed herein under
"Dividends, Capital Gains Distributions and Tax Matters".)
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The FUND will enter into forward foreign currency exchange contracts as
described hereafter. When the FUND enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to establish
the U.S. dollar cost or proceeds. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the FUND will be able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships.
When a Portfolio Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the FUND's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is extremely difficult and the successful execution of a
short-term hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall strategies.
However, the Trustees of the FUND believe that it is important to have the
flexibility to enter into such forward contracts when a Portfolio Adviser
determines that the best interests of the FUND will be served.
Generally, the FUND will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, the FUND may either sell the portfolio security and make delivery of
the foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the FUND to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the FUND to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the FUND is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the FUND is obligated to
deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the FUND
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the FUND enters into an offsetting contract for
the purchase of the foreign currency, the FUND will realize a gain to the extent
the price of the currency the FUND has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the FUND
will suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.
The FUND's dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the FUND is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Portfolio Adviser. It also should be realized that this method of protecting
the value of the FUND's portfolio securities against the decline in the value of
a currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time.
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Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.
Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the FUND may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent the
FUND from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the FUND to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it
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determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Regulatory Matters
In connection with its proposed futures and options transactions, the
FUND will file with the Commodity Futures Trading Commission ("CFTC") a notice
of eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
FUND may engage in futures and options transactions only to the extent permitted
by the CFTC and the Securities and Exchange Commission ("SEC").
The Staff of the SEC has taken the position that the purchase and sale
of futures contracts and the writing of related options may involve senior
securities for the purposes of the restrictions contained in Section 18 of the
Investment Company Act of 1940 on investment companies issuing senior
securities. However, the Staff has issued letters declaring that it will not
recommend enforcement action under Section 18 if an investment company:
(i) sells futures contracts to offset expected declines in
the value of the investment company's portfolio
securities, provided the value of such futures contracts
does not exceed the total market value of those
securities (plus such additional amount as may be
necessary because of differences in the volatility factor
of the portfolio securities vis a vis the futures
contracts);
(ii) writes call options on futures contracts, stock indexes
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding long futures position, by its ownership of
portfolio securities which correlate with the underlying
stock index, or otherwise;
(iii) purchases futures contracts, provided the investment
company establishes a segregated account ("cash
segregated account") consisting of cash or cash
equivalents in an amount equal to the total market value
of such futures contracts less the initial margin
deposited therefor; and
(iv) writes put options on futures contracts, stock indices
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding short futures position, by establishing a
cash segregated
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account in an amount equal to the value of its obligation
under the option, or otherwise.
The FUND will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the foregoing.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the 1940 Act, collateralized by the underlying securities.
The return on the collateral may be more or less than that from the repurchase
agreement. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the collateral is at least equal
to the value of the loan, including the accrued interest earned. In evaluating
whether to enter into a repurchase agreement, VCM will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the FUND may incur a
loss.
Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 15% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient
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institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
The FUND may invest up to 15% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering".
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. FUND management anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
RISK FACTORS AND SPECIAL CONSIDERATIONS
Lower Quality Fixed Income Securities.
The FUND may invest up to 35% of its assets in lower quality fixed
income securities. The lower quality fixed income securities that may comprise
all of the fixed income sector's investments generally produce a higher current
yield than do fixed income securities of higher quality. However, these high
risk/high return securities are considered speculative because they involve
greater price volatility and risk than do higher quality fixed income securities
and yields on these fixed income securities will tend to fluctuate over time.
Although the market value of all fixed income securities varies as a result of
changes in prevailing interest rates (e.g., when interest rates rise, the market
value of fixed income securities can be expected to decline), values of lower
quality fixed income securities tend to react differently than the values of
higher quality fixed income securities. The prices of lower quality fixed income
securities are less sensitive to changes in interest rates than higher quality
fixed income securities. Conversely, lower quality fixed income securities also
involve a greater risk of default by the issuer in the payment of principal and
income and are more sensitive to economic downturns and recessions than higher
quality fixed income securities. The financial stress resulting from an economic
downturn could have a greater negative effect on the ability of issuers of lower
quality fixed income securities to service their principal and interest
payments, to meet projected business goals and to obtain additional financing
than on more creditworthy issuers. In the event of an issuer's default in
payment of principal or interest on such securities, or any other fixed income
securities in the FUND's portfolio, the net asset value of the FUND will be
negatively affected. Moreover, as the market for lower quality fixed income
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securities is a relatively new one, a severe economic downturn might increase
the number of defaults, thereby adversely affecting the value of all outstanding
lower quality fixed income securities and disrupting the market for such
securities. Fixed income securities purchased by the FUND as part of an initial
underwriting present an additional risk due to their lack of market history.
These risks are exacerbated with respect to fixed income securities rated Caa or
lower by Moody's or CCC or lower by S&P. Unrated fixed income securities
generally carry the same risks as do lower rated fixed income securities.
Lower quality fixed income securities are typically traded among a
smaller number of broker- dealers rather than in a broad secondary market.
Purchasers of lower quality fixed income securities tend to be institutions,
rather than individuals, a factor that further limits the secondary market. To
the extent that no established retail secondary market exists, many lower
quality fixed income securities may not be as liquid as Treasury and investment
grade bonds. The ability of the FUND to sell lower quality fixed income
securities will be adversely affected to the extent that such securities are
thinly traded or illiquid. Moreover, the ability of the FUND to value lower
quality fixed income securities becomes more difficult, and judgment plays a
greater role in valuation, as there is less reliable, objective data available
with respect to such securities that are thinly traded or illiquid. Unrated
fixed income securities are not necessarily of lower quality than rated fixed
income securities, but they may not be attractive to as many buyers.
Because investors may perceive that there are greater risks associated
with the lower quality fixed income securities of the type in which the FUND may
invest, the yields and prices of such securities may tend to fluctuate more than
those for lower quality fixed income securities. Changes in perception of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner in the lower quality segments of the fixed income securities market than
do changes in higher quality segments of the fixed income securities market,
resulting in greater yield and price volatility. The speculative characteristics
of lower rated fixed income securities are set forth in Appendix A.
OFFITBANK believes that the risks of investing in such high yielding,
fixed income securities may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and S&P is
considered in selecting portfolio securities, they evaluate the safety of the
principal and the interest payments of the security, not their market value
risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. OFFITBANK relies, primarily, on its
own credit analysis. This may suggest, however, that the achievement of one
portion of the FUND's investment objective is more dependent on OFFITBANK's
proprietary credit analysis, than is otherwise the case for a fund that invests
exclusively in higher quality fixed income securities.
Once the rating of a portfolio security or the quality determination
ascribed by OFFITBANK to an unrated fixed income security has been downgraded,
OFFITBANK will consider all circumstances deemed relevant in determining whether
to continue to hold the security.
Investors should recognize that investing in securities of companies in
emerging countries involves certain special considerations and risk factors,
including those set forth below, which are not typically associated with
investing in securities of U.S. companies.
Foreign Currency Considerations
The FUND's assets will be invested principally in securities of
entities in emerging markets and substantially all of the income received by the
FUND will be in foreign currencies. However, the FUND will compute and
distribute its income in U.S. dollars, and the computation of income will be
made on the date
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that the income is earned by the FUND at the foreign exchange rate in effect on
that date. Therefore, if the value of the foreign currencies in which the FUND
receives its income falls relative to the U.S. dollar between the earning of the
income and the time at which the FUND converts the foreign currencies to U.S.
dollars, the FUND will be required to liquidate securities in order to make
distributions if the FUND has insufficient cash in U.S. dollars to meet
distribution requirements. The liquidation of investments, if required, may have
an adverse impact on the FUND's performance. In addition, if the liquidated
investments include securities that have been held less than three months, such
sales may jeopardize the FUND's status as a regulated investment company under
the Code. See "Tax Matters".
Since the FUND will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the value of securities in the FUND's portfolio and the
unrealized appreciation or depreciation of investments. Further, the FUND may
incur costs in connection with conversions between various currencies. Foreign
exchange dealers realize a profit based on the difference between the prices at
which they are buying and selling various currencies. Thus, a dealer normally
will offer to sell a foreign currency to the FUND at one rate, while offering a
lesser rate of exchange should the FUND desire immediately to resell that
currency to the dealer. The FUND will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward, futures
or options contracts to purchase or sell foreign currencies.
The FUND may seek to protect the value of some portion or all of its
portfolio holdings against currency risks by engaging in hedging transactions.
The FUND may enter into forward currency exchange contracts and currency futures
contracts and options on such futures contracts, as well as purchase put or call
options on currencies, in U.S. or foreign markets. In order to hedge against
adverse market shifts, the FUND may purchase put and call options on stocks,
write covered call options on stocks and enter into stock index futures
contracts and related options. There can be no guarantee that instruments
suitable for hedging currency or market shifts will be available at the time
when the FUND wishes to use them. Moreover, investors should be aware that in
most emerging countries the markets for certain of these hedging instruments are
not highly developed and that in many emerging countries no such markets
currently exist.
Investment and Repatriation Restrictions
Some emerging market countries have laws and regulations that currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchange in these countries is permitted by certain emerging
market countries through investment funds which have been specifically
authorized. The FUND may invest in these investment funds subject to the
provisions of the 1940 Act. If the FUND invests in such investment funds, the
FUND's shareholders will bear not only their proportionate share of the expenses
of the FUND (including operating expenses and the fees of VCM), but also will
indirectly bear similar expenses of the underlying investment funds. See also
"Tax Matters" for a discussion of passive foreign investment companies.
In addition, prior governmental approval for foreign investments may be
required under certain circumstances in some emerging market countries, and the
extent of foreign investment in domestic companies may be subject to limitation
in other emerging countries. Foreign ownership limitations also may be imposed
by the charters of individual companies in emerging market countries to prevent,
among other concerns, violation of foreign investment limitations.
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Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging market countries. The FUND could be adversely affected by delays in or
a refusal to grant any required governmental registration or approval for such
repatriation or by withholding taxes imposed by emerging market countries on
interest or dividends paid on securities held by the FUND or gains from the
disposition of such securities. See "Tax Matters".
Emerging Market Securities Markets
Trading volume in emerging market securities markets is substantially
less than that in the United States. Further, securities of some emerging market
country companies are less liquid and more volatile than securities of
comparable U.S. companies. Commissions for trading on emerging market country
stock exchanges are generally higher than commissions for trading on U.S.
exchanges, although the Portfolio Adviser will endeavor to achieve the most
favorable net results on the FUND's portfolio transactions and may, in certain
instances, be able to purchase its portfolio investments on other stock
exchanges where commissions are negotiable.
Companies in emerging market countries are not generally subject to
uniform accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. companies.
Consequently, there may be less publicly available information about an emerging
market country company than about a U.S. company. Further, there is generally
less government supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States.
Investments in Unlisted Securities
Although the Fund expects to invest primarily in listed securities, it
may invest up to 15% of its total assets in the aggregate in unlisted Emerging
Market Equity Securities, including investments in new and early stage
companies, which may involve a high degree of business and financial risk that
can result in substantial losses. Because of the absence of any trading market
for these investments, the FUND may take longer to liquidate these positions
than would be the case for publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized on these
sales could be less than those originally paid by the FUND. Further, companies
whose securities are not publicly traded may not be subject to public disclosure
and other investor protection requirements applicable to publicly traded
securities.
Economic and Political Risks
The economies of individual emerging market countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
With respect to any emerging market country, there is the possibility
of nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of the
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FUND's investment in those countries. In addition, it may be difficult to obtain
and enforce a judgment in a court outside of the United States.
Portfolio Turnover
Generally, the FUND's portfolio turnover rate is not expected to exceed
100%. A 100% portfolio turnover rate would occur if 100% of the securities owned
by the FUND were sold and either repurchased or replaced by it within one year.
The FUND's portfolio turnover rate is, generally, the percentage computed by
dividing the lesser of FUND's purchases or sales exclusive of short-term
securities, by the average value of the FUND's total investments exclusive of
short-term securities. High portfolio turnover involves correspondingly greater
brokerage commissions, other transaction costs, and a possible increase in
short-term capital gains or losses. Shareholders are taxed on any such net gains
at ordinary income rates. Because any capital gains realized would be
distributed to shareholders at year-end, shareholders should consider the impact
of such distributions on their own tax position. For the period March 1, 1994
(commencement of operations) to April 30, 1994 and the fiscal year ended April
30, 1995, the Funds portfolio turnover rates were 0% and 132%, respectively.
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
The FUND may not:
1. Purchase securities on margin, except such short-term
credits as may be necessary for clearance of transactions and the maintenance of
margin with respect to futures contracts.
2. Make short sales of securities or maintain a short
position (except that the FUND may maintain short positions in foreign currency
contracts, options and futures contracts).
3. Issue senior securities, except that the FUND may borrow
up to 33 1/3% of the value of its total assets from a lender (i) to increase its
holdings of portfolio securities, (ii) to meet redemption requests, or (iii) for
such short-term credits as may be necessary for the clearance or settlement of
the transactions. The FUND may pledge its assets to secure such borrowings.
4. Invest 25% or more of the total value of its assets in a
particular industry, except that this restriction shall not apply to U.S.
Government Securities.
5. Make any investment for the purpose of exercising control
or management.
6. Buy or sell commodities or commodity contracts or real
estate or interests in real estate, except that it may purchase and sell futures
contracts on stock indices and foreign currencies, securities which are secured
by real estate or commodities, and securities of companies which invest or deal
in real estate or commodities.
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7. Make loans, except through repurchase agreements
collateralized by the underlying securities. The securities underlying a
repurchase agreement will be marked to market every business day and the value
of the collateral will be at least equal to the value of the loan, including the
accrued interest earned.
8. Act as an underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to be
an underwriter under applicable securities laws.
9. Purchase or otherwise acquire the securities of any
investment company (except in connection with a merger, consolidation,
acquisition of substantially all of the assets or reorganization of another
investment company) if, as a result, the FUND and all of its affiliates would
own more than 3% of the total outstanding stock of that company.
10. Purchase or retain securities of any issuer (other than
the shares of the FUND) if to the FUND's knowledge, those officers and Trustees
of the FUND and the officers and directors of VCM, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities.
11. Invest directly in oil, gas or other mineral exploration
or development programs or leases; provided, however, that if consistent with
the objective of the FUND, the FUND may purchase securities of issuers whose
principal business activities fall within such areas.
In order to permit the sale of shares of the FUND in certain
states, the FUND may make commitments more restrictive than the restrictions
described above. Should the FUND determine that any such commitment is no longer
in the best interests of the FUND and its shareholders it will revoke the
commitment by terminating sales of its shares in the state(s) involved.
As a condition to the sale of its shares in the state of
Texas, the Fund will not invest in warrants valued at the lower of cost or
market, in excess of 5% of the value of the Fund's net assets, and no more than
2% of such value may be warrants which are not listed on the New York or
American Stock Exchanges.
Percentage restrictions apply at the time of acquisition and
any subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Advisers subject to the supervision of
VCM and the Trustees and pursuant to authority contained in the Investment
Advisory Contract between the FUND and VCM, and the Sub-Advisory Agreements
between VCM and the Portfolio Advisers. In selecting such brokers or dealers,
each Portfolio Adviser will consider various relevant factors, including, but
not limited to the best net price available, the size and type of the
transaction, the nature and character of the markets for the security to be
purchased or sold, the execution efficiency, settlement capability, financial
condition of the broker-dealer firm, the broker-dealer's execution services
rendered on a continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to a Portfolio Adviser for the FUND's
use, which in the opinion of the Trustees, are reasonable and necessary to the
FUND's normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to a Portfolio Adviser. Such
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allocation shall be in such amounts as VCM shall determine and each Portfolio
Adviser shall report regularly to VCM who will in turn report to the Trustees on
the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to a
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Adviser's other clients may be
useful to the Portfolio Adviser in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Adviser's normal
independent research activities.
Each Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. (the "Distributor"), and the Portfolio Adviser
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from brokerage commissions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, each Sub-Advisory Agreement between VCM and a Portfolio Adviser does
not provide for any reduction in the advisory fees as a result of profits
resulting from brokerage commissions effected through the Portfolio Adviser or
an affiliated brokerage firm.
The Trustees had adopted certain procedures incorporating the standards
of Rule 17e-1 issued under the 1940 Act which requires that the commissions paid
the Distributor or to each Portfolio Manager or an affiliated broker-dealer must
be "reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time".
The Rule and the procedures also contain review requirements and require VCM to
furnish reports to the Trustees and to maintain records in connection with such
reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND. For the period March
1, 1994 (commencement of operations) to April 30, 1994 and the fiscal year ended
April 30, 1995, the FUND incurred brokerage commission expenses of $4,763 and
$139,224, respectively.
It may happen that the same security will be held by other clients of
VCM or of a Portfolio Adviser. When the other clients are simultaneously engaged
in the purchase or sale of the same security, the prices and amounts will be
allocated in accordance with a formula considered by VCM to be equitable to
each, taking into consideration such factors as size of account, concentration
of holdings, investment objectives, tax status, cash availability, purchase
cost, holding period and other pertinent factors relative to each account. In
some cases this system could have a detrimental effect on the price or volume of
the security as far as the FUND is concerned. In other cases, however, the
ability of the FUND to participate in volume transactions will produce better
executions for the FUND.
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COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
The FUND will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
Portfolio securities of the FUND which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the FUND.
Money market instruments with less than sixty days remaining to
maturity when acquired by the FUND will be valued on an amortized cost basis by
the FUND, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the FUND acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Board determines during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders received by dealers prior to 4:15 P.M. (New York Time) will be
confirmed at the previous offering price computed as of the close of trading on
the options exchanges (normally 4:15 P.M., New York Time), provided the order is
received by the FUND's Transfer Agent prior to 4:15 P.M. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted timely to
the FUND. Orders received by dealers after 4:15 P.M. will be confirmed at the
next computed offering price.
