1933 Act File No. 33-3165
1940 Act File No. 811-4579
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 25 X
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 35
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BLANCHARD FUNDS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing on pursuant
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pursuant to paragraph (b) to paragraph (b)
X 60 days after filing pursuant on (date) pursuant to
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to paragraph (a)(1) paragraph (a)(1)
75 days after filing pursuant on (date) pursuant to
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to paragraph (a)(2) of paragraph (a)(2) rule 485.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company act of 1940,
and:
filed the Notice required by that Rule on ; or
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intends to file the Notice required by that Rule on or about
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; or
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X during the most recent fiscal year did not sell any securities pursuant
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to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of Blanchard Funds, which
consists of eight investment portfolios: (1) Blanchard Asset Allocation Fund;
(2) Blanchard Capital Growth Fund; (3) Blanchard Flexible Income Fund; (4)
Blanchard Flexible Tax-Free Bond Fund; (5) Blanchard Global Growth Fund; (6)
Blanchard Growth & Income Fund; (7) Blanchard Short-Term Flexible Income
Fund; and (8) Blanchard Worldwide Emerging Markets Fund, is comprised of the
following:
Part A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. (1-8) Cover Page.
Item 2. (1-8) Fee Table, Summary of Fund Expenses.
Item 3. (1-8) Highlights.
Item 4. (1-8) Investment Objectives and Policies; Additional
Information about the Funds and Portfolios; Additional
Information on Investment Policies and Techniques;
(1-8) General Information; Investment Information;
Investment Objective; Investment Policies; Additional
Risk Considerations; Investment Risks Associated with
Investment in Equity and Debt Securities.
Item 5. (1-8) Management of the Funds; Portfolio Advisory
Services.
(1-8) Blanchard Funds Information; Management of the
Fund; Distribution of Fund Shares; Administration of
the Fund.
(1-8) Transfer Agent and Dividend Disbursing Agent
Item 5 A. (1-8) Performance of the Portfolio Adviser; Performance
Computation Information.
(1-8) Not Applicable
Item 6. (1-8) Additional Information about the Funds and the
Portfolios; Other Information; Cover Page; Shareholder
Inquiries; Tax Matters.
(1-8) Expenses of the Fund; General Information;
Shareholder Information; Voting Rights;
Massachusetts Partnership Law; Tax Information; Federal
Income Tax.
Item 7. (1-8) How to Invest; Investor Services; How to Invest;
Distribution of Shares of the Funds.
(1-8) Net Asset Value; How to Invest; Purchases by
Mail; Investors Services; Automatic Withdrawal Plan.
Item 8. (1-8) How to Redeem; By Telephone; By Mail.
Item 9. (1-8) Not Applicable
Part B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. (1-8) Cover Page.
Item 11. (1-8) Table of Contents.
Item 12. (1-8) Not Applicable
Item 13. (1-8) Investment Objective; Policies and
Restrictions;
Portfolio Transactions.
(1-8) General Information About the Fund; Investment
Objectives and Policies; Investment Limitations.
Item 14. (1-8) The Management of the Fund.
(1-8) Blanchard Funds Management; Trustee
Compensation.
Item 15. (1-8) Not Applicable
(1-8) Share Ownership.
Item 16. (1-8) Investment Advisory Services; Investment
Advisory Services; Cover Page; See Prospectus.
(1-8) Investment Advisory Services; Administrative
Services; Custodian.
Item 17. (1-8) Portfolio Transactions.
(1-8) Brokerage Transactions.
Item 18. (1-8) See Prospectus.
Item 19. (1-8) See Prospectus; Computation of Net Asset Value.
(1-8) Purchasing Shares; Determining Net Asset Value;
Redeeming Shares; Redemption in Kind.
Item 20. (1-8) Tax Matters.
(1-8) Tax Status.
Item 21. (1-8) Not Applicable
Item 22. (1-8) Performance Information.
(1-8) Total Return; Yield; Performance Comparisons.
Item 23. (1-8) Not Applicable
Incorporate by reference pursuant to Rule 411 under the
Securities Act of 1933, Parts A and B of Post-Effective
Amendment No. 29, filed August 7, 1995, in their entirety.
BLANCHARD GROUP OF FUNDS
COMBINED PROSPECTUS
o Blanchard Global Growth Fund
o Blanchard Precious Metals Fund, Inc.
o Blanchard Flexible Income Fund
o Blanchard Short-Term Flexible Income Fund
o Blanchard Flexible Tax-Free Bond Fund
o Blanchard Worldwide Emerging Markets Fund
PROSPECTUS DATED AUGUST , 1996
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THE BLANCHARD GROUP OF FUNDS
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
Blanchard Funds (the "Trust"), which currently consists of seven
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.<R/>
Table of Contents will be generated when document is complete.
Please read this Prospectus carefully and retain it for future reference.
A copy of each Fund's Statement of Additional Information, dated August ,
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1996, has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated herein by reference. You may request a copy of the Statements
of Additional Information or a paper copy of this prospectus, if you have
received your prospectus electronically, free of charge by calling 1-800-829-
3863. To obtain other information or make inquiries about the Funds, contact
the Funds at 1-800-829-3863. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Funds, is maintained electronically with the SEC at Internet
Web site (http://www.sec.gov).<R/>
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 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 , 1996<R/>
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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; U.S. Fixed Income; and Emerging
Markets.
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 FLEXIBLE INCOME FUND ("BSTFIF") 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
poartfolio 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.
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,
1996, VCM had more than $ billion in assets under management. VCM selected,
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continually monitors and evaluates the Funds' Portfolio Advisers. The
Portfolio Advisers are responsible for the selection of each Fund's portfolio
investments.<R/>
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
is $3,000 ($2,000 for qualified retirement plans, such as IRAs and Keoghs).
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 has also adopted a distribution 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."
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
BGGF and BWEMF intend to declare dividends at least annually
from net investment income. BSTFIF, BFTFBF and BFIF intend to declare
dividends monthly 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 monthly check. See "Tax
Matters."<R/>
SPECIAL CONSIDERATIONS
The 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 will be collectively referred to as "Portfolio Advisers."
