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