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PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the 1, 5 or 10 year periods or at the end
of the 1, 5 or 10 year periods (or
fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee which was in effect through December, 1994, from the
initial value invested. The FUND will, however, disclose the pro rata share of
the account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would reduce
the performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules. The FUND's aggregate annualized total rate of return,
reflecting the initial investment and reinvestment of all dividends and
distributions, for the one year period ended April 30, 1995 and for the life of
the FUND (March 1, 1994 to April 30, 1995) were -19.80% and -17.44%,
respectively.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the
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FUND's Post-Effective Amendment to its Registration Statement, computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD 2[(a-b +1)6-1]
------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
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The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the FUND accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the FUND actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated
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securities that it has held for less than three months. However, the Short-Short
Gain Test will not prevent the FUND from disposing of investments at a loss,
since the recognition of a loss before the expiration of the three-month holding
period is disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of the
Short-Short Gain Test. However, income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256, will generally be treated as ordinary
income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the FUND as part of a "straddle" (which
term generally excludes a situation where the asset is stock and the FUND grants
a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and the FUND
grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (1) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital
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gain or loss. For purposes of the Short-Short Gain Test, the holding period of
an option written by the FUND will commence on the date it is written and end on
the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The FUND, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the FUND that are
not Section 1256 contracts. The IRS has held in several private rulings (and
Treasury Regulations now provide) that gains arising from Section 1256 contracts
will be treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256.
The FUND may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the FUND invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the FUND
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
FUND receives distributions of any such ordinary earning or capital gain from
the PFIC. If the FUND does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (1) any gain
recognized by the FUND upon sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the FUND from the
PFIC will be allocated ratably over the FUND's holding period of its interest in
the PFIC, (2) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is received
shall be included in the FUND's gross income for such year as ordinary income
(and the distribution of such portion by the FUND to shareholders will be
taxable as an ordinary income dividend, but such portion will not be subject to
tax at the FUND level), (3) the FUND shall be liable for tax on the portions of
such gain or excess distribution so allocated to prior years in an amount equal
to, for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest corporate tax rate in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the FUND to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the FUND thereon) will again
be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations the FUND can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the FUND's adjusted tax basis
in that share ("mark to market gain"). Such mark to market gain will be included
by the FUND as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and the FUND's
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holding period with respect to such PFIC stock commences on the first day of the
next taxable year. If the FUND makes such election in the first taxable year it
holds PFIC stock, the FUND will include ordinary income from any mark to market
gain, if any, and will not incur the tax described in the previous paragraph.
However, until the proposed regulations are finalized, the application of the
mark to market and related rules to the Fund is unclear.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year. As
of April 30, 1995, the Fund elected to defer a net currency loss of $144,048 and
a net capital loss of $2,474,894 incurred in fiscal 1995.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the
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<PAGE>
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
of the capital gain recognized upon the FUND's disposition of "small business"
stock will be subject to tax.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rate share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
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<PAGE>
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the IRS for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the FUND that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
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Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having paid. Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale of shares of the
FUND, capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
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<PAGE>
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc., Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Asociates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh
Medical Center-Downtown, Member, Board of
Directors, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Trustee
and Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of
some of the Funds; Vice President and Treasurer
of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
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<PAGE>
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.D. Government Securities Fund; 1-3 years;
Federated U.S. Government Securities Fund; 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust/ Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II, Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of July 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of July 31, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
Officers and Trustees Compensation
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND+ THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Truste $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trust $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
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<PAGE>
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus. For the period from March 1, 1994 (commencement of operations)
to April 30, 1994, the FUND's investment management fee paid to the prior
manager was $9,452,.00 less voluntary expense reimbursement of $9,452.00. For
the fiscal year ended April 30, 1995, the FUND's investment management fee paid
to the prior manager was $174,720 less voluntary expense reimbursement of
$90,297.
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<PAGE>
PORTFOLIO ADVISORY SERVICES
Pursuant to sub-advisory agreements between VCM and Martin Currie, and
between VCM and OFFITBANK (the "Sub-Advisory Agreements"), VCM, not the FUND,
has agreed to pay Martin Currie a monthly fee at the annual rate of .50% of the
first $150 million of the equity sector's average daily net assets and .40% of
the sector's average daily net assets in excess of $150 million, and to pay
OFFITBANK a monthly fee at the annual rate of .45% of the first $150 million of
the fixed income sector's average daily net assets and .35% of the sector's
average daily net assets in excess of $150 million. For the period March 1, 1994
(commencement of operations) to April 30, 1994 and the fiscal year ended April
30, 1995, the aggregate amounts paid by the prior manager to the sub-advisers
were as follows: Martin Currie, Inc.: $1,740 and $59,427, respectively; and
OFFITBANK: $0 and $2,703, respectively.
Under the terms of each Sub-Advisory Agreement, the Portfolio Adviser
has discretion to purchase and sell securities for the FUND, except as limited
by the FUND's investment objective, policies and restrictions. Although each
Portfolio Adviser's activities are subject to general oversight by VCM and the
FUND's Board of Trustees, selection of specific securities in which the FUND may
invest are made by the Portfolio Adviser.
In carrying out its obligations, each Portfolio Adviser uses the same
skill and care in providing such services as it uses in providing services to
fiduciary accounts for which it has investment responsibilities; obtains and
evaluates pertinent information about significant developments and economic,
statistical and financial data, domestic, foreign or otherwise, whether
affecting the economy generally or the FUND's portfolio and whether concerning
the individual issuers whose securities are included in the FUND's portfolio or
the activities in which the issuers engage, or with respect to securities which
it considers desirable for inclusion in the FUND's portfolio; determines which
issuers and securities shall be represented in the FUND's portfolio and
regularly reports thereon to the FUND's Board of Trustees; fromulates and
implements continuing programs for the purchases and sales of the securities of
such issuers and regularly reports thereon to the FUND's Board of Trustees, as
to deliveries of securities, transfers of currencies and payments of cash for
the account of the FUND, in relation to the matters contemplated by the
Sub-Advisory Agreement; and takes, on behalf of the FUND, all actions which
appear to the FUND and VCM necessary to carry into effect such purchase and sale
programs and supervisory functions as aforesaid, including the placing of orders
for the purchase and sale of securities for the FUND and the prompt reporting to
VCM of such purchases and sales.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment,
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<PAGE>
telephone facilities, and various personnel including clerical, supervisory, and
computer, as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Funds; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Trust reasonably requests. For the fiscal year ended April 30, 1995, the FUND
accrued payments under the Plan amounting to $72,335.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
-41-
<PAGE>
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
FINANCIAL STATEMENTS
Audited financial statements for the fiscal year ended April 30, 1995
are attached hereto.
-42-
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
*A: Bond which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
*Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-1
<PAGE>
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated Prime-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Corporation's
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. capacity to pay interest and repay principal is extremely strong.
*AA: Debt rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
*A: Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
A-2
<PAGE>
*BBB: Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" Rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "C" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1: The rating "C1" is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
A-3
<PAGE>
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
A-4
<PAGE>
Dear Shareholders,
Enclosed please find the Annual Report for your Blanchard Worldwide Emerging
Markets Fund (formerly known as the Blanchard Emerging Markets Growth & Income
Fund) for the fiscal year ending April 30, 1995.
Since the launch of the Blanchard Worldwide Emerging Markets Fund, the
returns available from global emerging markets have been generally disappointing
and incredibly volatile. Fortunately, past performance is no indication of
future performance. And indeed, the high volatility associated with the world's
emerging markets has in other years led to significant returns for investors.
That being said, here's a closer look at what happened in the emerging
markets and your Blanchard Worldwide Emerging Markets Fund in fiscal 1994, as
well as our outlook for fiscal 1995.
The Year In Review
The world's emerging markets were negatively affected by the change in the
U.S. interest rate environment which began in early February 1994. The
progressive tightening of U.S. monetary policy throughout the year significantly
diminished the flow of U.S. investor dollars into emerging markets. The impact
was initially felt in Asia, and as the year progressed, markets in Central
Europe and Latin America also came under pressure.
In addition to this diminished flow of U.S. investor dollars, a series of
assassinations in Mexico, followed by the clumsy handling of the peso's
devaluation in mid-December, caused the investment climate within Latin America
to deteriorate rapidly. As a result, investors' perception of the risk inherent
in South American investment dramatically increased and caused a sharp decline
in most Latin American markets.
As 1995 began, the world's emerging markets continued the volatile trend
established in 1994. Latin America has experienced a roller-coaster ride, with
The following information was reprint as a line graph.
The Value of a $10,000 Investment in the
Blanchard Worldwide Emerging Markets Fund
from inception 3/1/94 through 4/30/95 as
compared to Morgan Stanley Emerging
Markets Index for the same period
-----------------------------------------
Avg. Annual Returns through 4/30/95
Blanchard Worldwide Emerging Markets Fund*
-----------------------------------------
1 year -19.80%
since inception -17.44%
-----------------------------------------
FYE 4/30/94 FYE 4/30/95
BMBF -0.25% -19.80%
MORGAN STANLEY -7.00% -4.78%
BMBF $ 9,963 $9,938 $7,970
MORGAN STANLEY $10,000 $9,300 $8,855
Reflects deduction of $37.50 acct opening fee
Blanchard Morgan Stanley
Worldwide Emerging Emerging
Markets Fund^ Markets Index(D)
*Total return quoted above reflects reinvestment of distributions, but does not
reflect the deduction of the one-time account opening fee. If deducted, return
would be lower. Past performance is no guarantee of future results.
(D)Source: Morgan Stanley Emerging Markets Index is an unmanaged index comprised
of the average equity market performance of 20 emerging market countries
throughout the world.
^Reflects deduction of one-time account opening fee of $37.50.
This chart is for comparative purposes only and is not meant to reflect future
performance of the Fund or the index.
(over, please)
<PAGE>
both currencies and markets coming under significant pressure. This has led to a
backlash of investor sentiment against emerging markets investing, affecting
several markets in Asia, as well as Central Europe. Generally, investors'
concerns have centered on countries where significant current account deficits
have led to anxiety over currency values.
The portfolio performance of your Blanchard Worldwide Emerging Markets Fund
over the past year was negatively impacted by the high proportion of assets that
were allocated to Latin America at the time of the Mexican devaluation.
Ironically, our underweight position in these markets had affected overall
returns in the summer, and the increased allocation to Latin America was in
anticipation of what we believed would be a buoyant 1995! Investments in Poland
and India also underperformed in 1994.
A Look Ahead
As 1995 has progressed, investor sentiment has gradually improved, faced
with incredible valuation opportunities present in Latin America and,
selectively, in Asia and Central Europe.
Latin American markets, in particular, have bounced back almost to the
levels at which they were standing in late December. The Fund's overweighted
position in Peru has been of particular benefit to total returns.
In other regions, the portfolio's position in Poland has benefited from a
50% run in the market since the end of March, and India has recovered nicely as
well. Also, selective markets in South East Asia have begun to recover, and our
weightings to markets like Thailand have proved rewarding.
A word of caution, however: Confidence remains fragile, and with growth
estimates being pared back in South America and selectively in Asia, overall
returns are likely to continue to be difficult to achieve.
However, there are some bright spots. First, the long-term trend for
investment in these markets is well established and will continue for the
foreseeable future; and second, valuations look significantly attractive in a
number of the areas into which we are investing. Poland, for example, was
selling for less than 6 times 1995 earnings before its recent recovery.
In summary, provided that a long-term view is adopted, we believe it is
still an excellent time to be investing in these rapidly developing markets
where the potential exists for significant returns over time.
Sincerely,
JF:ml James Fairweather
Martin Currie Inc.
Portfolio Managers of the Blanchard Worldwide Emerging Markets Fund
Distributed by Sheffield Investments, Inc. (1551) 08ARSL0695
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995
(Left Column)
Shares Value
------ -----
EMERGING MARKETS SECURITIES (92.31%)
ARGENTINA (3.50%)
Consumer Goods & Related (1.83%)
BAESA (ADR).............................. 5,600 $ 154,000
Quilmes Industrial S.A. (Regd)........... 3,600 68,400
-----------
222,400
-----------
Utilities & Related (1.67%)
Compania Naviera Perez Compac "B" Shares. 24,920 101,669
YPF Sociedad Anonima..................... 5,000 101,250
-----------
202,919
-----------
TOTAL ARGENTINA.................... 425,319
-----------
BRAZIL (12.14%)
Basic Industries (6.14%)
Acesita PN (ADR)......................... 13,620 209,250
Compania Vale Do Rio Doce (ADR).......... 4,300 179,852
Usiminas (ADR)........................... 29,500 356,000
-----------
745,102
-----------
Capital Goods (1.31%)
(d)Rhodia Ster (GDR)........................ 11,687 158,986
-----------
Energy Related (1.54%)
*Electrobras.............................. 451,000 124,414
*Electrobras "B" Shares................... 235,000 63,284
-----------
187,698
-----------
Industrial Related (1.64%)
*Cemig (ADS).............................. 8,541 199,584
-----------
Telecommunications (1.51%)
Telebras (ADR)........................... 5,120 183,115
-----------
TOTAL BRAZIL....................... 1,474,485
-----------
CHILE (4.45%)
Basic Industries (1.55%)
Antofagasta Holding...................... 33,500 156,320
*Sociedad Quimica Y Minera (ADR).......... 900 31,388
-----------
187,708
-----------
Capital Goods (2.39%)
Madeco S.A. (ADR)........................ 6,000 174,750
Maderas Y Sinteticos Sociedad (ADS)...... 6,500 113,750
-----------
288,500
-----------
Financial Services (.51%)
Banco O'Higgins (ADS).................... 3,400 62,050
-----------
TOTAL CHILE........................ 538,258
-----------
CHINA (1.24%)
Financial Services (1.24%)
*China North Industries
Investment Ltd........................... 150,000 150,000
-----------
COLOMBIA (3.09%)
Basic Industries (2.13%)
Cementos Diamante (GDS).................. 11,800 258,066
-----------
Financial Services (.96%)
Banco Ganadero S.A. (GDR)................ 6,100 115,900
-----------
TOTAL COLOMBIA..................... 373,966
-----------
(Right Column)
Shares Value
------ -----
ECUADOR (.50%)
Construction (.50%)
La Cemento Nacional de Ecuador (GDR)..... 256 $ 60,160
-----------
HONG KONG (3.30%)
Banking (1.48%)
Dao Heng Bank Group Ltd. ................ 70,000 179,047
-----------
Manufacturing (.29%)
Champion Technology...................... 465,000 35,441
*Star Paging Int'l. Warrants 12/31/96..... 40,000 248
-----------
35,689
-----------
Transportation & Shipping (1.53%)
*Shanghai Haixing Shipping................ 1,000,000 186,022
-----------
TOTAL HONG KONG.................... 400,758
-----------
HUNGARY (1.52%)
Capital Goods (.80%)
*Matav Rt. ............................... 550 97,345
-----------
Consumer Goods & Related (.20%)
*Kekkut Asvanyjz (GDR).................... 2,800 24,284
-----------
Financial Services (.26%)
*Konzum (GDR)............................. 7,600 31,176
-----------
Telecommunications (.26%)
*Hungarian Telephone & Cable Co. ......... 2,700 31,725
-----------
TOTAL HUNGARY...................... 184,530
-----------
INDIA (7.20%)
Basic Industries (2.45%) Principal
Gujarat Ambuja Cements Ltd. ---------
Conv. Bd. 3.50%, 6/30/99............... $80,000 103,000
Shares
------
*Hindalco Industries Ltd. (GDR)........... 3,500 91,000
United Phosphorus (GDR).................. 4,300 104,275
-----------
298,275
-----------
Consumer Goods & Related (1.38%)
*DCW Ltd. (GDR)........................... 4,800 62,400
*Dr. Reddy's Laboratories (GDR)........... 10,000 105,000
-----------
167,400
-----------
Investment Companies (3.37%)