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.
SHAREHOLDER TRANSACTION
EXPENSES BGGF BTMMF BSTGIF BFIF BSTBF
BWEMF BAEF BFTFBF BPMF
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 .00% .75%4
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 ears 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.
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 $ 15 $ 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
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 Funds' 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.
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.
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
Funds". 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.
Growth & Capital
Shareholder Transaction Expenses Income 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 Funds") ...................... 1.10% 1.10%
12b-1 Fees7 ...................... .50% .50%
Other Expenses (See "Management of
the Funds") ...................... .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 & 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.
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
7
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.
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 polices reflect VCM's opinion that the world
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 by 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 table indicates the maximum
percentage of total assets of the Fund that may be invested in each
sector. The Fund may have zero percent allocated to any sector when
deemed appropriate by the Portfolio Adviser, Mellon Capital Management
Corporation ("MCM" or the "Portfolio Adviser").
PERCENTAGE OF TOTALASSETS OF THE FUND IN EACH SECTOR
SECTORS MAXIMUM
U.S. Equities Sector 65%
Foreign Equities Sector 65%
U.S. Fixed Income Sector 65%
Foreign Fixed Income Sector 65%
Precious Metals Securities Sector25%
Emerging Markets Sector 15%
The Portfolio Adviser will actively allocate Fund assets, through
investments in the U.S. Equities, Foreign Equities, U.S. Fixed Income and
Foreign Fixed Income Sectors, across the major debt and equity markets of
the world, overweighting sectors that the Portfolio Adviser believes are
undervalued. The Portfolio Adviser may also allocate Fund assets to the
Precious Metals Securities Sector and the Emerging Markets Sector in an
attempt to further diversify portfolio holdings, protect against
increases in inflation and enhance overall returns. The Portfolio Adviser
will monitor currency exposure, and such exposure will be actively hedged
as currencies become overvalued.
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 found only in the U. S. Equities sector, as the
Precious Metals Securities 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 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, FOREIGN EQUITIES, U.S. FIXED INCOME AND FOREIGN
FIXED INCOME SECTORS. Within the four U.S. and foreign equities and
income sectors, the Portfolio Adviser will use a highly disciplined
process to determine the percentage of the Fund's assets which will be
from time-to-time allocated among each U.S. and foreign country's
markets, based upon the Portfolio Adviser's assessment of risk and the
degree by which each such market is currently undervalued. (The foreign
countries which will be included within the Foreign Equities and the
Foreign Fixed Income Sectors are the following: Australia, Austria,
Belgium, Canada, Denmark, France, Finland, Germany, Hong Kong, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Singapore/Malaysia,
South Africa, Spain, Sweden, Switzerland and the United Kingdom. This
list may be modified from time-to-time to conform to the list of
countries included in the Morgan Stanley Capital International World
Index [the "Morgan Stanley Index"]).
In estimating the relative attractiveness of each asset class, MCM
will take into account various factors. Common stocks will be evaluated
using a "dividend-discount" model. This model provides an expected return
of the relevant common stock index of each market in which the Fund may
invest (i.e., the Standard & Poor's 500 Composite Stock Price Index*
[the "S&P 500 Index"] for the U.S. Equities Sector, and the separate
country indexes comprising the Morgan Stanley Index for the Foreign
Equities Sector) based upon earnings for companies whose stocks are
included in such Indexes. The expected bond return is that expected to be
produced by long-term bonds with credit risks similar to bonds rated Aa
by Moody's Investors Service, Inc. or AA by Standard & Poor's
Corporation.
Once expected return and volatility (risk) estimates are developed
for each asset class within the four U.S. and foreign equity and fixed
income sectors, the Portfolio Adviser will attempt to identify apparent
imbalances in the relative prices of the securities of each market, using
a computer model.
* "Standard & Poor's(R)," "S&P(R)," and "S&P 500(R)" and "Standard &
Poor's 500" are trademarks of McGraw Hill, Inc. and have been licensed
for use by MCM.
The Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the owners of the Fund or any member of the public regarding
the advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P 500 Index to track general stock
market performance. S&P's only relationship to MCM is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index which
is determined, composed and calculated by S&P without regard to MCM or
the Fund. S&P has no obligation to take the needs of MCM or the owners of
the Fund into consideration in determining, composing or calculating the
S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Fund or the timing of the
issuance or sale of the Fund or in the determination or calculation of
the equation by which the Fund is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing
or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY MCM,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
To implement its allocation strategy, the Portfolio Adviser will
invest in the following securities: (i) in the U.S. Equity Sector, the
Portfolio Adviser will invest in a diversified portfolio of common stocks
which seeks to track the performance of the S&P 500 Index; (ii) in the
U.S. Fixed Income Sector, the Portfolio Adviser will invest in a
diversified portfolio of U.S. fixed income obligations which seeks to
track the performance of the Lehman Long-Term Treasury Index; (iii) in
the Foreign Equities Sector, the Portfolio Adviser will invest in a
diversified portfolio of common stocks which seeks to track the
performance of individual country segments of the Morgan Stanley Index;
(iv) and in the Foreign Fixed Income Sector, the Portfolio Adviser will
invest in a portfolio of Foreign Government fixed income obligations
which seeks to track the individual country segments of the Salomon
Brothers World Government (5+) Bond Index.
PRECIOUS METALS SECURITIES SECTOR. Precious metals securities
include securities of metal mining producer and non-producer companies
that are engaged in (i) the exploration, refining and development of
gold, silver, palladium, and platinum; (ii) the manufacture or production
of products incorporating such precious metals, (for example, jewelry,
photographic supplies and medical equipment and supplies); or (iii) 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.
In particular, the Portfolio Adviser 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.
EMERGING MARKETS SECTOR. The Fund may invest in emerging country
equity securities, which would include 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 market for which is 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 Portfolio Adviser based upon publicly
available information and inquiries made to the companies.
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 Portfolio Adviser believes the economies are
developing strongly and in which the markets are becoming more
sophisticated.
In addition to the normal determinants of interest rates,
inflation, economic growth and currency movements, country selections and
weightings 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 balance sheet,
geographical sales and profit spread, and good marketability in shares);
and (iii) price and timing.
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.
OPTIONS AND FUTURES. With respect to all sectors, the Portfolio
Adviser may utilize stock and bond futures and options, currency hedging,
and other investment techniques described under "Certain Investment
Strategies and Policies - Options and Futures " and in the Fund's
Statement of Additional Information, subject to the limitations set forth
therein.<R/>
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 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 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 FLEXIBLE INCOME 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.
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 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.
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 Flexible Income 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 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 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 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:
BGGF- 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. BPMF -1.00% 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. BFIF -.75%;
BSTFIF -.75%; BFTFBF -.75% and BWEMF -1.25%.<R/>
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.
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.
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
Mellon Capital Management Corporation is the Portfolio Adviser to
the Fund. MCM was established in 1983, and provides investment advisory
services to investment companies, pension plans, foundations, endowments
and other institutions located both in the U.S. and abroad. As of
September 30, 1995, MCM had over $ billion of assets under management.
--
MCM, a wholly owned indirect subsidiary of Mellon Bank Corporation, is
located at 595 Market Street, Suite 3000, San Francisco, California
94105.
The Fund's portfolio manager is Charles J. Jacklin. Mr. Jacklin has
performed this duty since May 28, 1996. Mr. Jacklin manages and develops
global asset allocation strategies, and develops and implements MCM's
value-added investment strategies. Prior to joining MCM, he served on the
finance faculties of the Stanford University and University of Chicago
Schools of Business. Mr. Jacklin has also served as Senior Staff
Economist for Financial Markets and Banking for the President's Council
of Economic Advisers, and had primary responsibility for all matters
related to financial markets and banking. He has published a number of
articles on finance and investment in academic research journals, and is
an associate editor for the Review of Quantitative Finance and
Accounting. Mr. Jacklin holds a Ph.D. in Finance from Stanford
University.
The Sub-Advisory Contract. The Sub-Advisory Contract provides that
MCM shall pay all expenses incurred by it and its staff in connection
with the performance of its services under the Sub-Advisory Contract,
including the payment of salaries of all officers and employees who are
employed by it. VCM will pay MCM an annual fee not to exceed .375% of the
Fund's average daily net assets up to $100 million; .35% on net assets
between $100 million and $150 million; and .325% on net assets in excess
of $150 million. (The Trust pays VCM an annual fee not to exceed 1.00% of
the Fund's average daily net assets up to $150 million; .875% on net
assets between $150 million and $300 million; and .75% on net assets in
excess of $300 million.)
The Sub-Advisory Contract provides that MCM shall not be liable for
any error of judgment or mistake of law or for any loss suffered by VCM
or the Trust in connection with the matters to which the Sub-Advisory
Contract relates, provided that nothing in the Sub-Advisory Contract
shall be deemed to protect or purport to protect MCM against any
liability to VCM or the Trust to which MCM would otherwise be subject by
reason of willful malfeasance, bad faith or gross negligence on its part
in the performance of its duties or by reason of MCM's reckless disregard
of its obligation and duties under the Sub-Advisory Contract.<R/>
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
BLANCHARD FLEXIBLE INCOME FUND
VCM has retained OFFITBANK, 520 Madison Avenue, New York, New York
10022 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 $ 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 $ 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 WORLDWIDE EMERGING MARKETS FUND
VCM has retained Martin Currie Inc., a member of the Martin Currie
Group, to provide portfolio advisory services for the Equity Securities
sector of the Fund. 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 $1.5
billion in global assets.
Currently, the Martin Currie Group operates its investment business
through four companies: in North America, through Martin Currie Inc., 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.
BLANCHARD PRECIOUS METALS FUND, INC.
VCM has retained Cavelti Capital Management, Ltd., of Toronto,
Canada to provide portfolio advisory services to the Fund. Cavelti Capital
Mangement, 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.
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 determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange. If your order is
received after the above time, 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.<R/>
For all Funds 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 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, P.O. Box 8612, Boston, MA 02266-8612, together
with a check payable to the Blanchard Group of Funds in payment for the
shares. 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.
<R/>
Orders by mail are considered received after payment by check is
converted into Federal funds. This is generally the next business day after
the Transfer Agent receives the check.
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 to: State
Street Bank and Trust Company, ABA #011000028, DDA #0627-975-6, Boston, MA,
indicating the name of the Fund, your account number and the account
registration.<R/>
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.
BY TELEPHONE. This service allows you to purchase additional
shares quickly and conveniently through an electronic transfer of money. When
you make an additional purchase by telephone, Blanchard will automatically
debit your predesignated bank account for the desired amount. To establish
the telephone purchase option on your new account you must complete the
action on the application and attach a "voided" check from your bank account.
If your account is already established, please call 1-800-829-3863 to request
the appropriate form. This option will become effective 15 calendar days
after the form is processed. <R/>
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 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.
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 or for Investment Shares of any Virtus Fund at
net asset value. No fees are charged in connection with any such exchange.
Before making an exchange, you should read the Prospectus concerning the
participating Fund into which your exchange is being made. <R/>
To request an exchange by telephone, simply call 1-800-829-3863,
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 Blanchard
Flexible Income Fund or Blanchard Short-Term Flexible Income Fund, you may
elect a service which allows you to write an unlimited number of checks in
any amount of $250 or more which will clear through the Transfer Agent. There
is no charge for this service for regular checks; special checkbooks are
assessed a $60 check printing fee. If the amount of your check is less than
$250 the check will be cleared but you will be assessed a $10 charge. If the
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, please call
Investors' Services at 1-800-829-3863. <R/>
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, 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 by calling
1-800-829-3863, prior to 4:00 P.M., Eastern 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 your Fund or the Transfer
Agent.<R/>
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, P.O. Box 8612, Boston, Massachusetts 02266-
8612. 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
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. Eastern 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 7 calendar 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 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 BFIF,
BSTFIF and BFTFBF; .50 of 1% of the average daily net assets of shares of
BWEMF; 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 COMBINED AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST/CORPORATION
AND THE VIRTUS FUNDS
.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 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.