*Himalayan Fund........................... 7,803 106,901
*Himalayan Fund Bonus Wts. 12/31/96....... 1,180 738
*Indian Opportunities Fund Ltd............ 22,807 301,514
-----------
409,153
-----------
TOTAL INDIA........................ 874,828
-----------
INDONESIA (2.74%)
Banking (.79%)
Bank Internasional Indonesia............. 41,000 95,477
-----------
Chemicals (.29%)
*PT Keramika Indonesia Assoc. ............ 41,000 34,886
-----------
Capital Goods (.52%)
*PT Argha Karya Prima..................... 12,000 8,598
PT Indosat (ADR)......................... 1,500 54,187
-----------
62,785
-----------
3
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
(Left column)
Shares Value
------ -----
Consumer Goods & Related (1.14%)
PT Andayani Megah........................ 34,000 $ 30,452
PT Concord Benefic Textile Co. .......... 39,000 77,721
*PT Kalbe Farma........................... 8,500 30,262
-----------
138,435
-----------
TOTAL INDONESIA.................... 331,583
-----------
ISRAEL (.34%)
Investment Companies (.23%)
First Israel Fund........................ 2,300 27,600
-----------
Financial Services (.11%)
*Ampal American Israel Cl. A ............. 2,200 14,025
-----------
TOTAL ISRAEL....................... 41,625
-----------
KOREA (8.87%)
Basic Industries (.46%)
Kumho Construction & Energy Co. Pfd. .... 8,000 56,142
-----------
Capital Goods (.83%)
*Anam Industrial Co. Ltd. Pfd. ........... 4,000 50,318
*Dae Woo Heavy Industries Pfd. ........... 6,000 50,764
-----------
101,082
-----------
Consumer Goods & Related (1.99%)
*Midopa Co. .............................. 6,000 74,769
*Samsung Electronics Pfd. ................ 2,036 166,651
-----------
241,420
-----------
Energy Related (.12%) Principal
Ssangyong Oil Refining Co. ---------
3.00% 12/31/04 .................... $20,000 14,050
Shares -----------
Financial Services (1.69%) ------
*Commercial Bank of Korea................. 12,000 124,352
*Hanshin Securities Co. Pfd. ............. 3,000 37,975
*Jin Heung Svgs. & Finance................ 1,500 42,697
-----------
205,024
-----------
Transportation (.34%)
*Dong Bang Forwarding Co. ................ 1,000 40,795
-----------
Utilities & Related (3.44%)
*Korea Electric Power Co. ................ 9,000 329,376
*Yukong Ltd. ............................. 2,000 88,673
-----------
418,049
-----------
TOTAL KOREA........................ 1,076,562
-----------
LUXEMBOURG (1.23%)
Telecommunications (1.23%)
*Millicom International Cellular.......... 6,000 149,250
-----------
MALAYSIA (2.87%)
Basic Industries (1.57%)
Aokam Perdana Ltd. ...................... 42,400 190,465
-----------
Consumer Goods & Related (.41%)
Edaran Otomobile Nasional................ 7,000 49,858
-----------
Financial Services (.89%)
Westmont Berhard......................... 25,000 108,256
-----------
TOTAL MALAYSIA..................... 348,579
-----------
(Right column)
Shares Value
------ -----
MEXICO (3.55%)
Basic Industries (.51%)
Kimberly Clark de Mexico (ADR)........... 3,000 $ 61,976
-----------
Financial Services (3.04%)
*Ceteco (ADR)............................. 9,500 260,965
*Grupo Carso S.A. (ADR)................... 10,000 108,526
-----------
369,491
-----------
TOTAL MEXICO....................... 431,467
-----------
PAKISTAN (.05%)
Basic Industries (.05%)
*D.G. Khan Cement Ltd. ................... 4,620 6,369
-----------
PERU (7.90%)
Capital Goods (1.64%)
Cementos Lima "C" Shares................. 7,800 172,908
Cementos Norte Pacasmayo................. 7,632 26,552
-----------
199,460
-----------
Financial Services (1.84%)
Banco Wiese (ADR)........................ 8,149 73,339
*Banco Wiese " C" Shares.................. 2 4
Banco de Credito del Peru................ 71,785 150,486
-----------
223,829
-----------
Real Estate (2.36%)
*Peru Real Estate S.A. "B" Shares.......... 345,000 286,350
-----------
Telecommunications (2.06%)
*CIA Peruana de Telefonos "B" Shares....... 129,874 217,808
*La Neuva Com de Telefonos................. 39,756 32,273
-----------
250,081
-----------
TOTAL PERU......................... 959,720
-----------
POLAND (4.26%)
Capital Goods (1.21%)
*Bydogoska Fabryka Kabli (PDR)............ 3,000 33,060
*Polifarb Ciezyn (PDR).................... 11,500 63,607
*T. C. Debica (PDR)....................... 4,000 50,666
-----------
147,333
-----------
Consumer Goods & Related (1.44%)
*Irena Huta Szkla Gospodarcz (PDR)........ 1,400 19,625
*Mostostal Exports (PDR).................. 13,775 77,353
Zwyeic Brewing Company (PDR)............. 1,019 77,443
-----------
174,421
-----------
Financial Services (1.61%)
Bank Rozwoju Eksportu S.A. (PDR)......... 9,200 135,565
Elektrim Trading Co. (PDR)............... 15,760 60,220
-----------
195,785
-----------
TOTAL POLAND....................... 517,539
-----------
RUSSIA (.46%)
Telecommunications (.46%)
*Petersburg Long Distance Inc. ........... 11,000 56,375
-----------
SINGAPORE (1.43%)
Capital Goods (1.43%)
Clipsal Industries Holdings Ltd. ........ 48,000 103,680
GP Batteries Int'l. Ltd. ................ 29,000 69,600
-----------
TOTAL SINGAPORE.................... 173,280
-----------
4
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
(Left column)
Shares Value
------ -----
SLOVENIA (.51%)
Banking (.51%)
*Slovenia Kredit Bank (IDR)............... 210 $ 61,377
-----------
SOUTH AFRICA (5.34%)
Basic Industries (1.54%)
*Iscor Ltd. .............................. 72,633 90,120
Sasol Ltd. .............................. 10,000 96,718
-----------
186,838
-----------
Consumer Goods & Related (1.08%)
*JD Group................................. 17,000 62,245
South African Breweries Ltd. ............ 2,500 69,085
-----------
131,330
-----------
Financial Services (.60%)
Barlow Rand Ltd. ........................ 3,700 37,320
*Nedcor Ltd. ............................. 2,900 35,461
-----------
72,781
-----------
Real Estate (1.23%)
Safmarine & Rennie Hldgs. Ltd. .......... 48,000 149,223
-----------
Metals & Mining (.89%)
Samancor Ltd. ........................... 7,800 108,311
-----------
TOTAL SOUTH AFRICA................. 648,483
-----------
TAIWAN (6.02%)
Basic Industries (.82%)
*Tuntex Distinct (GDS).................... 8,500 99,875
-----------
Industrial & Related (1.16%) Principal
Pacific Construction Conv. Bond ---------
2.13%, 10/1/98......................... $150,000 140,997
-----------
Shares
Investment Companies (4.04%) ------
*Taiwan Opportunities Fund Ltd. .......... 47,500 490,200
-----------
TOTAL TAIWAN....................... 731,072
-----------
(Right column)
Shares Value
------ -----
THAILAND (9.11%)
Capital Goods (.37%)
*Hana Microelectronics.................... 12,000 $ 45,131
-----------
Financial Services (7.68%)
Bangkok Bank Public Co. Ltd. ............ 20,000 193,535
Dhana Siam Finance & Securities Co. ..... 33,000 140,882
General Finance & Securities............. 46,500 185,282
MDX Corporation Ltd. .................... 31,500 65,318
Nat'l Finance & Securities............... 40,000 136,613
Siam City Bank Ltd. ..................... 140,000 143,728
Siam City Credit Fin. & Securities....... 22,000 67,087
-----------
932,445
-----------
Transportation (1.06%)
Precious Shipping Corp. ................. 12,000 128,807
-----------
TOTAL THAILAND..................... 1,106,383
-----------
URUGUAY (.69%)
Financial Services (.69%)
*Banco Commercial S.A. ................... 6,400 83,200
-----------
TOTAL EMERGING
MARKETS SECURITIES
(IDENTIFIED COST
$12,596,388)..................... 11,205,168
-----------
Principal
SHORT-TERM SECURITIES (2.89%) ---------
U.S. GOVERNMENT OBLIGATIONS (2.89%)
U.S. Treasury Bill 5.50%, 5/4/95
(AMORTIZED COST $349,840).......... $350,000 349,840
-----------
TOTAL INVESTMENTS
(IDENTIFIED COST $12,946,228)(a) (95.20%). 11,555,008
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES (4.80%)(b).......... 583,044
-----------
NET ASSETS (100%).................. $12,138,052
===========
(a) The aggregate cost for federal income tax purposes is $13,038,908; the gross
unrealized appreciation is $460,586 and the gross unrealized depreciation is
$1,944,486; resulting in net unrealized depreciation of $1,483,900.
(b) Includes one open forward currency contract as of April 30, 1995. The Fund
sold 15,761 South African Commercial Rand and purchased US $4,360 for
delivery on May 2, 1995. At April 30, 1995, there was no unrealized
appreciation or depreciation on this contract.
* Non-income producing.
(d) Registered under SEC rule 144A; resale restricted as to qualified
institutional buyers, represents 1.31% of net assets.
See notes to financial statements.
5
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND-PORTFOLIO OF INVESTMENTS
April 30, 1995 (continued)
Schedule of Foreign Currency Held as of April 30, 1995
Currency Held Cost Market Value
------------- ---- ------------
Argentina Peso........................ 102,859 $102,864 $102,854
So. African Commercial Rand........... 188,067 52,323 51,970
-------- --------
$155,187 $154,824
======== ========
6
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
Statement of Assets and Liabilities
April 30, 1995
Assets:
Investments in securities, at value
(Identified Cost $12,946,228) (note 1).................. $11,555,008
Cash....................................................... 479,261
Foreign currencies (Identified Cost $155,187).............. 154,824
Receivables for:
Investments sold........................................ 452,347
Shares of beneficial interest sold...................... 158,840
Dividends............................................... 25,083
Interest................................................ 3,652
Foreign withholding tax reclaimable..................... 308
Deferred organizational costs (note 1...................... 116,081
-----------
Total assets...................................... 12,945,404
-----------
Liabilities:
Payables for:
Investments purchased................................... 762,573
Accrued expenses and other liabilities..................... 44,779
-----------
Total liabilities................................. 807,352
-----------
Net assets........................................ $12,138,052
===========
Net assets are comprised of:
Paid in capital (unlimited authorized shares of beneficial
interest, $.01 par value, 1,895,181 shares outstanding). $16,198,715
Accumulated investment loss-net ........................... (115,247)
Accumulated realized loss-net.............................. (2,552,372)
Unrealized net depreciation of investments................. (1,393,044)
-----------
Net assets................................................. $12,138,052
===========
Net asset value per share.................................. $6.40
=====
See notes to financial statements.
7
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
STATEMENT OF OPERATIONS
For the Year Ended April 30, 1995
<TABLE>
<CAPTION>
Investment income:
<S> <C>
Interest (net of $3,051 foreign withholding tax)........................ $ 187,123
Dividends (net of $7,632 foreign withholding tax)....................... 122,193
-----------
Total income........................................................ 309,316
-----------
Expenses
Investment management fee (note 2)...................................... $ 174,720
Custodian fees.......................................................... 90,580
Accounting fees......................................................... 73,203
Plan of distribution fees (note 3)...................................... 72,335
Transfer agent fees..................................................... 54,178
Professional fees....................................................... 47,739
Organizational expenses................................................. 29,000
Registration fees....................................................... 27,099
Shareholder reports and notices......................................... 19,067
Trustees' fees, retirement plan curtailment and other expenses (note 5). 16,786
Other................................................................... 1,606
---------
Total expenses...................................................... 606,313
Less: Expenses absorbed by Manager (note 2)......................... (90,297)
---------
Net expenses............................................................ 516,016
-----------
Investment loss - net................................................... (206,700)
-----------
Realized and unrealized gain (loss) - net (note 1):
Investments in securities-net (net of $20,951 foreign capital gains tax) (2,292,242)
Foreign currency contracts and foreign exchange
transactions-net...................................................... (167,440) (2,459,682)
---------
Change in unrealized appreciation on investments-net
and translation of other assets and liabilities
donominated in foreign currencies-net................................. (1,382,453)
-----------
Net realized and unrealized losses...................................... (3,842,135)
-----------
Net decrease in net assets resulting from operations.................... $(4,048,835)
-----------
</TABLE>
See notes to financial statements.
8
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the period
March 1, 1994*
For the (commencement of
Year Ended operations) to
April 30, 1995 April 30, 1994
-------------- --------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Investment loss-net.................................................. $ (206,700) $ (707)
Realized loss-net.................................................... (2,459,682) (530)
Change in unrealized appreciation or depreciation-net................ (1,382,453) (10,591)
----------- ----------
Net decrease in net assets resulting from operations................. (4,048,835) (11,828)
----------- ----------
Transactions in shares of beneficial interest-net increase (note 6).... 8,144,318 7,554,397
----------- ----------
Net increase in net assets....................................... 4,095,483 7,542,569
Net assets:
Beginning of year.................................................... 8,042,569 500,000
----------- ----------
End of year (including accumulated investment loss-net of $115,247
and $707, respectively)............................................ $12,138,052 $8,042,569
=========== ==========
<FN>
*Commencement of operations.
</FN>
</TABLE>
See notes to financial statements.
9
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
NOTE 1-Organization and Accounting Policies:
Blanchard Worldwide Emerging Markets Fund (the "Fund"), formerly known as
the Blanchard Emerging Markets Growth & Income Fund, is a series of Blanchard
Funds which was organized as a Massachusetts business trust on January 24, 1986.
The Fund is a registered, open-end non-diversified management investment company
under the Investment Company Act of 1940 (the "Act"). The Fund had no operations
before March 1, 1994 other than the sale of 62,500 shares of beneficial interest
for $500,000 to Sheffield Management Company (the "Manager").
The following is a summary of the significant accounting policies followed
by the Fund:
A. Valuation of Investments-Portfolio securities traded on domestic or
foreign exchanges are valued at the 4 PM EST price on that date, or if no sale
is made on that day, at the closing bid price (or the mean price in cases where
a mean is reported instead of the closing bid). In cases where a security is
traded on more than one exchange, it is valued at the quotation on the exchange
determined to be the primary market for such security by the Trustees or the
Manager. All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest available bid prices.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity was 60 days or less. Short-term debt
securities having a maturity date of more than sixty days at the time of
purchase are valued on a mark to market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day. All other
securities and other assets of the Fund are valued at fair value as determined
in good faith by the Trustees. Foreign currency exchange rates are determined
when such rates are made available to the Fund at times prior to the close of
the New York Stock Exchange.
The abilities of the issuers of debt securities held by the Fund to meet
their obligations may be affected by economic or political developments in a
particular country, industry or region.
B. Accounting for Investments and Investment Income Transactions-Security
transactions are accounted for on the trade date (date the order to buy or sell
is executed). Realized gains and losses on security transactions are determined
on the identified cost method. Dividend income and other distributions are
recorded on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the Fund is informed after the ex-dividend
date. Interest income is accrued daily. Premiums or discounts on debt securities
are amortized or accreted as adjustments to interest income over the lives of
such securities.
C. Foreign Currency Contracts & Translation-The books and records of the
Fund are maintained in U.S. dollars as follows: (1) the foreign currency market
value of investment securities, forward currency contracts, and other assets and
liabilities denominated in foreign currencies are translated at the exchange
rates at the end of the period; and (2) purchases, sales, income and expenses
are translated at the rates of exchange prevailing on the respective dates of
such transactions. The Fund does not separately identify that portion of the
results of operations of the Fund that arise as a result of changes in the
exchange rates from the fluctuations that arise from changes in market prices of
equity investments during the year.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
10
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS-(continued)
April 30, 1995
The Fund may enter into forward currency contracts to protect the U.S.
dollar value of securities and related receivables and payables against changes
in future foreign exchange rates. Forward currency contracts are valued based
upon the current forward rates. Fluctuations in the value of such contracts are
recorded as unrealized gains or losses; realized gains or losses include net
gains or losses on contracts which have settled. The Fund generally enters into
a forward currency contract as a hedge against foreign exchange rate fluctuation
upon the purchase or sale of a security denominated in a foreign currency. The
Fund maintains, as collateral, U.S. Government debt obligations in an amount
equal to or greater than its net obligation for forward foreign currency
contracts. Risks may arise as a result of the potential inability of the
counterparts to meet the terms of their contracts.
D. Federal Income Tax Status-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. Dividends and Distributions to Shareholders-The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income or net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income or net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
F. Organizational Expenses-The Fund's Manager paid the organizational
expenses of the Fund incurred prior to the public offering of its shares
amounting to $145,001. The Fund is liable to the Manager for these expenses and
has deferred and is amortizing such expenses on the straight-line method over
five years from the date of commencement of the Fund's operations.
G. Other-Certain expenses of the Blanchard Funds are allocated among the
Funds based upon their relative average net assets.
NOTE 2-Investment Management Agreement:
Pursuant to a management agreement (the "Agreement"), the Manager manages
the Fund and the investment of the Fund's assets, subject at all times to the
supervision of the Fund's Trustees. In addition to providing overall business
management and administrative services, the Manager selects, monitors and
evaluates the Portfolio Managers described below. The Manager receives from the
Fund an advisory fee payable monthly at an annual rate of 1.25% of the Fund's
average daily net assets.
Expenses of the Fund, exclusive of taxes, interest, brokerage commissions,
distribution fees, extraordinary expenses and certain other excludable expenses
for which a waiver has been obtained, are subject to the
11
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS-(continued)
April 30, 1995
expense limitation imposed by one state in which shares of the Fund are offered
for sale. For the year ended April 30, 1995, the Fund's expenses did not exceed
the above limitation.
Certain officers and/or Trustees of the Fund are officers and/or directors
of the Manager.
The Manager has sub-advisory agreements with Martin Currie, Inc. (Equities
Sector) and OFFITBANK (Fixed Income Sector) to serve, as the Portfolio Managers
for their respective sectors of the Fund. The Manager has advised the Fund that
the amount of fees paid to the Portfolio Managers was $59,427 and $2,703,
respectively.
The Manager voluntarily waived a portion of its advisory fee, which
amounted to $90,297, for the year ended April 30, 1995.
NOTE 3-Distribution Agreement and Plan:
Pursuant to a Distribution Agreement, Sheffield Investments, Inc. (the
"Distributor"), an affiliated company of the Manager, acts as principal
distributor of the Fund's shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act which provides that the Fund may finance activities which
are primarily intended to result in the sale of the Fund's shares, including but
not limited to advertising, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, and payments to dealers and shareholder servicing agents who
enter into agreements with the Manager or Distributor.
Pursuant to the plan, the Fund may pay distribution fees not to exceed .50%
per annum of the Fund's average daily net assets. Provided that the Plan
continues in effect, any cumulative expenses incurred by the Distributor on or
after March 1, 1994, but not yet reimbursed by the Fund, may be reimbursed
through future distribution fees from the Fund. The Distributor has advised the
Fund that at April 30, 1995, the unreimbursed distribution expenses amounted to
$1,010,046. If the Plan is terminated or discontinued in accordance with its
terms, the obligation of the Fund to make payments to the Distributor
pursuant
to the Plan will cease and the Fund will not be required to make any payments
past the date the Plan is terminated.
NOTE 4-Acquisition Agreement:
Sheffield Management Company (the "Manager") and Sheffield Investments,
Inc. (the "Distributor"), have entered into an acquisition agreement (the
"Acquisition Agreement") with Signet Banking Corporation and two of its
subsidiaries ("Signet"), dated February 15, 1995, pursuant to which Sheffield
will sell to Signet the assets relating to, and the ability to succeed to
contracts with, the Blanchard Funds, including Blanchard Worldwide Emerging
Market Fund (collectively, the "Funds"). The transactions contemplated by the
Acquisition Agreement which have been approved by the Board of Trustees of the
Funds are conditioned upon the approval of the shareholders of each Fund, of (1)
a new investment management agreement with Signet, (2) a new distribution
agreement with Federated Securities Corp., and (3) certain other conditions.
No material changes are contemplated in the operation of the Funds and no
management or distribution and administration fee increases are being proposed.
12
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS-(continued)
April 30, 1995
NOTE 5-Security Transactions and Transactions with Affiliates:
Purchases and sales of portfolio securities for the year ended April 30,
1995, excluding short-term investments, aggregated $29,004,768 and $16,231,172,
respectively. The Distributor has advised the Fund that it received $17,513 from
shareholders as account opening fees for the year ended April 30, 1995. The
Manager has advised the Fund that, for the same period, it incurred costs, which
were reimbursed by the Fund, amounting to $16,196 for performing internal
accounting and transfer agency functions for the Fund.
The Funds have adopted an unfunded noncontributory pension plan (the
"Plan") covering all independent directors/trustees of the Funds who will have
served as an independent director/trustee for at least five years at the time of
retirement. Benefits under this plan are based on an annual amount equal to 75%
of the director/trustee fee at the time of retirement, plus 5% for each year of
service in excess of five years of service but not in excess of ten years of
service. Net periodic pension expense included in Trustees' fees, retirement
plan curtailment and other expenses in the Statement of Operations for the year
ended April 30, 1995 was $2,615. As indicated in Note 4, the Manager has entered
into an agreement which provides for the acquisition of the Manager by Signet.
Following the acquisition, the independent directors/trustees of the Funds will
not stand for re-election. As a result, the Plan was curtailed and additional
pension expense of $9,250 was recorded to reflect the previously unrecognized
prior service costs of the independent directors/trustees. Included in accrued
expenses and other liabilities at April 30, 1995 is $11,865 of accrued pension
expense.
NOTE 6-Shares of Beneficial Interest:
For the period
March 1, 1994
For the (commencement of
Year Ended operations)
April 30, 1995 to April 30, 1994
---------------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
Sold................. 2,641,403 $21,445,228 1,072,843 $8,573,224
Repurchased.......... (1,754,090) (13,300,910) (127,475) (1,018,827)
--------- ----------- --------- ----------
Net increase......... 887,313 $ 8,144,318 945,368 $7,554,397
========= =========== ========= ==========
NOTE 7-Federal Income Taxes:
Any capital or foreign currency loss incurred after October 31 through the
end of the Fund's taxable year is deemed to arise on the first day of the Fund's
next taxable year, if so elected. The Fund elected to defer a net capital loss
of $2,474,894 and a currency loss of $144,048 incurred during such period in
fiscal 1995.
As of April 30, 1995, the Fund had temporary book/tax differences primarily
attributable to wash sales and post-October capital and currency loss deferrals.
To reflect reclassifications arising from permanent book/tax differences for the
year ended April 30, 1995, accumulated realized loss-net was credited $92,160
and accumulated net loss was debited $92,160.
13
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS-(continued)
April 30, 1995
NOTE 8-Financial Highlights:
Selected ratios and per share data for a share of beneficial interest
outstanding:
<TABLE>
<CAPTION>
For the period
March 1, 1994
For the (commencement
Year Ended of operations)
April 30, 1995 to April 30, 1994
-------------- -----------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year..................................... $7.98 $8.00
----- -----
Income from investment operations:
Net investment income (loss)........................................ (.11) (.00)(3)
Net gains or loss on securities (both realized and unrealized)...... (1.47) (.02)
----- -----
Net (loss) from investment operations............................ (1.58) (.02)
----- -----
Less dividends and distributions:
Dividends from investment income.................................... - -
Distributions from realized gains................................... - -
----- -----
Change in net asset value........................................ (1.58) (.02)
----- -----
Net asset value, end of period......................................... $6.40 $7.98
===== =====
Total return (not annualized).......................................... (19.80%) (.25%)
Ratios/Supplemental Data:
Net assets, end of period ($ Million)............................... $12 $8
Ratio of expenses to average net assets............................. 3.59%(2) 3.07%(1)(2)
Ratio of net investment income (loss) to average net assets......... (1.44%)(2) (.10%)(1)(2)
Portfolio turnover.................................................. 132% 0%
<FN>
- -----------------
(1) Annualized.
(2) The ratios of expenses to average net assets and net investment (loss) to
average net assets would have been 4.22% and (2.07%), respectively, for the
year ended April 30, 1995 and 4.42% and (1.45%), respectively, for the
period ended April 30, 1994, if a portion of the Fund's expenses had not
been voluntarily deferred and absorbed by the Manager (See note 2).
(3) Less than one cent per share.
</FN>
</TABLE>
14
<PAGE>
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Blanchard Worldwide Emerging Markets Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Blanchard Worldwide Emerging
Markets Fund (the "Fund") at April 30, 1995, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period March 1, 1994
(commencement of operations) through April30, 1994, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 20, 1995
15
<PAGE>
(Left Column)
Portfolio Advisers
Martin Currie Inc.
Equity Securities
OFFITBANK
Fixed Income Securities
Custodian and Transfer Agent
United States Trust Company
of New York
Independent Accountants
Price Waterhouse LLP
Legal Counsel
Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel
Blanchard Worldwide
Emerging Markets Fund
41 Madison Ave., 24th Floor
New York, NY 10010-2267
(Right Column)
------------------
Blanchard
Worldwide
Emerging
Markets Fund
------------------
Annual Report
April 30, 1995
Managed by: Sheffield Management Company
41 Madison Ave., 24th Floor
New York, NY 10010-2267
1-800-922-7771
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GROWTH & INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Growth & Income Fund (the "FUND") is offered. Please retain this
document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History 2
Investment Objectives, Policies and Restrictions 2
Portfolio Transactions 17
Computation of Net Asset Value 20
Performance Information 21
Additional Purchase and Redemption Information 24
Tax Matters 25
The Management of the FUND 34
Management Services 37
Administrative Services 40
Distribution Plan
Description of the FUND 42
Shareholder Reports 43
Appendix A A-1
Financial Statements B-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank, N.A.
Distributor
Federated Securities Corp.
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP Dated: August 7, 1995
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the Blanchard Growth & Income Fund's (the "FUND")
Prospectus, the FUND is a non-diversified series of Blanchard Funds, a
Massachusetts business trust that was organized under the name "Blanchard
Strategic Growth Fund" (the "Trust"). The trustees of the Trust approved the
change in the name of the Trust on December 4, 1990.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The Fund seeks its investment objectives by investing 100% of its net
assets in the Growth & Income Portfolio (the "Portfolio") . The Portfolio has
investment objectives identical to the Fund and invests in accordance with
investment policies and restrictions identical to those of the Fund.
The investment objectives of the Fund and the Portfolio may not be
changed except by a majority vote of shareholders.
The investment policies of the Fund and the Portfolio, as described
below, are not fundamental and may be changed without shareholder approval.
The investment restrictions of the Fund and the Portfolio, as described
below, are fundamental and may not be changed without approval by a majority of
the outstanding shares of the Fund or the Portfolio which means the vote of the
lesser of (i) 67% or more of the shares of the Fund or total beneficial
interests of the Portfolio present at the meeting, if the holders of more than
50% of the outstanding shares of the Fund or total beneficial interests of the
Portfolio are present or represented by proxy or (ii) more than 50% of the
outstanding shares of the Fund or total beneficial interests of the Portfolio.
Investment Policies
The following information supplements and should be read in conjunction
with the Prospectus discussion of investment policies and with the Appendix
included at the end of the Prospectus.
U.S. Government Securities - Although the Portfolio invests primarily
in common stocks, it may also maintain cash reserves and invest in a variety of
short-term debt securities, including obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, which have remaining
maturities not exceeding one year. Agencies and instrumentalities that issue or
guarantee debt securities and have been established or sponsored by the U.S.
Government include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association and the Student Loan Marketing
Association. Certain of these securities may not be backed by the full faith and
credit of the U.S. Government.
Bank Obligations - Investments by the Portfolio in short-term debt
securities as described above also include investments in obligations (including
certificates of deposit and bankers' acceptances) of those U.S. banks which have
total assets at the time of purchase in excess of $1 billion and the deposits of
which are insured by either the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date.
-2-
<PAGE>
Commercial Paper - Investments by the Portfolio in short-term debt
securities also included investments in commercial paper, which represents
short-term, unsecured promissory notes issued in bearer form by bank holding
companies, corporations and finance companies. The commercial paper purchased
for the Portfolio will consist of direct obligations of domestic issuers which,
at the time of investment, are (i) rated "P-1" by Moody's or "A-1" or better by
Standard & Poor's, (ii) issued or guaranteed as to principal and interest by
issuers or guarantors having an existing debt security rating of "Aa" or better
by Moody's or "AA" or better by Standard & Poor's, or (iii) securities which, if
not rated, are, in the Portfolio Adviser's opinion, of an investment quality
comparable to rated commercial paper in which the Portfolio may invest. The
rating "P-1" is the highest commercial paper rating assigned by Moody's and the
ratings "A-1" and "A-1+" are the highest commercial paper ratings assigned by
Standard & Poor's. Debt securities rated "Aa" or better by Moody's or "AA" or
better by Standard & Poor's are generally regarded as high-grade obligations and
such ratings indicate that the ability to pay principal and interest is very
strong.
Repurchase Agreements - The Portfolio may, when appropriate, enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers believed creditworthy, and only if fully collateralized by
U.S. Government obligations or other securities in which the Portfolio is
permitted to invest. Under the terms of a typical repurchase agreement, the
Portfolio would acquire an underlying debt instrument for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase the instrument and the Portfolio to resell the instrument at a
fixed price and time, thereby determining the yield during the Portfolio's
holding period. This procedure results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed under the 1940 Act to be loans collateralized by the underlying
securities. All repurchase agreements entered into by the Portfolio will be
fully collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to the amount of the
loan, including the accrued interest thereon, and the Portfolio or its custodian
or sub-custodian will have possession of the collateral, which the Board of
Trustees believes will give it a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by the Portfolio, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, the Portfolio may suffer time
delays and incur costs in connection with the disposition of the collateral. The
Board of Trustees believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio. The Portfolio will not be invested
in a repurchase agreement maturing in more than seven days if any such
investment together with securities subject to restrictions on transfer held by
the Portfolio exceed 10% of its total net assets. Repurchase agreements are also
subject to the same risks described below with respect to stand-by commitments.
Loans of Portfolio Securities - Certain securities dealers who make
"short sales" or who wish to obtain particular securities for short periods may
seek to borrow them from an institutional investor such as the Portfolio. The
Portfolio reserves the right to seek to increase its income by lending its
portfolio securities. Under present regulatory policies, including those of the
Board of Governors of the Federal Reserve System and the Securities and Exchange
Commission, such loans may be made only to member firms of the New York Stock
Exchange, and are required to be secured continuously by collateral in cash,
cash equivalents, or U.S. Government securities maintained on a current basis in
an amount at least equal to the market value of the securities loaned. Under a
loan, the Portfolio has the right to call a loan and obtain the securities
loaned at any time on five days' notice.
During the existence of a loan, the Portfolio continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and also receives compensation based on investment of the collateral. The
Portfolio does not, however, have the right to vote any securities having voting
rights during the existence of the loan, but can call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment.
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As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be made
only to dealers deemed by the Portfolio to be of good standing, and when, in the
judgment of the Portfolio, the consideration that can be earned currently from
securities loans of this type justifies the attendant risk. In the event the
Portfolio makes securities loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Portfolio's total assets.
Additional Policies Regarding Futures and Options Transactions
Futures Contracts in General - A futures contract is an agreement
between two parties for the future delivery of fixed income securities or for
the payment or acceptance of a cash settlement in the case of futures contracts
on an index of fixed income securities or stock index futures contracts. A
"sale" of a futures contract means the contractual obligation to deliver the
securities at a specified price on a specified date, or to make the cash
settlement called for by the contract. Futures contracts have been designed by
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a brokerage firm, known
as a futures commission merchant, which is a member of the relevant contract
market. Futures contracts trade on these markets, and the exchanges, through
their clearing organizations, guarantee that the contracts will be performed as
between the clearing members of the exchange. Presently, futures contracts are
based on such debt securities as long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury Bills, bank certificates of deposit, and
on indexes of municipal, corporate and government bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are very seldom
made. Generally, a futures contract is terminated by entering into an offsetting
transaction. The Portfolio will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, the Portfolio
must provide cash or money market securities as a deposit known as "margin". The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market", and the Portfolio may receive or be
required to pay "variation margin" as the futures contract becomes more or less
valuable. At the time of delivery of securities pursuant to a futures contract
based on securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than the
specific security that provides the standard for the contract. In some (but not
many) cases, securities called for by a futures contract may not have been
issued when the contract was written.
Futures contracts on indexes of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
Futures Contracts on Fixed Income Securities and Related Indexes - The
Portfolio may enter into transactions in futures contracts on fixed income
securities and indexes of municipal, corporate and government securities for the
purpose of hedging a relevant portion of its portfolio. Such transactions will
be entered into where movements in the value of the securities or index
underlying a futures contract can be expected to correlate closely with
movements in the value of securities held in the Portfolio's portfolio. The
Portfolio may sell futures contracts in anticipation of a general rise in the
level of interest rates, which would result in a decline in the value of fixed
income securities held in the Portfolio's portfolio. If the expected rise in
interest rates occurs, the Portfolio may realize gains on its futures position
which should offset all or part of the decline in value of fixed income
portfolio securities. The Portfolio could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Portfolio would be unable to take advantage of the resulting
market advance without purchases of additional securities.
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<PAGE>
The purpose of the purchase or sale of a futures contract on fixed
income securities and indexes of municipal, corporate and government securities,
in the case of the Portfolio, which hold or intend to acquire long-term debt
securities, is to protect the Portfolio from fluctuations in interest rates
without actually buying or selling long-term debt securities. For example, if
long-term bonds are held in the Portfolio's portfolio, and interest rates were
expected to increase, the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the long-term bonds held by the Portfolio. If interest
rates did increase, the value of the debt securities in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. When the Portfolio
is not fully invested and a decline in interest rates is anticipated, which
would increase the cost of fixed income securities which the Portfolio intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Portfolio should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of these
transactions, the Portfolio will purchase fixed income securities upon
termination of the long futures positions, but under unusual market conditions,
a long futures position may be terminated without a corresponding purchase of
securities.
The Portfolio will sell futures contracts on indexes of municipal,
corporate and government securities for the purpose of hedging against a broad
market decline which would cause a general reduction in the value of a portfolio
of municipal securities, or in the value of a portion of such portfolio. To the
extent that municipal securities held in a portfolio are the same, or have the
same characteristics, as the securities comprising the index underlying the
futures contract, changes in the value of the index should correlate closely
with changes in the value of the Portfolio's portfolio securities. Under such
circumstances, the Portfolio may be able to offset declines in the value of its
portfolio securities through gains on its futures position. Similarly, the
Portfolio may purchase futures contracts on indexes of municipal securities
where it expects to acquire a portfolio of municipal securities and anticipates
an increase in the cost of such securities prior to acquisition. To the extent
that the securities to be acquired reflect the composition of the index
underlying the futures contract, such increased cost may be offset, in whole or
in part, through gains on the futures position. To the extent that the Portfolio
enters into futures contracts for other than municipal bonds, there is a
possibility that the value of such futures contracts would not vary in direct
proportion to the value of the Portfolio's portfolio securities since the value
of municipal bonds and other debt securities may not react exactly the same to a
general change in interest rates and may react differently to factors other than
changes in the general level of interest rates. The Portfolio's overall
performance would be adversely affected if the value of its futures contracts
for securities other than municipal bonds declined disproportionately to the
value of the Portfolio's municipal bond portfolio. Conversely, the Portfolio's
overall performance would be positively affected if the value of such futures
contracts increased disproportionately to the value of its municipal bond
portfolio.
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indexes of municipal, corporate and
government securities may be purchased for the purpose of hedging against
anticipated purchases of long-term bonds at higher prices. Since the
fluctuations in the value of such futures contracts should be similar to that of
long-term bonds, the Portfolio could take advantage of the anticipated rise in
the value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio's cash reserves could then be used to buy long-term bonds in the cash
market. Similar results could be accomplished by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more liquid than the
cash market, the use of these futures contracts as an investment technique
allows the Portfolio to act in anticipation of such an interest rate decline
without having to sell its portfolio securities. To the extent the Portfolio
enters into futures contracts for this purpose, the assets in the segregated
asset accounts maintained by the Portfolio will consist of cash, cash
equivalents or high quality debt securities from the Portfolio's portfolio in an
amount equal to the difference between the fluctuating market value of such
futures contract and the aggregate value of the initial deposit and variation
margin payments made by the Portfolio with respect to such futures contracts.