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
and Blanchard Global Growth 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 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.
Investment income that may be received by the Blanchard Short-Term
Flexible Income 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 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 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 seven series. All
of the series are non-diversified series of the Trust. 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.
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. Deloitte & Touche LLP, 2500 One PPG
Place, Pittsburgh, Pennsylvania 15222-5401 has been appointed the independent
accountants for the Funds.
CUSTODIAN. Signet Trust Company, Richmond, Virginia is custodian
for the securities and cash of the Funds. Under the Custodian Agreement,
Signet Trust Company holds the Funds' portfolio securities in safekeeping and
keeps all necessary records and documents relating to its duties.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Shareholder
Services Company, Pittsburgh, Pennsylvania, is transfer agent for the Funds
and dividend disbursing agent for the Funds. <R/>
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.
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 (BSTFIF, BFIF, BGGF)<R/>
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 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 (BSTFIF, BFIF, BGGF)<R/>
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 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 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 (BSTFIF, 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.
CERTAIN INVESTMENT STRATEGIES AND POLICIES
OPTIONS AND FUTURES TRANSACTIONS (BSTFIF, 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 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. (BSTFIF, BFIF, BGGF) 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.<R/>
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. (BSTFIF,
BFTFBF, BFIF, BGGF) 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.<R/>
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.
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. (BSTFIF, BFIF, BGGF) 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.<R/>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (BSTFIF, BFIF,
BWEMF, BGGF) 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 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.<R/>
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, 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 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.
LENDING OF PORTFOLIO SECURITIES. (BSTFIF, BFTFBF, BFIF) 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, BSTFIF)
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, BSTFIF 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. (BSTFIF, BFIF, 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.
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 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.
PORTFOLIO 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 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. (BWEMF) The 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, the
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 the 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. (BSTFIF, 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
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 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 Portfolio Adviser
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.<R/>
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.
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. (BSTFIF, 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 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 Portfolio 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 Portfolio 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
portfolio security or the quality determination ascribed by a Portfolio
Adviser to an unrated debt security has been downgraded, the Portfolio
Adviser will consider all circumstances deemed relevant in determining
whether to continue to hold the security.
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.
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.
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GLOBAL 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 , 1996 (the "Prospectus"), pursuant to
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which Blanchard Global 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
Investment Objective and Policies
--
Investment Restrictions
--
Portfolio Transactions
--
Computation of Net Asset Value
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Performance Information
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Additional Purchase and Redemption Information
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Tax Matters
--
The Management of the FUND
--
Management Services
--
Sector Management Services
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Administrative Services
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Distribution Plan
--
Description of the FUND
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Shareholder Reports
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Appendix A A-1
Manager
Virtus Capital Management, Inc.
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: August , 1996<R/>
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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 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.
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 Mellon Capital Management Corporation ("MCM"), the FUND's
portfolio adviser, expects 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 on 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 bought 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, MCM expects general stock market prices to
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 put options
acquired as a hedge against a potential decline. <R/>
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.
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.
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.
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 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 MCM 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 MCM determines that the best interests
of the FUND will be served. <R/>
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.
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 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
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.
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 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, 1996, 1995 and 1994, were
91%, 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 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
for stock, bond, currency and other financial futures contracts. (see
"Investment Objective and Policies- Forward Foreign currency Exchange
Contracts").
9. The FUND may not buy or sell any securities or other property
on margin, except for such short term credits as are necessary for the
clearance of transactions, and except for margin payments in connection with
the use of stock, bond, currency and other financial futures contracts; and
the FUND may not engage in short sales.<R/>
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 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 MCM subject to the supervision of VCM and the
Trustees and pursuant to authority contained in the Investment Advisory
Contract and the Sub-Advisory Agreement between the FUND and VCM and VCM and
MCM. In selecting such brokers of dealers, MCM 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 MCM 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 MCM. Such allocation shall be in such
amounts as VCM shall determine and MCM 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 MCM 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 MCMs' other clients may be useful to MCM in carrying out
their obligations to the FUND.
MCM is authorized, subject to its best efforts to obtain 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 MCM or
its 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 shareholders of VCM. The Investment Advisory Contract
does not provided 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 MCM does
not provide for any reduction in the advisory fee as a result of profits
resulting from brokerage commissions effected through MCM or its affiliated
brokerage firms.
The Trustees have 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
MCM or its 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
Trustees and to maintain records in connection with such reviews. <R/>
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, 1996, 1995, 1994, the FUND incurred
brokerage commission expenses of $166,428, $488,175, and $583,706,
respectively, from the purchase and sale of portfolio securities, of which
$40,660, $173,599, and $121,292, respectively, or approximately 24%, 36%, and
21%,respectively, was paid to Shufro, Rose & Ehrman, a Sector Manager of the
FUND, for effecting 10%, 46%, and 27% 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 4:00 p.m.
(Eastern 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, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at the
mean between the bid and asked prices.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary
from the closing of the New York Stock Exchange. In computing the net asset
value, the FUND values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain 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. Foreign securities quoted in foreign currencies
are translated into U. S. dollars at current rates. Occasionally, events that
affect these values and exchange rates may occur between the times at which
they are determined and the closing of the New York Stock Exchange. If such
events materially affect the value of portfolio securities, these securities
may be valued at their fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others. <R/>
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 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, 1996 and for the period from
June 1, 1986 (commencement of operations) to April 30, 1996, were 19.68%,
8.55% and 8.75%, respectively.<R/>
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 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.
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 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, 1996, the FUND did not have foreign currency losses to
defer. At April 30, 1996, the Fund did not have a net capital loss
carryover.<R/>
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
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).
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 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 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.