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Stock Index Futures Contracts - The Portfolio may sell stock index
futures contracts in order to offset a decrease in market value of its
securities portfolio that might otherwise result from a market decline. The
Portfolio may do so either to hedge the value of its portfolio as a whole, or to
protect against declines, occurring prior to sales of securities, in the value
of portfolio securities to be sold. Conversely, the Portfolio may purchase stock
index futures contracts in order to protect against anticipated increases in the
cost of securities to be acquired. As also described above with respect to
futures contracts on fixed income securities and related indexes, in a
substantial majority of these transactions, the Portfolio would purchase such
securities upon termination of the long futures position, but under unusual
market conditions, a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that the Portfolio expects to narrow the range of industry groups
represented in its portfolio, the Portfolio may, prior to making purchases of
the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. As such securities are acquired, the Portfolio's futures
positions would be closed out. The Portfolio may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of the
Portfolio's portfolio will decline prior to the time of sale.
Options on Futures Contracts on Fixed Income Securities and Related
Indexes - The Portfolio may purchase put options on futures contracts in which
the Portfolio is permitted to invest for the purpose of hedging a relevant
portion of its portfolio against an anticipated decline in the values of
portfolio securities resulting from increases in interest rates, and may
purchase call options on such futures contracts as a hedge against an interest
rate decline when it is not fully invested. The Portfolio would write options on
these futures contracts primarily for the purpose of terminating existing
positions.
Options on Stock Index Futures Contracts, Options on Stock Indexes and
Options on Equity Securities - The Portfolio may purchase put options on stock
index futures contracts, stock indexes or equity securities for the purpose of
hedging the relevant portion of its securities portfolio against an anticipated
market-wide decline or against declines in the values of individual portfolio
securities, and the Portfolio may purchase call options on such futures
contracts as a hedge against a market advance when it is not fully invested. The
Portfolio would write options on such futures contracts primarily for the
purpose of terminating existing positions. In general, options on stock indexes
will be employed in lieu of options on stock index futures contracts only where
they present an opportunity to hedge at lower cost. With respect to options on
equity securities, the Portfolio may, under certain circumstances, purchase a
combination of call options on such securities and U.S. Treasury bills. The
Portfolio Adviser believes that such a combination may more closely parallel
movements in the value of the security underlying the call option than would the
option itself.
Further, while the Portfolio generally would not write options on
individual portfolio securities it may do so under limited circumstances known
as "targeted sales" and "targeted buys", which involve the writing of call or
put options in an attempt to purchase or sell portfolio securities at specific
desired prices. The Portfolio would receive a fee, or a "premium", for the
writing of the option. For example, where the Portfolio seeks to sell portfolio
securities at a "targeted" price, it may write a call option at that price. In
the event that the market rises above the exercise price, the Portfolio would
receive its "targeted" price, upon the exercise of the option, as well as the
premium income. Also, where the Portfolio seeks to buy portfolio securities at a
"targeted" price, it may write a put option at that price for which it will
receive the premium income. In the event that the market declines below the
exercise price, the Portfolio would pay its "targeted" price upon the exercise
of the option. In the event that the market does not move in the direction or to
the extent anticipated, however, the targeted sale or buy might not be
successful and the Portfolio could sustain a loss on the transaction which may
not be offset by the premium received. In addition, the Portfolio may be
required to forego the benefits of an intervening increase or decline in value
of the underlying security.
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Risk Factors Associated with Futures and Options Transactions
In addition to any risk factors which may be described above, the
following sets forth certain information regarding the potential risks
associated with the Portfolio's futures and options transactions.
Risk of Imperfect Correlation - The Portfolio's ability effectively to
hedge all or a portion of its portfolio through transactions in futures, options
on futures or options on stock indexes depends on the degree to which movements
in the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Portfolio's
portfolio. If the values of the portfolio securities being hedged do not move in
the same amount or direction as the underlying security or index, the hedging
strategy for the Portfolio might not be successful and the Portfolio could
sustain losses on its hedging transactions which would not be offset by gains on
its portfolio. It is also possible that there may be a negative correlation
between the security or index underlying a futures or option contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Stock index futures or options based on a narrower index of
securities may present greater risk than options or futures based on a broad
market index, as a narrower index is more susceptible to rapid and extreme
fluctuations resulting from changes in the value of a small number of
securities. The Portfolio would, however, effect transactions in such futures or
options only for hedging purposes.
The trading of futures and options on indexes involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that the Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
The Portfolio will purchase or sell futures contracts or options only
if, in the Portfolio's Adviser's judgment, there is expected to be a sufficient
degree of correlation between movements in the value of such instruments and
changes in the value of the relevant portion of the Portfolio's portfolio for
the hedge to be effective. There can be no assurance that the Portfolio
Adviser's judgment will be accurate.
Potential Lack of a Liquid Secondary Market - The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require the Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While the Portfolio will
establish a futures or option position only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a market will
exist for any particular futures or option contract at any specific time. In
such event, it may not be possible to close out a position held by the
Portfolio, which could require the Portfolio to purchase or sell the instrument
underlying the position, make or receive a cash settlement, or meet ongoing
variation margin requirements. The inability to close out futures or option
positions also could have an adverse impact on the Portfolio's ability
effectively to hedge its portfolio, or the relevant portion thereof.
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<PAGE>
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements - Investments in futures
contracts on fixed income securities and related indexes involve the risk that
if the Portfolio's Adviser's investment judgment concerning the general
direction of interest rates is incorrect, the Portfolio's overall performance
may be poorer than if it had not entered into any such contract. For example, if
the Portfolio has been hedged against the possibility of an increase in interest
rates which would adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the Portfolio will lose part or all of the
benefit of the increased value of its bonds which have been hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements, possibly at a
time when it may be disadvantageous to do so. Such sale of bonds may be, but
will not necessarily be, at increased prices which reflect the rising market.
Trading and Position Limits - Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Portfolio Adviser does not believe that
these trading and position limits will have an adverse impact on the hedging
strategies regarding the Portfolio's portfolios.
Restrictions on the Use of Futures and Option Contracts
Regulations of the CFTC require that the Portfolio enters into
transactions in futures contracts and options thereon for hedging purposes only,
in order to assure that it is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations require that all short futures
positions be entered into for the purpose of hedging the value of securities
held in the Portfolio's portfolio, and that all long futures positions either
constitute bona fide hedging transactions, as defined in such regulations, or
have a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained for the Portfolio, and accrued profits
on such positions. In addition, the Portfolio may not purchase or sell such
instruments if, immediately thereafter, the sum of the amount of initial margin
deposits on its existing futures positions and premiums paid for options on
futures contracts would exceed 5% of the market value of the Portfolio's total
assets.
When the Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the account of
its broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that the
Portfolio derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than three months.
In addition to the foregoing requirements, the Portfolio's Board of
Trustees has adopted an additional restriction on the use of futures contracts
and options thereon, requiring that the aggregate market value of the futures
contracts held by the Portfolio not exceed 50% of the market value of its total
assets. Neither this restriction nor any policy with respect to the
above-referenced restrictions, would be changed by the Board of Trustees without
considering the policies and concerns of the various federal and state
regulatory agencies.
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Investment Restrictions
In addition to the investment restrictions set forth below, the Fund
has adopted the following investment restrictions to enable it to invest in the
Portfolio:
It is a fundamental policy of the Fund that because it holds no
portfolio securities except interests in the Portfolio, the Fund's investment
objective, policies and restrictions shall be identical to the Portfolio's
investment objective, policies and restrictions, except for the following: the
Fund (1) may invest more than 5% of its assets in another issuer, (2) may,
consistent with Section 12 of the 1940 Act, invest in securities issued by other
registered investment companies, (3) may invest more than 10% of its net assets
in the securities of a registered investment company, (4) may hold more than 10%
of the voting securities of a registered investment company, (5) will
concentrate its investments in the investment company and (6) will not issue
senior securities except as permitted by an exemptive order of the SEC.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate its assets,
except that, as a temporary measure for extraordinary or emergency
purposes, it may borrow in an amount not to exceed 1/3 of the current
value of its net assets, including the amount borrowed, and may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that, aside from reverse repurchase
transactions, money would be borrowed by the Portfolio only from banks
and only to accommodate requests for the repurchase of shares of the
Portfolio while effecting an orderly liquidation of portfolio
securities), provided that collateral arrangements with respect to the
Portfolio's permissible futures and options transactions, including
initial and variation margin, are not considered to be a pledge of
assets for purposes of this restriction; the Portfolio will not
purchase investment securities if its outstanding borrowing, including
reverse repurchase agreements, exceeds 5% of the value of the
Portfolio's total assets;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and
except that, with respect to the Portfolio's permissible options and
futures transactions, deposits of initial and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures or options positions;
(3) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter under
the Securities Act of 1933 in selling a portfolio security;
(4) write, purchase or sell any put or call option or any
combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of
the warrants is the issuer of the underlying securities, (ii) the
writing, purchasing or selling of puts, calls or combinations thereof
with respect to U.S. Government securities or (iii) permissible futures
and options transactions, the writing, purchasing, ownership, holding
or selling of futures and options positions or of puts, calls or
combinations thereof with respect to futures;
(5) knowingly invest in securities which are subject to legal
or contractual restrictions on resale (including securities that are
not readily marketable, but not including repurchase agreements
maturing in not more than
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<PAGE>
seven days) if, as a result thereof, more than 10% of the Fund's or
Portfolio's total assets (taken at market value) would be so invested
(including repurchase agreements maturing in more than seven days);
(6) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business, other than (i)
permissible futures and options transactions or (ii) forward purchases
and sales of foreign currencies or securities;
(7) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held by the Portfolio;
(8) make short sales of securities or maintain a short
position; except that the Portfolio may make such short sales of
securities or maintain a short position if when a short position is
open the Portfolio owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10%
of the Portfolio's net assets (taken at market value) is held as
collateral for such sales at any one time (it is the present intention
of management to make such sales only for the purpose of deferring
realization of gain or loss for federal income tax purposes; such sales
would not be made of securities subject to outstanding options);
(9) concentrate its investments in any particular industry, but
if it is deemed appropriate for the achievement of the Portfolio's
investment objective, up to 25% of the assets of the Portfolio, at
market value at the time of each investment, may be invested in any one
industry, except that positions in options and futures shall not be
subject to this restriction; or
(10) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to the Portfolio's permissible
options and futures transactions, including deposits of initial and
variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction.
The Portfolio is not permitted to make loans to other persons, except
(i) through the lending of its portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's total assets (taken at market value),
(ii) through the use of repurchase agreements or the purchase of short-term
obligations and provided that not more than 10% of the Portfolio's total assets
will be invested in repurchase agreements maturing in more than seven days, or
(iii) by purchasing, subject to the limitation in paragraph 5 above, a portion
of an issue of debt securities of types commonly distributed privately to
financial institutions, for which purposes the purchase of short-term commercial
paper or a portion of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
For purposes of the investment restrictions described above and the
state and federal restrictions described below, the issuer of a tax-exempt
security is deemed to be the entity (public or private) ultimately responsible
for the payment of the principal of and interest on the security. For purposes
of Investment Restriction No. 9, industrial development bonds, where the payment
of principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an "industry".
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<PAGE>
The Portfolio has also adopted the following non-fundamental investment
policy which may be changed without shareholder approval. The Portfolio may
enter into repurchase agreements (a purchase of and a simultaneous commitment to
resell a security at an agreed-upon price on an agreed-upon date) only with
member banks of the Federal Reserve System and securities dealers believed
creditworthy and only if fully collateralized by U.S. Government obligations or
other securities in which the Portfolio is permitted to invest. If the vendor of
a repurchase agreement fails to pay the sum agreed to on the agreed-upon
delivery date, the Portfolio would have the right to sell the securities
constituting the collateral; however, the Portfolio might thereby incur a loss
and in certain cases may not be permitted to sell such securities. Moreover, as
noted above in paragraph 5, the Portfolio may not, as a matter of fundamental
policy, invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days.
The Portfolio has no current intention of engaging in the following
activities in the foreseeable future: (i) writing, purchasing or selling puts,
calls or combinations thereof with respect to U.S. Government securities; (ii)
purchasing voting securities of any issuer.
State and Federal Restrictions: In order to comply with certain federal
and state statutes and regulatory policies, as a matter of operating policy, the
Portfolio will not: (i) sell any security which it does not own unless by virtue
of its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions, (ii) invest for the
purpose of exercising control or management, (iii) invest more than 5% of the
Fund's assets in companies which, including predecessors, have a record of less
than three years' continuous operation, (iv) invest in warrants valued at the
lower of cost or market, in excess of 5% of the value of the Fund's net assets,
and no more than 2% of such value may be warrants which are not listed on the
New York or American Stock Exchanges, (v) purchase or retain in the Portfolio's
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or trustee of the Portfolio, or is an
officer or director of the Portfolio Adviser, if after the purchase of the
securities of such issuer by the Portfolio one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value, or (vi) as to 50% of the
Portfolio's total assets, purchase securities of any issuer if such purchase at
the time thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class. These policies are not fundamental and may be changed by
the Portfolio's Board of Trustees without shareholder approval.
Percentage and Rating Restrictions: If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in the Prospectus is adhered to at the time an investment is made or assets
are so utilized, a later change in percentage resulting from changes in the
value of the portfolio securities or a later change in the rating of a portfolio
security of the Portfolio will not be considered a violation of policy.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Portfolio Adviser and who
is appointed and supervised by senior officers of the Portfolio Adviser. Changes
in the Portfolio's investments are reviewed by the Board of Trustees. The
Portfolio's portfolio manager may serve other clients of the Portfolio Adviser
in a similar capacity.
The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the Portfolio Adviser will weigh the added costs of
short-term investment against anticipated gains.
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The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Portfolio Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the level of
their brokerage commissions. Debt securities are traded principally in the
over-the-counter market through dealers acting on their own account and not as
brokers. In the case of securities traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Portfolio Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Portfolio Adviser on the tender of the Portfolio's portfolio securities in
so-called tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for the Portfolios by the Portfolio Adviser. At present, no other
recapture arrangements are in effect.
Under Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Adviser may cause the Portfolio to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for the Portfolio in excess of the amount
other broker-dealers would have charged for the transaction if the Portfolio
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Portfolio Adviser's overall responsibilities to the Portfolio or to its
clients. Not all of such services are useful or of value in advising the
Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Portfolio Adviser's other clients as part of
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Portfolio Adviser for
no consideration other than brokerage or underwriting commissions. Securities
may be bought or sold through such broker-dealers, but at present, unless
otherwise directed by the Portfolio, a commission higher than one charged
elsewhere will not be paid to such a firm solely because it provided Research to
the Portfolio Adviser.
The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Portfolio Adviser as a consideration in the selection of
brokers to execute portfolio transactions. However, the Portfolio Adviser would
be unable to quantify the amount of commissions which are paid as a result of
such Research because a substantial number of transactions are effected through
brokers which provide Research but which are selected principally because of
their execution capabilities.
The management fees that the Funds pay to the Portfolio Adviser will
not be reduced as a consequence of the Adviser's receipt of brokerage and
research services. To the extent the Portfolio's portfolio transactions are used
to obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be
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useful and of value to the Portfolio Adviser in serving the Portfolio and other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients would be useful to the Portfolio Adviser in carrying
out its obligations to the Portfolio. While such services are not expected to
reduce the expenses of the Portfolio Adviser, the Portfolio Adviser would,
through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When the Portfolio or the
Portfolio Adviser's other clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will generally
produce better executions for the Portfolio.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Years Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees of the
Portfolio. Portfolio securities which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the Portfolio.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Portfolio will be valued on an amortized cost
basis by the Portfolio, excluding unrealized gains or losses thereon from the
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it will be valued at current market value until the 60th day
prior
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to maturity, and will then be valued on an amortized cost basis based upon the
value on such date unless the Trustees of the Portfolio determine during such
60-day period that this amortized cost value does not represent fair market
value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders to purchase or redeem Shares of the Fund received by dealers
prior to 4:15 P.M. (New York Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options exchanges
(normally 4:15 P.M., New York Time), provided the order is received by the
FUND's Transfer Agent prior to 4:15 P.M. on that day. It is the responsibility
of the dealer to insure that all orders are transmitted timely to the FUND.
Orders received by dealers after 4:15 P.M. will be confirmed at the next
computed offering or redemption price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year periods or at the end of the 1, 5 or
10 year periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
period ended February 28, 1995 was 21.89%.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return
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with data published by Lipper Analytical Services, Inc. or similar independent
services or financial publications, the FUND calculates its aggregate total
return for the specified periods of time by assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial net asset value
of the investment from the ending net asset value and by dividing the remainder
by the beginning net asset value. The FUND does not, for these purposes, deduct
the pro rata share of the account opening fee, which was in effect until
December, 1994, from the initial value invested. The FUND will, however,
disclose the pro rata share of the account opening fee and will disclose that
the performance data does not reflect such non-recurring charge and that
inclusion of such charge would reduce the performance quoted. Such alternative
total return information will be given no greater prominence in such advertising
than the information prescribed under the Commission's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the FUND is not subject to federal income tax on the portion
of its net investment income (i.e., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (i.e., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
Because the FUND invests all of its assets in the Portfolio, which is classified
as a partnership for federal income tax purposes, the FUND will be deemed to own
a proportionate share of the assets and income of the Portfolio for
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purposes of determining whether the FUND satisfies the requirements (described
more fully below) necessary to qualify as a regulated investment company.
In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the company's principal business of
investing in stock or securities) and other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement");
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). Because of the
Short-Short Gain Test, the FUND may have to limit the sale of appreciated
securities that it held for less than three months. However, foreign currency
gains that are directly related to the company's investment in stock or
securities are not treated as short-short gains. Similarly, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss, since
losses are disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-Short
Gain Test. However, income attributable to realized market appreciation will be
so treated for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition
of an asset (and allocated to the Fund) will be a capital gain or loss. However,
gain recognized on the disposition of a debt obligation purchased at a market
discount will be treated as ordinary income to the extent of the portion of the
discount that accrued while the Portfolio held the obligation. In addition,
under the rules of Code Section 988, a portion of gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto, and (with certain exceptions) gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, will generally
be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which may include the acquisition of
a put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Portfolio as part of a "straddle" (as defined) or
(3) the asset is stock and the Portfolio grants an in-the-money qualified
covered call option with respect thereto. In addition, the FUND may be required
to defer the recognition of a loss on a disposition of an asset held as part of
a straddle to the extent of any unrecognized gain on the offsetting position.
Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option written by
the Portfolio will be treated as a short-term capital gain or loss. For purposes
of the Short-Short Gain Test, the holding period of such an option will commence
on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, the Portfolio may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts are subject to special tax
treatment as "Section 1256 contracts." Such contracts are treated as if they are
sold for their fair market value on the last business day of the taxable year,
even though a taxpayer's obligations (or rights) under such contracts have not
terminated as of such date. Gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any gain or loss recognized upon the actual
termination of such contracts during the year. The combined capital gain or loss
for the year with respect to Section 1256 contracts is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. (The
Portfolio may elect not to
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have this special tax treatment apply to Section 1256 contracts that are part of
a "mixed straddle" with other investments that are not Section 1256 contracts.)
The IRS has held in private rulings that constructive gains arising from deemed
year-end dispositions of Section 1256 contracts will not be taken into account
for purposes of the Short-Short Gain Test.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it were incurred in the succeeding year.
In addition to the requirements described above, the FUND must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the RIC has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which it does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the RIC controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security and not
the issuer of the option.
If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the FUND's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a RIC that fails to
distribute in each calendar year an amount equal to 98% of its ordinary taxable
income for the calendar year and 98% of its capital gain net income for the
one-year period ended on October 31 of the year. The balance of such income must
be distributed during the next calendar year.
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. The FUND
may in certain circumstances have to liquidate portfolio investments in order to
effect such distributions.
FUND Distributions
The FUND intends to distribute substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute
such gains annually. Net capital gain distributed and designated as a capital
gain dividend is taxable to shareholders as long-term capital gain, regardless
of the shareholder's holding period in his shares and the time when such gain
was recognized by the Portfolio.
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If the FUND elects to retain its net capital gain, it will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if each
received a distribution of his pro rata share of the gain, with the result that
each would be required to report his pro rata share of such gain on his tax
return as a long-term capital gain, would receive a refundable tax credit for
his pro rata share of the tax paid by the FUND on the gain, and would increase
the tax basis for his shares by an amount equal to the deemed distribution less
the credit.
Ordinary income dividends distributed by the FUND will qualify for the
70% dividends-received deduction generally available to corporations (other than
corporations, such as S corporations, which are not eligible for the deduction)
to the extent of the portion of the distribution attributed to "qualifying
dividends" received by the Portfolio during the taxable year from domestic
corporations. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it was received with respect to stock that the
Portfolio held for less than 46 days (91 days in the case of certain preferred
stock), subject to the limitations of Code Sections 246(c)(3) and (4) and 246A.
Moreover, the dividends-received deduction for a corporate shareholder will also
be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its FUND shares or the FUND fails to satisfy them
with respect to its interest in the Portfolio.
Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries, which
entitle the Portfolio to reduced rates of, or exemptions from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the future mix of the Portfolio's investment in various countries
is not known.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholders' tax basis in their shares;
any excess will be treated as gain from a sale of the shares, as discussed more
fully below.
Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the FUND (or
of another fund). In addition, if a shareholder's cost for his shares already
reflects undistributed (realized or unrealized) income or gain, a subsequent
distribution of such amounts will be taxable to the shareholder in the manner
described above, although economically it constitutes a return of capital.
Ordinarily, shareholders are required to take distributions into
account in the year in which they are made. However, dividends declared by the
Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such year if such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of dividends and the proceeds of redemption paid to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all to the Fund, (2) who is subject to backup withholding
pursuant to a notice from the IRS for failure to report interest or dividend
income properly, or (3) who has not otherwise certified to the FUND that it is
not subject to backup withholding.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
his shares in an amount equal to the difference between the amount realized on
the shares and his adjusted tax basis in them. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
FUND within 30 days before or after the disposition. In general, gain or loss
arising from a sale or redemption of
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FUND shares will constitute capital gain or loss, and will be long-term capital
gain or loss if the shares were held longer than one year. However, a capital
loss arising from a disposition of shares held for six months or less will be
treated as a long-term capital loss to the extent of any amount of capital gain
dividends received on the shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) (alluded to above in connection with the
dividends-received deduction for corporations) will generally apply. Capital
losses in any year are deductible only to the extent of capital gains plus, in
the case of noncorporate taxpayers, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income
received from the FUND is "effectively connected" with a U.S. trade or business
carried on by the shareholder.
If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or a lower treaty rate, if one applies) of
the gross amount of the dividend. Such a shareholder would generally be exempt
from U.S. federal income tax on gains realized on a sale of FUND shares and
capital gain dividends.
If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and gain realized upon the sale of FUND shares will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless they furnish the FUND with proper notification of their exempt
status.
The tax consequences to foreign shareholders entitled to claim the
benefits of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the FUND, including the
applicability of any foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly alter the
conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax advisers
as to the consequences of their investing in the FUND in light of their
particular circumstances.
-19-
<PAGE>
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses,
principal occupations, and present positions, including any affiliation with
Virtus Capital Management, Inc., Signet Trust Company, Federated Investors,
Federated Securities Corp., Federated Services Company, and Federated
Administrative Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C>
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh
Medical Center--Downtown, Member, Board of
Directors, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee, of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Trustee
and Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
</TABLE>
-21-
<PAGE>
<TABLE>
<S> <C>
Administrative Services; Trustee or Director of
some of the Funds; Vice President and Treasurer
of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D.,
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C>
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
<FN>
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment
Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of Trustees handles
the responsibilities of the Board of Trustees between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for reviewing compliance
with all internal controls and all regulations related to the financial reporting process.
</FN>
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 years;
Federated U.S. Government Securities Fund: 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc,; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust:
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligation; The Virtus Funds; and World Investment Series,
Inc.
Fund Ownership
As of June 30, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
-23-
<PAGE>
To the best knowledge of the FUND, as of June 30, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
The Trustees and officers of the Portfolio and their principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 6 St. James Avenue,
Suite 900, Boston, Massachusetts 02116.
<TABLE>
<S> <C>
Stuart W. Cragin, Jr. Trustee, Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio, International Equity
108 Valley Road Portfolio, Mutual Fund Group, Mutual Fund Trust and Mutual Fund
Greenwich, CT 06870 Variable Annuity Trust; President, Fairfield Testing Laboratory, Inc.
(laboratory providing materials testing), since 1989; prior to 1989 he
served in a variety of positions with Union Camp Corporation,
Trinity Paper & Plastics Corp., and Conover Industries, Inc.
Irv Thode Trustee, Growth and Income Portfolio, Capital Growth Portfolio,
Trustee Global Fixed Income Portfolio, International Equity Portfolio,
80 Perkins Road Mutual Fund Group, Mutual Fund Trust and Mutual Fund Variable
Greenwich, CT 06830 Annuity Trust; Retired; Vice President, Eastern Region Sales,
Quotron Systems; 1983 through 1990 has held numerous executive
positions with Control Data Corporation including President of Latin
American operations and General Manager of its Data Services business.
H. Richard Vartabedian* Trustee and Chairman, Growth and Income Portfolio, Capital
Chairman Growth Portfolio, Global Fixed Income Portfolio, International
P.O. Box 296 Equity Portfolio; Trustee, Mutual Fund Group, Mutual Fund Trust
Beach Road and Mutual Fund Variable Annuity Trust; Retired; Former Senior
Hendrick's Head Investment Officer, Division Executive of the Investment
Southport, Maine 04576 Management Division of The Chase Manhattan Bank, N.A., 1980
through 1991.
Fergus Reid, III* Trustee, Growth and Income Portfolio, Capital Growth Portfolio,
Trustee Global Fixed Income Portfolio, International Equity Portfolio;
971 West Road Trustee and Chairman, Mutual Fund Group, Mutual Fund Trust and
New Canaan, CT 06840 Mutual Fund Variable Annuity Trust; Chairman and Chief Executive
Officer, Lumelite Corporation, since September, 1985.
Joseph Harkins* Retired; Trustee, Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio, International Equity
257 Plantation Circle South Portfolio, Mutual Fund Group, Mutual Fund Trust and Mutual Fund
Ponte Vedra Beach, FL 32082 Variable Annuity Trust; Commercial Sector Executive and Executive
Vice President of The Chase Manhattan Bank, N.A. from 1985
through 1989; Director of Blessing Corporation and Jefferson
Insurance Company of New York, Monticello Insurance Company.
Richard E. Ten Haken Trustee of Growth and Income Portfolio, Capital Growth Portfolio,
Trustee Global Fixed Income Portfolio, International Equity Portfolio,
4 Barnfield Road Mutual Fund Group, Mutual Fund Trust and Mutual Fund Variable
Pittsford, New York 14534 Annuity Trust; District Superintendent of Schools, Monroe No. 2
and Orleans Counties, New York; Chairman of the Finance and
</TABLE>
-24-
<PAGE>
<TABLE>
<S> <C>
Audit and Accounting Committees, Member of the Executive
Committee and Vice President, New York State Teachers'
Retirement System.
William J. Armstrong Trustee of Growth and Income Portfolio, Capital Growth Portfolio,
Trustee Global Fixed Income Portfolio, International Equity Portfolio,
49 Aspen Way Mutual Fund Group, Mutual Fund Trust and Mutual Fund
Upper Saddle River, NJ 07458 Variable Annuity Trust; Vice President and Treasurer, Ingersoll-
Rand Company (Woodcliff Lake, New Jersey).
John R.H. Blum Trustee of Growth and Income Portfolio, Capital Growth Portfolio,
Trustee Global Fixed Income Portfolio, International Equity Portfolio,
1 John Street Mutual Fund Group, Mutual Fund Trust and Mutual Fund Variable
Millerton, New York 12546 Annuity Trust; Partner in the law firm of Richards, O'Neil &
Allegaert.
</TABLE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts $-0- $1,816.00 for the Fund Complex
Trustee
</TABLE>
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
-25-
<PAGE>
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which is a
division of Signet Trust Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls maintained by Signet Bank to
restrict the flow of non-public information, Fund investments are typically made
without any knowledge of Signet Bank's or its affiliates' lending relationships
with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in the
prospectus.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly
-26-
<PAGE>
servicing these accounts, the Fund may be able to curb sharp fluctuations in
rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known asa "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certaincircumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further
providesthat the Trustees will not be liable for errors of judgment or mistakes
of fact or law, but nothing in theDeclaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
-27-
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
Bond Ratings
Moody's Investors Service, Inc. -- Bonds which are rated Aaa are judged
to be the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong positions of
such issues. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's applies numerical modifiers "1," "2" and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation Bonds rated AAA have the highest rating
assigned by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from AAA issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than bonds in higher rated categories.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions liable to but slight market fluctuation other than through changes
in the money rate. The prime feature of an AAA bond is showing of earnings
several times or many times interest requirements, with such stability of
applicable earnings that safety is beyond reasonable question whatever changes
occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety
virtually beyond question and are readily salable, whose merits are not unlike
those of the AAA class, but whose margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured but influenced
as to rating by the lesser financial power of the enterprise and more local type
market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit
quality with negligible risk factors; only slightly more than U.S. Treasury
debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit
quality with strong protection factors. Risk is modest but may vary slightly
from time to time because of economic conditions.
Bonds rated TBW-1 are judged by Thomson BankWatch, Inc. to be of the
highest credit quality with a very high degree of likelihood that principal and
income will be paid on a timely basis. Bonds rated TBW-2 offer a strong degree
of safety regarding repayment. The relative degree of safety, however, is not as
high as TBW-1.
Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1-Highest Quality; Prime 2-Higher
Quality; Prime 3-High Quality.
A-1
<PAGE>
vote of the FUND. Shareholders of the FUND shall be entitled to receive
distributions as a class of the assets belonging to
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess safety characteristics. Capacity for timely payment on
issues with the designation A-2 is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Issues carrying the
designation A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
A-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD CAPITAL GROWTH FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
- --------------------------------------------------------------------------------
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 7, 1995 (the "Prospectus"), pursuant to which
the Blanchard Capital Growth Fund (the "FUND") is offered. Please retain this
document for future reference.
- --------------------------------------------------------------------------------
To obtain the Prospectus please call the FUND at 1-800-829-3863
- --------------------------------------------------------------------------------
TABLE OF CONTENTS Page
General Information and History ............................................ 2
Investment Objective, Policies and Restrictions ............................ 2
Portfolio Transactions ..................................................... 15
Computation of Net Asset Value ............................................. 17
Performance Information .................................................... 19
Additional Purchase and Redemption Information ............................. 21
Tax Matters ................................................................ 22
The Management of the FUND ................................................. 31
Management Services ........................................................ 34
Administrative Services .................................................... 37
Distribution Plan .......................................................... 25
Description of the FUND .................................................... 39
Shareholder Reports ........................................................ 40
Appendix A ................................................................. A-1
Financial Statements ....................................................... B-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank, N.A.
Distributor
Federated Securities Corp.
Transfer Agent
United States Trust Company of New York
Independent Accountants
Price Waterhouse LLP Dated: August 7, 1995
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GENERAL INFORMATION AND HISTORY
As described in Blanchard Capital Growth's (the "FUND") Prospectus, the
FUND is a non-diversified series of Blanchard Funds, a Massachusetts business
trust that was organized under the name "Blanchard Strategic Growth Fund" (the
"Trust"). The trustees of the Trust approved the change in the name of the Trust
on December 4, 1990.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund seeks its investment objective by investing 100% of its assets
in the Capital Growth Portfolio (the "Portfolio"). The Portfolio has an
investment objective identical to the Fund and invests in accordance with
investment policies and restrictions identical to those of the Fund.
The investment objective of the Fund and the Portfolio may not be
changed except by a majority vote of shareholders.
The investment policies of the Fund and the Portfolio, as described
below, are not fundamental and may be changed without shareholder approval.
The investment restrictions of the Fund and the Portfolio, as described
below, are fundamental and may not be changed without approval by a majority of
the outstanding shares of the Fund or the Portfolio which means the vote of the
lesser of (i) 67% or more of the shares of the Fund or total beneficial
interests of the Portfolio present at the meeting, if the holders of more than
50% of the outstanding shares of the Fund or total beneficial interests of the
Portfolio are present or represented by proxy or (ii) more than 50% of the
outstanding shares of the Fund or total beneficial interests of the Portfolio.
Investment Policies
The following information supplements and should be read in conjunction
with the Prospectus discussion of investment policies and with the Appendix
included at the end of the Prospectus.
U.S. Government Securities - Although the Portfolio invests primarily
in common stocks, it may also maintain cash reserves and invest in a variety of
short-term debt securities, including obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, which have remaining
maturities not exceeding one year. Agencies and instrumentalities that issue or
guarantee debt securities and have been established or sponsored by the U.S.
Government include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association and the Student Loan Marketing
Association. Certain of these securities may not be backed by the full faith and
credit of the U.S. Government.
Bank Obligations - Investments by the Portfolio in short-term debt
securities as described above also include investments in obligations (including
certificates of deposit and bankers' acceptances) of those U.S. banks which have
total assets at the time of purchase in excess of $1 billion and the deposits of
which are insured by either the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date.
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Commercial Paper - Investments by the Portfolio in short-term debt
securities also include investments in commercial paper, which represents
short-term, unsecured promissory notes issued in bearer form by bank holding
companies, corporations and finance companies. The commercial paper purchased
for the Portfolio will consist of direct obligations of domestic issuers which,
at the time of investment, are (i) rated "P-1" by Moody's or "A-1" or better by
Standard & Poor's, (ii) issued or guaranteed as to principal and interest by
issuers or guarantors having an existing debt security rating of "Aa" or better
by Moody's or "AA" or better by Standard & Poor's, or (iii) securities which, if
not rated, are, in the Portfolio Adviser's opinion, of an investment quality
comparable to rated commercial paper in which the Portfolio may invest. The
rating "P-1" is the highest commercial paper rating assigned by Moody's and the
ratings "A-1" and "A-1+" are the highest commercial paper ratings assigned by
Standard & Poor's. Debt securities rated "Aa" or better by Moody's or "AA" or
better by Standard & Poor's are generally regarded as high-grade obligations and
such ratings indicate that the ability to pay principal and interest is very
strong.
Repurchase Agreements - The Portfolio may, when appropriate, enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers believed creditworthy, and only if fully collateralized by
U.S. Government obligations or other securities in which the Portfolio is
permitted to invest. Under the terms of a typical repurchase agreement, the
Portfolio would acquire an underlying debt instrument for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase the instrument and the Portfolio to resell the instrument at a
fixed price and time, thereby determining the yield during the Portfolio's
holding period. This procedure results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed under the 1940 Act to be loans collateralized by the underlying
securities. All repurchase agreements entered into by the Portfolio will be
fully collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to the amount of the
loan, including the accrued interest thereon, and the Portfolio or its custodian
or sub-custodian will have possession of the collateral, which the Board of
Trustees believes will give it a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by the Portfolio, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, the Portfolio may suffer time
delays and incur costs in connection with the disposition of the collateral. The
Board of Trustees believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio. The Portfolio will not be invested
in a repurchase agreement maturing in more than seven days if any such
investment together with securities subject to restrictions on transfer held by
the Portfolio exceed 10% of its total net assets. Repurchase agreements are also
subject to the same risks described below with respect to stand-by commitments.