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of
some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member
of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Trustees own less than 1% of the outstanding
--------
shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder owned 5% or
---------
more of the outstanding shares of the FUND.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE TOTAL
WITH THE TRUST COMPENSATION FROM COMPENSATION PAID
THE TRUST+ TO TRUSTEES FROM
THE FUND AND FUND
COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Complex
Trustee
THOMAS G. BIGLEY, $-1008.23- $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, $-1129.96- $3441.37 for the
JR., TRUSTEE Fund Complex
WILLIAM J. $-1129.96 $3441.37 for the
COPELAND, TRUSTEE Fund Complex
JAMES E. DOWD, $-1129.96- $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. $-1008.23- $3145.78 for the
ELLIS, M.D., Fund Complex
TRUSTEE
EDWARD L. $-1129.96- $3441.37 for the
FLAHERTY, JR., Fund Complex
TRUSTEE
EDWARD C. $-0- $-0- for the Fund
GONZALES, Complex
PRESIDENT AND
TRUSTEE
PETER E. MADDEN, $-1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, $-1008.23- $3145.78 for the
JR., J.D., Fund Complex
S.J.D., TRUSTEE
WESLEY W. POSVAR, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious
Metals Fund, Inc. for the fiscal year ended 4/30/96, and for The Virtus
Funds for the fiscal year ended 9/30/95.<R/>
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, 1996,
1995, and 1994, the aggregate amount paid or accrued by the FUND to the prior
manager was $171,279, $983,753, and $943,678, respectively. For the fiscal
year ended April 30, 1996, the aggregate amount paid or accrued by the FUND
to VCM was $612,141.<R/>
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement which became effective on May
28, 1996, (the "Sub-Advisory Agreement") between VCM and MCM, VCM has
delegated to MCM 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, MCM 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 MCM, by VCM,
an annual fee based on the FUND's daily net assets. For a detailed
description of the Sub-Advisory Agreement see "Portfolio Advisory Services"
in the FUND's prospectus.<R/>
For the fiscal years ended April 30, 1996, 1995, and 1994, the
aggregate amounts paid by the prior manager to the prior Portfolio Manager
under prior Sub-Advisory Agreements were as follows: Shufro Rose & Ehrman -
$ , $90,508, and $104,023; Investment Advisers, Inc. - $ , $22,423,
----- ------
and $5,641, and, respectively; Cavelti Capital Management, Inc. - $ ,
------
$23,596, and $10,558, respectively; Morgan Stanley Asset Management Limited
(replaced by Fiduciary International, Inc.) - $ , $63,586 and $165,781,
-----
respectively; Fiduciary International, Inc. - $ , $108,636, and $91,814,
-----
and Morgan Stanley Asset Management Inc. (replaced by Martin Currie Inc.) -
$55,912 (for the fiscal period ended April 30, 1993).
The Sub-Advisory Agreement provides that MCM's fee shall be reduced
proportionately based on the ratio of MCM'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 Agreement, dated , 1996, was approved by
--------
the FUND's Trustees on and the FUND's shareholders on .
----------- ----------
The Sub-Advisory Agreement provides that it may be terminated without penalty
by either the FUND or the MCM 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.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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, 1996, the Fund accrued payments under the Plan
amounting to $586,707.<R/>
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.
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.
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.
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.
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: 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.
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 , 1996 (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 ...........................
-
Investment Restrictions .....................................
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Computation of Net Asset Value...............................
--
Performance Information......................................
--
Portfolio Transactions.......................................
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Dividends, Capital Gains Distributions
and Tax Matters............................................
--
The Management of the Fund...................................
-
Management Services..........................................
--
Portfolio Management Services................................
--
Administrative Services......................................
--
Distribution Plan............................................
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Description of the FUND......................................
--
Shareholder Reports..........................................
--
Financial Statements.........................................
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Manager
Virtus Capital Management, Inc.
Portfolio Adviser
Cavelti Capital Management, Ltd.
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: August , 1996<R/>
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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.
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.
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.
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 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.,
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 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.
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 Directors 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").<R/>
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) 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.
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, 1996 and 1995, were 176% and 116%, 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.
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).
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 4:00 p.m. (Eastern
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, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. <R/>
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Directors determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at the
mean between the bid and asked prices.
The Fund will value bullion at the closing spot price based
onexchange quotations.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary
from the closing of the New York Stock Exchange. In computing the net asset
value, the FUND values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain 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. Foreign securities quoted in foreign currencies
are translated into U. S. dollars at current rates. Occasionally, events that
affect these values and exchange rates may occur between the times at which
they are determined and the closing of the New York Stock Exchange. If such
events materially affect the value of portfolio securities, these securities
may be valued at their fair value as determined in good faith by the
Directors, although the actual calculation may be done by others.
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 ended April 30, 1996 and the life of fund (June 22, 1988 to April 30,
1995) were 37.03%, 16.71% and 4.90%, respectively. <R/>
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.
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, 1996, 1995, and 1994, the FUND incurred brokerage commission
expenses of $514,423, $395,000, and $654,000, respectively from the purchase
and sale of portfolio securities.<R/>
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 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 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 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.
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 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
determine ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions 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. Met 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.
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 of (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 ("ATM") 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 corporate'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
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 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 precedes
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) 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 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 shareholder, 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 bases on the Code and the Treasury Regulation 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 expresses 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 Directors are listed with their addresses, birthdates, and
present positions with Blanchard Precious Metals Fund, and principal
occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND DIRECTOR OF THE FUND;
Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA DIRECTOR OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL DIRECTOR OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds
.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA DIRECTOROF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA DIRECTOR OF THE FUND; Attorney-at-
law; Director,
BIRTHDATE: MAY 18, 1922 The Emerging Germany Fund, Inc.; Director
or Trustee of the Funds..
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA DIRECTOR OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA DIRECTOR OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND DIRECTOR OF THE
BIRTHDATE: OCTOBER 22, 1930 FUND;Vice Chairman, Treasurer, and
Trustee, Federated Investors; Vice
President, Federated Advisers, Federated
Management, Federated Research, Federated
Research Corp., Federated Global Research
Corp. and Passport Research, Ltd.;
Executive Vice President and Director,
Federated Securities Corp.; Trustee,
Federated Shareholder Services Company;
Trustee or Director of some of the Funds;
President, Executive Vice President and
Treasurer of some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA DIRECTOR OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA DIRECTOR OF THE FUND; Attorney,
Member of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA DIRECTOR OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA DIRECTOR OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA DIRECTOR OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Director is deemed to be an "interested person" of the Corporation
as defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Directors own less than 1% of the
----------
outstanding shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder
----------
owned 5% or more of the outstanding shares of the FUND.