Loans of Portfolio Securities - Certain securities dealers who make
"short sales" or who wish to obtain particular securities for short periods may
seek to borrow them from an institutional investor such as the Portfolio. The
Portfolio reserves the right to seek to increase its income by lending its
portfolio securities. Under present regulatory policies, including those of the
Board of Governors of the Federal Reserve System and the Securities and Exchange
Commission, such loans may be made only to member firms of the New York Stock
Exchange, and are required to be secured continuously by collateral in cash,
cash equivalents, or U.S. Government securities maintained on a current basis in
an amount at least equal to the market value of the securities loaned. Under a
loan, the Portfolio has the right to call a loan and obtain the securities
loaned at any time on five days' notice.
During the existence of a loan, the Portfolio continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and also receives compensation based on investment of the collateral. The
Portfolio does not, however, have the right to vote any securities having voting
rights during the existence of the loan, but can call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment.
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As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be made
only to dealers deemed by the Portfolio to be of good standing, and when, in the
judgment of the Portfolio, the consideration that can be earned currently from
securities loans of this type justifies the attendant risk. In the event the
Portfolio makes securities loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Portfolio's total assets.
Additional Policies Regarding Futures and Options Transactions
Futures Contracts in General - A futures contract is an agreement
between two parties for the future delivery of fixed income securities or for
the payment or acceptance of a cash settlement in the case of futures contracts
on an index of fixed income securities or stock index futures contracts. A
"sale" of a futures contract means the contractual obligation to deliver the
securities at a specified price on a specified date, or to make the cash
settlement called for by the contract. Futures contracts have been designed by
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a brokerage firm, known
as a futures commission merchant, which is a member of the relevant contract
market. Futures contracts trade on these markets, and the exchanges, through
their clearing organizations, guarantee that the contracts will be performed as
between the clearing members of the exchange. Presently, futures contracts are
based on such debt securities as long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury Bills, bank certificates of deposit, and
on indexes of municipal, corporate and government bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are very seldom
made. Generally, a futures contract is terminated by entering into an offsetting
transaction. The Portfolio will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, the Portfolio
must provide cash or money market securities as a deposit known as "margin". The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market", and the Portfolio may receive or be
required to pay "variation margin" as the futures contract becomes more or less
valuable. At the time of delivery of securities pursuant to a futures contract
based on securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than the
specific security that provides the standard for the contract. In some (but not
many) cases, securities called for by a futures contract may not have been
issued when the contract was written.
Futures contracts on indexes of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
Stock Index Futures Contracts - The Portfolio may sell stock index
futures contracts in order to offset a decrease in market value of its
securities portfolio that might otherwise result from a market decline. The
Portfolio may do so either to hedge the value of its portfolio as a whole, or to
protect against declines, occurring prior to sales of securities, in the value
of portfolio securities to be sold. Conversely, the Portfolio may purchase stock
index futures contracts in order to protect against anticipated increases in the
cost of securities to be acquired. As also described above with respect to
futures contracts on fixed income securities and related indexes, in a
substantial majority of these transactions, the Portfolio would purchase such
securities upon termination of the long futures position, but under unusual
market conditions, a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that the Portfolio expects to narrow the range of industry groups
represented in its portfolio, the Portfolio may, prior to making purchases of
the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of
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securities of a particular industry group. As such securities are acquired, the
Portfolio's futures positions would be closed out. The Portfolio may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the Portfolio's portfolio will decline prior to the time of
sale.
Options on Stock Index Futures Contracts, Options on Stock Indexes and
Options on Equity Securities - The Portfolio may purchase put options on stock
index futures contracts, stock indexes or equity securities for the purpose of
hedging the relevant portion of its securities portfolio against an anticipated
market-wide decline or against declines in the values of individual portfolio
securities, and the Portfolio may purchase call options on such futures
contracts as a hedge against a market advance when it is not fully invested. The
Portfolio would write options on such futures contracts primarily for the
purpose of terminating existing positions. In general, options on stock indexes
will be employed in lieu of options on stock index futures contracts only where
they present an opportunity to hedge at lower cost. With respect to options on
equity securities, the Portfolio may, under certain circumstances, purchase a
combination of call options on such securities and U.S. Treasury bills. The
Portfolio Adviser believes that such a combination may more closely parallel
movements in the value of the security underlying the call option than would the
option itself.
Further, while the Portfolio generally would not write options on
individual portfolio securities it may do so under limited circumstances known
as "targeted sales" and "targeted buys", which involve the writing of call or
put options in an attempt to purchase or sell portfolio securities at specific
desired prices. The Portfolio would receive a fee, or a "premium", for the
writing of the option. For example, where the Portfolio seeks to sell portfolio
securities at a "targeted" price, it may write a call option at that price. In
the event that the market rises above the exercise price, the Portfolio would
receive its "targeted" price, upon the exercise of the option, as well as the
premium income. Also, where the Portfolio seeks to buy portfolio securities at a
"targeted" price, it may write a put option at that price for which it will
receive the premium income. In the event that the market declines below the
exercise price, the Portfolio would pay its "targeted" price upon the exercise
of the option. In the event that the market does not move in the direction or to
the extent anticipated, however, the targeted sale or buy might not be
successful and the Portfolio could sustain a loss on the transaction which may
not be offset by the premium received. In addition, the Portfolio may be
required to forego the benefits of an intervening increase or decline in value
of the underlying security.
Risk Factors Associated with Futures and Options Transactions
In addition to any risk factors which may be described above, the
following sets forth certain information regarding the potential risks
associated with the Portfolio's futures and options transactions.
Risk of Imperfect Correlation - The Portfolio's ability effectively to
hedge all or a portion of its portfolio through transactions in futures, options
on futures or options on stock indexes depends on the degree to which movements
in the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Portfolio's
portfolio. If the values of the portfolio securities being hedged do not move in
the same amount or direction as the underlying security or index, the hedging
strategy for the Portfolio might not be successful and the Portfolio could
sustain losses on its hedging transactions which would not be offset by gains on
its portfolio. It is also possible that there may be a negative correlation
between the security or index underlying a futures or option contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Stock index futures or options based on a narrower index of
securities may present greater risk than options or futures based on a broad
market index, as a narrower index is more susceptible to rapid and extreme
fluctuations resulting from changes in the value of a small number of
securities. The Portfolio would, however, effect transactions in such futures or
options only for hedging purposes.
The trading of futures and options on indexes involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
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differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that the Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
The Portfolio will purchase or sell futures contracts or options only
if, in the Portfolio's Adviser's judgment, there is expected to be a sufficient
degree of correlation between movements in the value of such instruments and
changes in the value of the relevant portion of the Portfolio's portfolio for
the hedge to be effective. There can be no assurance that the Portfolio
Adviser's judgment will be accurate.
Potential Lack of a Liquid Secondary Market - The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require the Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While the Portfolio will
establish a futures or option position only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a market will
exist for any particular futures or option contract at any specific time. In
such event, it may not be possible to close out a position held by the
Portfolio, which could require the Portfolio to purchase or sell the instrument
underlying the position, make or receive a cash settlement, or meet ongoing
variation margin requirements. The inability to close out futures or option
positions also could have an adverse impact on the Portfolio's ability
effectively to hedge its portfolio, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Trading and Position Limits - Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Portfolio Adviser does not believe that
these trading and position limits will have an adverse impact on the hedging
strategies regarding the Portfolio's portfolios.
Restrictions on the Use of Futures and Option Contracts
Regulations of the CFTC require that the Portfolio enters into
transactions in futures contracts and options thereon for hedging purposes only,
in order to assure that it is not deemed to be a "commodity pool" under such
regulations. In particular, CFTC regulations require that all short futures
positions be entered into for the purpose of hedging the value of securities
held in the Portfolio's portfolio, and that all long futures positions either
constitute bona fide hedging transactions, as defined in such regulations, or
have a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained for the Portfolio, and accrued profits
on such positions. In addition, the Portfolio may not purchase or sell such
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instruments if, immediately thereafter, the sum of the amount of initial margin
deposits on its existing futures positions and premiums paid for options on
futures contracts would exceed 5% of the market value of the Portfolio's total
assets.
When the Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the account of
its broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that the
Portfolio derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than three months.
In addition to the foregoing requirements, the Portfolio's Board of
Trustees has adopted an additional restriction on the use of futures contracts
and options thereon, requiring that the aggregate market value of the futures
contracts held by the Portfolio not exceed 50% of the market value of its total
assets. Neither this restriction nor any policy with respect to the
above-referenced restrictions, would be changed by the Board of Trustees without
considering the policies and concerns of the various federal and state
regulatory agencies.
Investment Restrictions
In addition to the investment restrictions set forth below, the Fund
has adopted the following investment restrictions to enable it to invest in the
Portfolio:
It is a fundamental policy of the Fund that because it holds no
portfolio securities except interests in the Portfolio, the Fund's investment
objective, policies and restrictions shall be identical to the Portfolio's
investment objective, policies and restrictions, except for the following: the
Fund (1) may invest more than 5% of its assets in another issuer, (2) may,
consistent with Section 12 of the 1940 Act, invest in securities issued by other
registered investment companies, (3) may invest more than 10% of its net assets
in the securities of a registered investment company, (4) may hold more than 10%
of the voting securities of a registered investment company, (5) will
concentrate its investments in the investment company and (6) will not issue
senior securities except as permitted by an exemptive order of the SEC.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate its
assets, except that, as a temporary measure for extraordinary or
emergency purposes, it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed, and may
pledge, mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings (it is intended that, aside from reverse
repurchase transactions, money would be borrowed by the Portfolio only
from banks and only to accommodate requests for the repurchase of
shares of the Portfolio while effecting an orderly liquidation of
portfolio securities), provided that collateral arrangements with
respect to the Portfolio's permissible futures and options
transactions, including initial and variation margin, are not
considered to be a pledge of assets for purposes of this restriction;
the Portfolio will not purchase investment securities if its
outstanding borrowing, including reverse repurchase agreements, exceeds
5% of the value of the Portfolio's total assets;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and
except that, with respect to the
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Portfolio's permissible options and futures transactions, deposits of
initial and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures or options positions;
(3) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter under
the Securities Act of 1933 in selling a portfolio security;
(4) write, purchase or sell any put or call option or any
combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of
the warrants is the issuer of the underlying securities, (ii) the
writing, purchasing or selling of puts, calls or combinations thereof
with respect to U.S. Government securities or (iii) permissible futures
and options transactions, the writing, purchasing, ownership, holding
or selling of futures and options positions or of puts, calls or
combinations thereof with respect to futures;
(5) knowingly invest in securities which are subject to legal
or contractual restrictions on resale (including securities that are
not readily marketable, but not including repurchase agreements
maturing in not more than seven days) if, as a result thereof, more
than 10% of the Fund's or Portfolio's total assets (taken at market
value) would be so invested (including repurchase agreements maturing
in more than seven days);
(6) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts in the ordinary course of business,
other than (i) permissible futures and options transactions or (ii)
forward purchases and sales of foreign currencies or securities;
(7) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held by the Portfolio;
(8) make short sales of securities or maintain a short
position; except that the Portfolio may make such short sales of
securities or maintain a short position if when a short position is
open the Portfolio owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10%
of the Portfolio's net assets (taken at market value) is held as
collateral for such sales at any one time (it is the present intention
of management to make such sales only for the purpose of deferring
realization of gain or loss for federal income tax purposes; such sales
would not be made of securities subject to outstanding options);
(9) concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the Portfolio's
investment objective, up to 25% of the assets of the Portfolio, at
market value at the time of each investment, may be invested in any one
industry, except that positions in options and futures shall not be
subject to this restriction; or
(10) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and
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regulations promulgated thereunder, provided that collateral
arrangements with respect to the Portfolio's permissible options and
futures transactions, including deposits of initial and variation
margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
The Portfolio is not permitted to make loans to other persons, except
(i) through the lending of its portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's total assets (taken at market value),
(ii) through the use of repurchase agreements or the purchase of short-term
obligations and provided that not more than 10% of the Portfolio's total assets
will be invested in repurchase agreements maturing in more than seven days, or
(iii) by purchasing, subject to the limitation in paragraph 5 above, a portion
of an issue of debt securities of types commonly distributed privately to
financial institutions, for which purposes the purchase of short-term commercial
paper or a portion of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
For purposes of the investment restrictions described above and the
state and federal restrictions described below, the issuer of a tax-exempt
security is deemed to be the entity (public or private) ultimately responsible
for the payment of the principal of and interest on the security. For purposes
of Investment Restriction No. 9, industrial development bonds, where the payment
of principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an "industry".
The Portfolio has also adopted the following non-fundamental investment
policy which may be changed without shareholder approval. The Portfolio may
enter into repurchase agreements (a purchase of and a simultaneous commitment to
resell a security at an agreed-upon price on an agreed-upon date) only with
member banks of the Federal Reserve System and securities dealers believed
creditworthy and only if fully collateralized by U.S. Government obligations or
other securities in which the Portfolio is permitted to invest. If the vendor of
a repurchase agreement fails to pay the sum agreed to on the agreed-upon
delivery date, the Portfolio would have the right to sell the securities
constituting the collateral; however, the Portfolio might thereby incur a loss
and in certain cases may not be permitted to sell such securities. Moreover, as
noted above in paragraph 5, the Portfolio may not, as a matter of fundamental
policy, invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days.
The Portfolio has no current intention of engaging in the following
activities in the foreseeable future: (i) writing, purchasing or selling puts,
calls or combinations thereof with respect to U.S. Government securities; (ii)
purchasing voting securities of any issuer.
State and Federal Restrictions: In order to comply with certain federal
and state statutes and regulatory policies, as a matter of operating policy, the
Portfolio will not: (i) sell any security which it does not own unless by virtue
of its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions, (ii) invest for the
purpose of exercising control or management, (iii) invest more than 5% of the
Fund's assets in companies which, including predecessors, have a record of less
than three years' continuous operation, (iv) invest in warrants valued at the
lower of cost or market, in excess of 5% of the value of the Fund's net assets,
and no more than 2% of such value may be warrants which are not listed on the
New York or American Stock Exchanges, (v) purchase or retain in the Portfolio's
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or trustee of the Portfolio, or is an
officer or director of the Portfolio Adviser, if after the purchase of the
securities of such issuer by the Portfolio one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value, (vi) as to 50% of the
Portfolio's total assets, purchase securities of any issuer if such purchase at
the time thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class. These policies are not fundamental and may be changed by
the Portfolio's Board of Trustees without shareholder approval.
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Percentage and Rating Restrictions: If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in the Prospectus is adhered to at the time an investment is made or assets
are so utilized, a later change in percentage resulting from changes in the
value of the portfolio securities or a later change in the rating of a portfolio
security of the Portfolio will not be considered a violation of policy.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Portfolio Adviser and who
is appointed and supervised by senior officers of the Portfolio Adviser. Changes
in the Portfolio's investments are reviewed by the Board of Trustees. The
Portfolio's portfolio manager may serve other clients of the Portfolio Adviser
in a similar capacity.
The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the Portfolio Adviser will weigh the added costs of
short-term investment against anticipated gains.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Portfolio Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the level of
their brokerage commissions. Debt securities are traded principally in the
over-the-counter market through dealers acting on their own account and not as
brokers. In the case of securities traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Portfolio Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Portfolio Adviser on the tender of the Portfolio's portfolio securities in
so-called tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for the Portfolios by the Portfolio Adviser. At present, no other
recapture arrangements are in effect.
Under Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Adviser may cause the Portfolio to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for the Portfolio in excess of the amount
other broker-dealers would have charged for the transaction if the Portfolio
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Portfolio Adviser's overall responsibilities to the Portfolio or to its
clients. Not all of such services are useful or of value in advising the
Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Portfolio Adviser's other clients as part of
providing advice as to the availability of
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securities or of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto, such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Portfolio Adviser for
no consideration other than brokerage or underwriting commissions. Securities
may be bought or sold through such broker-dealers, but at present, unless
otherwise directed by the Portfolio, a commission higher than one charged
elsewhere will not be paid to such a firm solely because it provided Research to
the Portfolio Adviser.
The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Portfolio Adviser as a consideration in the selection of
brokers to execute portfolio transactions. However, the Portfolio Adviser would
be unable to quantify the amount of commissions which are paid as a result of
such Research because a substantial number of transactions are effected through
brokers which provide Research but which are selected principally because of
their execution capabilities.
The advisory fees that the Funds pay to the Portfolio Adviser will not
be reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Portfolio Adviser in carrying out its obligations to the
Portfolio. While such services are not expected to reduce the expenses of the
Portfolio Adviser, the Portfolio Adviser would, through use of the services,
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When the Portfolio or the
Portfolio Adviser's other clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will generally
produce better executions for the Portfolio.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Years Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
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materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees of the
Portfolio. Portfolio securities which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the Portfolio.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Portfolio will be valued on an amortized cost
basis by the Portfolio, excluding unrealized gains or losses thereon from the
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it will be valued at current market value until the 60th day
prior to maturity, and will then be valued on an amortized cost basis based upon
the value on such date unless the Trustees of the Portfolio determine during
such 60-day period that this amortized cost value does not represent fair market
value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
Orders to purchase or redeem shares of the Fund received by dealers
prior to 4:15 P.M. (New York Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options exchanges
(normally 4:15 P.M., New York Time), provided the order is received by the
FUND's Transfer Agent prior to 4:15 P.M. on that day. It is the responsibility
of the dealer to insure that all orders are transmitted timely to the FUND.