OFFICERS AND DIRECTORS COMPENSATION
AGGREGATE TOTAL COMPENSATION PAID
NAME, COMPENSATION TO DIRECTORS FROM
POSITION WITH FROM CORPORATION
CORPORATION CORPORATION AND FUND COMPLEX*
John F. Donahue, $ -0- $-0- for the Fund Complex
Chairman and Director
Thomas G. Bigley, Director $ -99.55- $2647.78 for the Fund
Complex
John T. Corny, Jr., Director $ -108.41- $3441.37 for the
Fund Complex
William J. Copeland, Director $ -108.41- $3441.37 for the
Fund Complex
James E. Dowd, Director $ -108.41- $3441.37 for the Fund
Complex
Lawrence D. Ellis, M.D., $ -99.55- $3145.78 for the Fund
Complex
Director
Edward L. Flaherty, Jr., Director $ -108.41- $3441.37 for the
Fund Complex
Edward C. Gonzales, President $ -0- $-0- for the Fund
Complex
and Director
Peter E. Madden, Director $ -99.55- $2846.78 for the Fund
Complex
Gregor F. Meyer, Director $ -99.55- $3145.78 for the Fund
Complex
John E. Murray, Jr., J.D., $ -99.55- $-3145.78- for the
Fund Complex
S.J.D., Director
Wesley W. Posvar, Director $ -99.55- $3145.78 for the Fund
Complex
Marjorie P. Smuts, $ -99.55- $3145.78 for the Fund Complex
Director
*The total compensation is provided for the Fund Complex, which consists of
the Blanchard Funds, The Virtus Funds, and the Corporation. The information
is provided for Blanchard Precious Metals Fund, Inc. and Blanchard Funds for
the fiscal year ended 4/30/96, and for The Virtus Funds for the fiscal year
ended 9/30/95.<R/>
MANAGEMENT SERVICES
MANAGER OF 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
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. VCM became the FUND's Manager on July 12, 1995.
Prior to July 12, 1995, Sheffield Management Company served as the FUND's
Manager. For the fiscal year ended April 30, 1996, VCM earned $675,300 and
Sheffield Management Company earned $165,642. For the fiscal years ended
April 30, 1995, and 1994, the aggregate amounts paid or accrued by the Fund
to the Sheffield Management Company under the then existing management
agreement were $765,766, and $602,610, respectively. The prior manager was
not required to reimburse the Fund for any expenses during the years ended
April 30, 1995, and 1994.<R/>
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, 1996, 1995, and 1994, the
aggregate amounts paid or accrued by the prior manager to the Portfolio
Manager under the Sub-Advisory Agreement were $ , $227,033, $170,058,
------
respectively.<R/>
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 cast in person at a meeting called for the
purpose of voting on such approval.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Fund. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary records
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net assets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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 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 investment of client account
designations, and addresses; and providing such other services as the
Director reasonably requests. For the fiscal year ended April 30, 1996, the
FUND accrued payments under the Plan amounting to $630,406.<R/>
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
consist 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.
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.
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 , 1996 (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
Investment Objective and Policies
Investment Restrictions
Portfolio Transactions
Computation of Net Asset Value
Performance Information
Additional Purchase and Redemption Information
Tax Matters
The Management of the FUND
Management Services
The Sub-Advisory Agreement
Administrative Services
Purchasing Shares
Distribution Plan
Description of the FUND
Shareholder Reports
Financial Statements
Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: August , 1996<R/>
-
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, 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.
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.
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 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 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.
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.
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.
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 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
"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.
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 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 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 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 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.
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 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, 1996 and 1995, the FUND's
annual rate of portfolio turnover was approximately % and 455%
---
respectively.<R/>
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m.
(Eastern 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, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.<R/>
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at the
mean between the bid and asked prices.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary
from the closing of the New York Stock Exchange. In computing the net asset
value, the FUND values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain 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. Foreign securities quoted in foreign currencies
are translated into U. S. dollars at current rates. Occasionally, events that
affect these values and exchange rates may occur between the times at which
they are determined and the closing of the New York Stock Exchange. If such
events materially affect the value of portfolio securities, these securities
may be valued at their fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others. <R/>
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 fiscal year ended April 30, 1996 was % and for the life of the
---
fund (November 2, 1992 through April 30, 1996) was %.<R/>
---
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:
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 "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.
The FUND's yield as of April 30, 1996, based on a 30-day period,
was %.<R/>
---
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 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, 1996, the FUND had a net
capital loss carryover of $ , which is available through April 30,
---------
2003, to the extent provided by regulations.<R/>
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 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.
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, 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 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) 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 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.
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of
some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member
of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Trustees own less than 1% of the
---------
outstanding shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder
---------
owned 5% or more of the outstanding shares of the FUND.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE TOTAL
WITH THE TRUST COMPENSATION FROM COMPENSATION PAID
THE TRUST+ TO TRUSTEES FROM
THE FUND AND FUND
COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Complex
Trustee
THOMAS G. BIGLEY, $-1008.23- $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, $-1129.96- $3441.37 for the
JR., TRUSTEE Fund Complex
WILLIAM J. $-1129.96 $3441.37 for the
COPELAND, TRUSTEE Fund Complex
JAMES E. DOWD, $-1129.96- $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. $-1008.23- $3145.78 for the
ELLIS, M.D., Fund Complex
TRUSTEE
EDWARD L. $-1129.96- $3441.37 for the
FLAHERTY, JR., Fund Complex
TRUSTEE
EDWARD C. $-0- $-0- for the Fund
GONZALES, Complex
PRESIDENT AND
TRUSTEE
PETER E. MADDEN, $-1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, $-1008.23- $3145.78 for the
JR., J.D., Fund Complex
S.J.D., TRUSTEE
WESLEY W. POSVAR, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious
Metals Fund, Inc. for the fiscal year ended 4/30/96, and for The Virtus
Funds for the fiscal year ended 9/30/95.<R/>
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 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. For
the fiscal year ended April 30, 1996, the FUND's investment management fee
paid to the prior manager was $ , less voluntary expense
---------
reimbursement of $ , and the FUND's investment management fee paid to
------
VCM was $ , less voluntary expense reimbursement of $ .<R/>
------ ------
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 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.
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.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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
Fund's 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, 1996, the Fund accrued payments under the Plan
amounting to $ .
-------
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.
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.
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD SHORT-TERM 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 , 1996 (the "Prospectus"), pursuant to
--
which the Blanchard Short-Term 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
Investment Objective and Policies
Securities in Which the FUND May Invest
Investment Restrictions
Portfolio Transactions
Computation of Net Asset Value
Performance Information
Additional Purchase and Redemption Information
Tax Matters
The Management of the FUND
Management Services
The Sub-Advisory Agreement
Administrative Services
Distribution Plan
Description of the FUND
Shareholder Reports
Financial Statements
Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Services Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: August , 1996<R/>
--
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.
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.
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 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 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 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 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 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 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 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 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 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 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.
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 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 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.
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 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 1996, the FUND's rate
of portfolio turnover was approximately 84% and 291%, respectively.<R/>
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
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, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.<R/>
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at the
mean between the bid and asked prices.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary
from the closing of the New York Stock Exchange. In computing the net asset
value, the FUND values foreign securities at the latest closing price on the
exchange on which they are traded immediately prior to the closing of the New
York Stock Exchange. Certain 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. Foreign securities quoted in foreign currencies
are translated into U. S. dollars at current rates. Occasionally, events that
affect these values and exchange rates may occur between the times at which
they are determined and the closing of the New York Stock Exchange. If such
events materially affect the value of portfolio securities, these securities
may be valued at their fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others. <R/>
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, 1996 and
for the life of the FUND (April 16, 1993 to April 30, 1996) was 7.47% and
5.47%, respectively.<R/>
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 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, 1996, the FUND's yield was
4.95%.<R/>
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 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, 1996, the FUND had a net capital loss carryover of $9,659,884, which is
available through April 30, 2003 to offset future capital gains. The capital
loss carryover was acquired on February 12, 1996, from the merger between the
FUND andBlanchard Short-Term Global Income Fund.<R/>
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 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 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. 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.
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.
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 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 applicable 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.
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of
some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member
of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Trustees own less than 1% of the outstanding
--------
shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder owned 5% or
---------
more of the outstanding shares of the FUND.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE TOTAL
WITH THE TRUST COMPENSATION FROM COMPENSATION PAID
THE TRUST+ TO TRUSTEES FROM
THE FUND AND FUND
COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Complex
Trustee
THOMAS G. BIGLEY, $-1008.23- $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, $-1129.96- $3441.37 for the
JR., TRUSTEE Fund Complex
WILLIAM J. $-1129.96 $3441.37 for the
COPELAND, TRUSTEE Fund Complex
JAMES E. DOWD, $-1129.96- $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. $-1008.23- $3145.78 for the
ELLIS, M.D., Fund Complex
TRUSTEE
EDWARD L. $-1129.96- $3441.37 for the
FLAHERTY, JR., Fund Complex
TRUSTEE
EDWARD C. $-0- $-0- for the Fund
GONZALES, Complex
PRESIDENT AND
TRUSTEE
PETER E. MADDEN, $-1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, $-1008.23- $3145.78 for the
JR., J.D., Fund Complex
S.J.D., TRUSTEE
WESLEY W. POSVAR, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious
Metals Fund, Inc. for the fiscal year ended 4/30/96, and for The Virtus
Funds for the fiscal year ended 9/30/95.<R/>
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 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. For the fiscal year
ended April 30, 1996, the FUND's investment management fee paid to the prior
manager was $32,746 of which $23,550 was voluntarily waived by the prior
manager, and the FUND's investment management fee paid to VCM was $389,107 of
which $162,247 was voluntarily waived by VCM.<R/>
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 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.
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.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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, 1996, the Fund accrued payments under the Plan
amounting to $140,612, of which $36,364 was waived.<R/>
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.
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.
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 , 1996 (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
Investment Objective and Policies
Securities in Which the FUND May Invest
Investment Restrictions
Portfolio Transactions
Computation of Net Asset Value
Performance Information
Additional Purchase and Redemption Information
Tax Matters
The Management of the FUND
Management Services
The Advisory Agreement
Administrative Services
Distribution Plan
Description of the FUND
Shareholder Reports
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
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP
Dated: August , 1996<R/>
--
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.
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
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 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.
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.
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 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.
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.
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.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
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, Martin Luther King
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a securitie is traded on more than one
exchange, the price on theprimary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data. <R/>
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, 1996 and
for the life of the FUND (August 12, 1993 to April 30, 1996) was % and
----
%, 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. .<R/>
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;
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, 1996 the FUND's yield was
%.<R/>
- ----
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 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 30,1996, the FUND
had a net capital loss carryover of $ which is available through April
-------
30, 2003 to offset future capital gains.<R/>
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 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 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 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 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.
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of
some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member
of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Trustees own less than 1% of the outstanding
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shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder owned 5% or
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more of the outstanding shares of the FUND.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE TOTAL
WITH THE TRUST COMPENSATION FROM COMPENSATION PAID
THE TRUST+ TO TRUSTEES FROM
THE FUND AND FUND
COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Complex
Trustee
THOMAS G. BIGLEY, $-1008.23- $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, $-1129.96- $3441.37 for the
JR., TRUSTEE Fund Complex
WILLIAM J. $-1129.96 $3441.37 for the
COPELAND, TRUSTEE Fund Complex
JAMES E. DOWD, $-1129.96- $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. $-1008.23- $3145.78 for the
ELLIS, M.D., Fund Complex
TRUSTEE
EDWARD L. $-1129.96- $3441.37 for the
FLAHERTY, JR., Fund Complex
TRUSTEE
EDWARD C. $-0- $-0- for the Fund
GONZALES, Complex
PRESIDENT AND
TRUSTEE
PETER E. MADDEN, $-1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, $-1008.23- $3145.78 for the
JR., J.D., Fund Complex
S.J.D., TRUSTEE
WESLEY W. POSVAR, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious
Metals Fund, Inc. for the fiscal year ended 4/30/96, and for The Virtus
Funds for the fiscal year ended 9/30/95.<R/>
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 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 $89,180 and $127,835, respectively, all of which was voluntarily waived.