Orders received by dealers after 4:15 P.M. will be confirmed at the next
computed offering or redemption price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
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ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
period ended February 28, 1995 was 19.34%.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December 1994, from the
initial value invested. The FUND will, however, disclose the pro rata share of
the account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would reduce
the performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
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TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the FUND is not subject to federal income tax on the portion
of its net investment income (i.e., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (i.e., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the FUND made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
Because the FUND invests all of its assets in the Portfolio, which is classified
as a partnership for federal income tax purposes, the FUND will be deemed to own
a proportionate share of the assets and income of the Portfolio for purposes of
determining whether the FUND satisfies the requirements (described more fully
below) necessary to qualify as a regulated investment company.
In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the company's principal business of
investing in stock or securities) and other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement");
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). Because of the
Short-Short Gain Test, the FUND may have to limit the sale of appreciated
securities that it held for less than three months. However, foreign currency
gains that are directly related to the company's investment in stock or
securities are not treated as short-short gains. Similarly, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss, since
losses are disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-Short
Gain Test. However, income attributable to realized market appreciation will be
so treated for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition
of an asset (and allocated to the Fund) will be a capital gain or loss. However,
gain recognized on the disposition of a debt obligation purchased at a market
discount will be treated as ordinary income to the extent of the portion of the
discount that accrued while the Portfolio held the obligation. In addition,
under the rules of Code Section 988, a portion of gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto, and (with certain exceptions) gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, will generally
be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an asset is
long-term or short-term, the holding period of the asset
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may be affected if (1) the asset is used to close a "short sale" (which may
include the acquisition of a put option) or is substantially identical to
another asset so used, (2) the asset is otherwise held by the Portfolio as part
of a "straddle" (as defined) or (3) the asset is stock and the Portfolio grants
an in-the-money qualified covered call option with respect thereto. In addition,
the FUND may be required to defer the recognition of a loss on a disposition of
an asset held as part of a straddle to the extent of any unrecognized gain on
the offsetting position.
Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option written by
the Portfolio will be treated as a short-term capital gain or loss. For purposes
of the Short-Short Gain Test, the holding period of such an option will commence
on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, the Portfolio may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts are subject to special tax
treatment as "Section 1256 contracts." Such contracts are treated as if they are
sold for their fair market value on the last business day of the taxable year,
even though a taxpayer's obligations (or rights) under such contracts have not
terminated as of such date. Gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any gain or loss recognized upon the actual
termination of such contracts during the year. The combined capital gain or loss
for the year with respect to Section 1256 contracts is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. (The
Portfolio may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments that are
not Section 1256 contracts.) The IRS has held in private rulings that
constructive gains arising from deemed year-end dispositions of Section 1256
contracts will not be taken into account for purposes of the Short-Short Gain
Test.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it were incurred in the succeeding year.
In addition to the requirements described above, the FUND must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the RIC has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which it does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the RIC controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security and not
the issuer of the option.
If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the FUND's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
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Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a RIC that fails to
distribute in each calendar year an amount equal to 98% of its ordinary taxable
income for the calendar year and 98% of its capital gain net income for the
one-year period ended on October 31 of the year. The balance of such income must
be distributed during the next calendar year.
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. The FUND
may in certain circumstances have to liquidate portfolio investments in order to
effect such distributions.
FUND Distributions
The FUND intends to distribute substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute
such gains annually. Net capital gain distributed and designated as a capital
gain dividend is taxable to shareholders as long-term capital gain, regardless
of the shareholder's holding period in his shares and the time when such gain
was recognized by the Portfolio.
If the FUND elects to retain its net capital gain, it will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if each
received a distribution of his pro rata share of the gain, with the result that
each would be required to report his pro rata share of such gain on his tax
return as a long-term capital gain, would receive a refundable tax credit for
his pro rata share of the tax paid by the FUND on the gain, and would increase
the tax basis for his shares by an amount equal to the deemed distribution less
the credit.
Ordinary income dividends distributed by the FUND will qualify for the
70% dividends-received deduction generally available to corporations (other than
corporations, such as S corporations, which are not eligible for the deduction)
to the extent of the portion of the distribution attributed to "qualifying
dividends" received by the Portfolio during the taxable year from domestic
corporations. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it was received with respect to stock that the
Portfolio held for less than 46 days (91 days in the case of certain preferred
stock), subject to the limitations of Code Sections 246(c)(3) and (4) and 246A.
Moreover, the dividends-received deduction for a corporate shareholder will also
be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its FUND shares or the FUND fails to satisfy them
with respect to its interest in the Portfolio.
Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries, which
entitle the Portfolio to reduced rates of, or exemptions from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the future mix of the Portfolio's investment in various countries
is not known.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholders' tax basis in their shares;
any excess will be treated as gain from a sale of the shares, as discussed more
fully below.
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Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the FUND (or
of another fund). In addition, if a shareholder's cost for his shares already
reflects undistributed (realized or unrealized) income or gain, a subsequent
distribution of such amounts will be taxable to the shareholder in the manner
described above, although economically it constitutes a return of capital.
Ordinarily, shareholders are required to take distributions into
account in the year in which they are made. However, dividends declared by the
Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such year if such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of dividends and the proceeds of redemption paid to any
shareholder (1) who has provided either an incorrect tax identification number
or no number at all to the Fund, (2) who is subject to backup withholding
pursuant to a notice from the IRS for failure to report interest or dividend
income properly, or (3) who has not otherwise certified to the FUND that it is
not subject to backup withholding.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
his shares in an amount equal to the difference between the amount realized on
the shares and his adjusted tax basis in them. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
FUND within 30 days before or after the disposition. In general, gain or loss
arising from a sale or redemption of FUND shares will constitute capital gain or
loss, and will be long-term capital gain or loss if the shares were held longer
than one year. However, a capital loss arising from a disposition of shares held
for six months or less will be treated as a long-term capital loss to the extent
of any amount of capital gain dividends received on the shares. For this
purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(alluded to above in connection with the dividends-received deduction for
corporations) will generally apply. Capital losses in any year are deductible
only to the extent of capital gains plus, in the case of noncorporate taxpayers,
$3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income
received from the FUND is "effectively connected" with a U.S. trade or business
carried on by the shareholder.
If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or a lower treaty rate, if one applies) of
the gross amount of the dividend. Such a shareholder would generally be exempt
from U.S. federal income tax on gains realized on a sale of FUND shares and
capital gain dividends.
If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and gain realized upon the sale of FUND shares will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.
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In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless they furnish the FUND with proper notification of their exempt
status.
The tax consequences to foreign shareholders entitled to claim the
benefits of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the FUND, including the
applicability of any foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly alter the
conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax advisers
as to the consequences of their investing in the FUND in light of their
particular circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their ages, addresses, principal
occupations, and present positions, including any affiliation with Virtus
Capital Management, Inc., Signet Trust Company, Federated Investors, Federated
Securities Corp., Federated Services Company, and Federated Administrative
Services or the Funds (as defined below).
<TABLE>
<S> <C>
John F. Donahue, 70 (1)(2)
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman
and Director of Blanchard Precious Metals
Fund, Inc.; Chairman and Trustee of The Virtus
Funds; Chairman and Trustee, Federated
Investors, Federated Advisers, Federated
Management, and Federated Research;
Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.;
Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee,
or Managing General Partner of the Funds.
Thomas G. Bigley, 61
28th Floor
One Oxford Centre
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director, Oberg Manufacturing
Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
John T. Conroy, Jr., 57 (3)
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; President, Investment Properties
Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President,
Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds;
formerly, President, Naples Property
Management, Inc.
William J. Copeland, 76 (3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Director and Member of the
Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.
James E. Dowd, 72 (3)
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Director, The
Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the
Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D., 62 (1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Member,
Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh
Medical Center--Downtown, Member, Board of Directors,
University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr., 70 (1)(3)
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A.,
Western Region.
Edward C. Gonzales, 64 (1)
Federated Investors Tower
Pittsburgh, PA President, Trustee and Treasurer of the Fund;
President, Director and Treasurer of Blanchard
Precious Metals Fund, Inc.; President, Trustee
and Treasurer of The Virtus Funds; Vice
President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer,
Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of
some of the Funds; Vice President and Treasurer
of the Funds.
Peter E. Madden, 53
225 Franklin Street
Boston, MA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Consultant; State Representative,
Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the
Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer, 68
Two Gateway Center - Suite 674
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Attorney-at-law; Partner, Henny,
Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial,
F.A.
John E. Murray, Jr., J.D., S.J.D., 62
Duquesne University
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C>
Virtus Funds; President, Law Professor,
Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee
or Managing Partner of the Funds.
Wesley W. Posvar, 69
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Professor, Foreign Policy and
Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND
Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman,
Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the
Funds; President Emeritus, University of
Pittsburgh; formerly, Chairman, National
Advisory Council for Environmental Policy and
Technology.
Marjorie P. Smuts, 59
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Director of Blanchard
Precious Metals Fund, Inc.; Trustee of The
Virtus Funds; Public relations/marketing
consultant; Director, Trustee, or Managing
General Partner of the Funds.
- ---------------
(1) This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
(2) Member of the Executive Committee. The Executive Committee of the Board of Trustees handles
the responsibilities of the Board of Trustees between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations
related to the financial reporting process.
</TABLE>
The Funds
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Cash Management Trust; Automated Government Money Trust; California
Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
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<PAGE>
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 years;
Federated U.S. Government Securities Fund: 3-5 years; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities, Inc,; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal Trust:
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligation; The Virtus Funds; and World Investment Series,
Inc.
Fund Ownership
As of June 30, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of June 30, 1995, no shareholder
owned 5% or more of the outstanding shares of the FUND.
The Trustees and officers of the Portfolio and their principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 6 St. James Avenue,
Suite 900, Boston, Massachusetts 02116.
<TABLE>
<S> <C>
Stuart W. Cragin, Jr. Trustee, Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio,
108 Valley Road International Equity Portfolio, Mutual Fund
Greenwich, CT 06870 Group, Mutual Fund Trust and Mutual Fund Variable
Annuity Trust; President, Fairfield Testing Laboratory, Inc.
(laboratory providing materials testing), since 1989; prior to
1989 he served in a variety of positions with Union Camp
Corporation, Trinity Paper & Plastics Corp., and Conover
Industries, Inc.
Irv Thode Trustee, Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Capital Growth Global Fixed Income Portfolio,
80 Perkins Road International Equity Portfolio, Mutual Fund Group, Mutual
Greenwich, CT 06830 Fund Trust and Mutual Fund Variable Annuity Trust;
Retired; Vice President, Eastern Region Sales, Quotron
Systems; 1983 through 1990 has held numerous executive
positions with Control Data Corporation including President
of Latin American operations and General Manager of its
Data Services business.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
H. Richard Vartabedian* Trustee and Chairman, Growth and Income Portfolio,
Chairman Capital Growth Portfolio, Global Fixed Income
P.O. Box 296 Portfolio, International Equity Portfolio; Trustee, Mutual
Beach Road Fund Group, Mutual Fund Trust and Mutual Fund Variable
Hendrick's Head Annuity Trust; Retired; Former Senior Investment Officer,
Southport, Maine 04576 Division Executive of the Investment Management Division
of The Chase Manhattan Bank, N.A., 1980 through 1991.
Fergus Reid, III* Trustee, Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio, International
971 West Road Equity Portfolio; Trustee and Chairman, Mutual Fund
New Canaan, CT 06840 Group, Mutual Fund Trust and Mutual Fund Variable
Annuity Trust; Chairman and Chief Executive Officer,
Lumelite Corporation, since September, 1985.
Joseph Harkins* Retired; Trustee, Growth and Income Portfolio, Capital
Trustee Growth Portfolio, Global Fixed Income Portfolio,
257 Plantation Circle South International Equity Portfolio, Mutual Fund Group, Mutual
Ponte Vedra Beach, FL 32082 Fund Trust and Mutual Fund Variable Annuity Trust;
Commercial Sector Executive and Executive Vice President
of The Chase Manhattan Bank, N.A. from 1985 through
1989; Director of Blessing Corporation and Jefferson
Insurance Company of New York, Monticello Insurance
Company.
Richard E. Ten Haken Trustee of Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income International Equity
4 Barnfield Road Portfolio, Mutual Fund Group, Mutual Fund Trust and
Pittsford, New York 14534 Mutual Fund Variable Annuity Trust; District
Superintendent of Schools, Monroe No. 2 and Orleans
Counties, New York; Chairman of the Finance and Audit
and Accounting Committees, Member of the Executive
Committee and Vice President, New York State Teachers'
Retirement System.
William J. Armstrong Trustee of Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio, International
49 Aspen Way Equity Portfolio, Mutual Fund Group, Mutual Fund
Upper Saddle River, NJ 07458 Trust and Mutual Fund Variable Annuity Trust; Vice
President and Treasurer, Ingersoll-Rand Company
(Woodcliff Lake, New Jersey).
John R.H. Blum Trustee of Growth and Income Portfolio, Capital Growth
Trustee Portfolio, Global Fixed Income Portfolio, International
1 John Street Equity Portfolio, Mutual Fund Group, Mutual Fund Trust
Millerton, New York 12546 and Mutual Fund Variable Annuity Trust; Partner in the law
firm of Richards, O'Neil & Allegaert.
</TABLE>
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<PAGE>
Officers and Trustees Compensation
- --------------------------------------------------------------------------------
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUND COMPENSATION FROM PAID TO TRUSTEES FROM
THE FUND THE FUND AND FUND
COMPLEX*
- --------------------------------------------------------------------------------
John F. Donahue, $-0- $-0- for the Fund Complex
Chairman and Trustee
Thomas G. Bigley, Trustee $-0- $489.00 for the Fund Complex
John T. Conroy, Jr., Trustee $-0- $2,001.50 for the Fund Complex
William J. Copeland, Trustee $-0- $2,001.50 for the Fund Complex
James E. Dowd, Trustee $-0- $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D., $-0- $1,816.00 for the Fund Complex
Trustee
Edward L. Flaherty, Jr., $-0- $2,001.50 for the Fund Complex
Trustee
Edward C. Gonzales, President $-0- $-0- for the Fund Complex
and Trustee
Peter E. Madden, Trustee $-0- $1,517.50 for the Fund Complex
Gregory F. Meyer, Trustee $-0- $1,816.00 for the Fund Complex
John E. Murray, Jr., J.D., $-0- $-0- for the Fund Complex
S.J.D., Trustee
Wesley W. Posvar, Trustee $-0- $1,816.00 for the Fund Complex
Marjorie P. Smuts, $-0- $1,816.00 for the Fund Complex
Trustee
* Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund,Inc. and The
Virtus Funds.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet Bank
to restrict the flow of non-public information, Fund investments are typically
made without any knowledge of Signet Bank's or its affiliates' lending
relationships with an issuer.
The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or
-24-
<PAGE>
omitted by it, except acts or omissions involving willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.
Management Fees
For its services, VCM receives an annual management fee as described in
the prospectus.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
Fund's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the
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<PAGE>
FUND or the Trustees. The Declaration of Trust provides for indemnification out
of the FUND property of any shareholder held personally liable for the
obligations of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.
-26-
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
Bond Ratings
Moody's Investors Service, Inc. -- Bonds which are rated Aaa are judged
to be the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong positions of
such issues. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's applies numerical modifiers "1," "2" and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's Corporation Bonds rated AAA have the highest rating
assigned by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from AAA issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than bonds in higher rated categories.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions liable to but slight market fluctuation other than through changes
in the money rate. The prime feature of an AAA bond is showing of earnings
several times or many times interest requirements, with such stability of
applicable earnings that safety is beyond reasonable question whatever changes
occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety
virtually beyond question and are readily salable, whose merits are not unlike
those of the AAA class, but whose margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured but influenced
as to rating by the lesser financial power of the enterprise and more local type
market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit
quality with negligible risk factors; only slightly more than U.S. Treasury
debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit
quality with strong protection factors. Risk is modest but may vary slightly
from time to time because of economic conditions.
Bonds rated TBW-1 are judged by Thomson BankWatch, Inc. to be of the
highest credit quality with a very high degree of likelihood that principal and
income will be paid on a timely basis. Bonds rated TBW-2 offer a strong degree
of safety regarding repayment. The relative degree of safety, however, is not as
high as TBW-1.
Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1-Highest Quality; Prime 2-Higher
Quality; Prime 3-High Quality.
A-1
<PAGE>
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess safety characteristics. Capacity for timely payment on
issues with the designation A-2 is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Issues carrying the
designation A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
A-2
<PAGE>
August 11, 1995
U.S.Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Blanchard Funds
Blanchard Global Growth Fund
Blanchard 100% Treasury Money Market Fund
Blanchard Short-Term Global Income Fund
Blanchard American Equity Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Bond Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Worldwide Emerging Markets Fund
Blanchard Growth & Income Fund
Blanchard Capital Growth Fund
Registration No. 33-3165
------------------------
Dear Sir/Madam:
We are electronically filing via EDGAR, on behalf of Blanchard Funds
("Registrant"), and pursuant to the provisions of Rule 497(c) promulgated under
the Securities Act of 1933, as amended, Registrant's combined prospectus for
Blanchard Growth and Income Fund series and Blanchard Capital Growth Fund
series, Registrant's combined prospectus for its other above-referenced series
and each of the series' statements of additional information dated Agust 7,
1995.
Very truly yours,
Joanne Doldo
cc: C. Grant Anderson
Michael Freedman
Beth Tafuri
Susan Penry-Williams, Esq.