For the same periods, the prior manager paid fees to the Portfolio Adviser of
$9,758 and $34,662, respectively. For the fiscal year ended April 30, 1996,
the FUND's investment management fee paid to the prior manager was $
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less voluntary expense reimbursement of $ .<R/>
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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 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 years ended
April 30, 1995 and 1996, the fees paid to the Portfolio Adviser by the prior
manager were $9,758, $34,662, and $ , respectively.<R/>
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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.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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 30,1996, the FUND accrued payments under the Plan
amounting to $ .<R/>
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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.
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.
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.
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.
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD WORLDWIDE EMERGING MARKETS FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
is Statement is not a prospectus but should be read in conjunction with the
nt prospectus dated August , 1996 (the "Prospectus"), pursuant to which the
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hard Worldwide Emerging Markets Fund (the "FUND") is offered. Please retain
document for future reference.
tain the Prospectus please call the FUND at 1-800-829-3863
OF CONTENTS Page
al Information and History
tment Objective and Policies
Factors and Special Considerations
tment Restrictions
olio Transactions
tation of Net Asset Value
rmance Information
ional Purchase and Redemption Information
atters
anagement of the FUND
ement Services
olio Advisory Services
istrative Services
ibution Plan
iption of the FUND
holder Reports
dix A A-1
cial Statements B-1
er
s Capital Management, Inc.
olio Advisers
n Currie Inc. (Equity sector)
BANK (Fixed Income sector)
ibutor
ated Securities Corp.
dian
t Trust Company
fer Agent
ated Shareholder Services Company
endent Accountants
tte & Touche LLP
: August , 1996<R/>
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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.
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 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 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 that 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 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
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 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.
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 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.
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.
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) 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".)
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. 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 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
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 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 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 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.
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 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
Fund's portfolio turnover rates were 200% 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.
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 e 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 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 years ended April 30, 1995 and 1996, the FUND incurred
brokerage commission expenses of $4,763 and $139,224 and $35,175,
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.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
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, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the FUND's portfolio securities are
determined as follows:
. according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as determined by
the Adviser or sub-adviser, is used.);
. according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
. for short-term obligations, according to the prices furnished by
an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
. at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at the
mean between the bid and asked prices.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which
vary from the closing of the New York Stock Exchange. In computing the net
asset value, the FUND values foreign securities at the latest closing price
on the exchange on which they are traded immediately prior to the closing of
the New York Stock Exchange. Certain 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. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the New
York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined
in good faith by the Trustees, although the actual calculation may be done by
others. <R/>
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, 1996 and for the
life of the FUND (March 1, 1994 to April 30, 1996) were 3.10% and (19.80)%,
respectively.<R/>
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;
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
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 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 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 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 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.
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.
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 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.
BLANCHARD FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and Director,
Federated Research Corp. and Federated
Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer
and Director or Trustee of the Funds. Mr.
Donahue is the father of J. Christopher
Donahue, Executive Vice President of the
Trust.
THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.
JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in Southwest
Florida; formerly, President, Naples
Property Management, Inc. and Northgate
Village Development Corporation; Director
or Trustee of the Funds.
WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..
LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of
Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.
EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel,
Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;
BIRTHDATE: OCTOBER 22, 1930 Vice Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated Management,
Federated Research, Federated Research
Corp., Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of
some of the Funds.
PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.
GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member
of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee of
the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the Funds.
.
MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.
J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated Management,
and Federated Research:; President and
Director, Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.;Trustee, Federated Shareholder
Services Company, and Federated
Shareholder Services; Director, Federated
Services Company; President or Executive
Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue
is the son of Johm F. Donahue, Chairman
and Trustee of the Trust.
JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company; President and Trustee, Federated
Shareholder Services; Director, Federated
Securities Corp.; Executive Vice President
and Secretary of the Funds.
RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;
BIRTHDATE: MAY 17, 1923 Executive Vice President and Trustee,
Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.
@ 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.
THE FUNDS
As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:
111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock
and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series.
FUND OWNERSHIP
As of , Officers and Trustees own less than 1% of the outstanding
--------
shares of each Fund.
To the best knowledge of the FUND, as of , no shareholder owned 5% or
---------
more of the outstanding shares of the FUND.
OFFICERS AND TRUSTEES COMPENSATION
NAME, POSITION AGGREGATE TOTAL
WITH THE TRUST COMPENSATION FROM COMPENSATION PAID
THE TRUST+ TO TRUSTEES FROM
THE FUND AND FUND
COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Complex
Trustee
THOMAS G. BIGLEY, $-1008.23- $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, $-1129.96- $3441.37 for the
JR., TRUSTEE Fund Complex
WILLIAM J. $-1129.96 $3441.37 for the
COPELAND, TRUSTEE Fund Complex
JAMES E. DOWD, $-1129.96- $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. $-1008.23- $3145.78 for the
ELLIS, M.D., Fund Complex
TRUSTEE
EDWARD L. $-1129.96- $3441.37 for the
FLAHERTY, JR., Fund Complex
TRUSTEE
EDWARD C. $-0- $-0- for the Fund
GONZALES, Complex
PRESIDENT AND
TRUSTEE
PETER E. MADDEN, $-1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, $-1008.23- $3145.78 for the
JR., J.D., Fund Complex
S.J.D., TRUSTEE
WESLEY W. POSVAR, $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $-1008.23- $3145.78 for the
TRUSTEE Fund Complex
+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious
Metals Fund, Inc. for the fiscal year ended 4/30/96, and for The Virtus
Funds for the fiscal year ended 9/30/95.<R/>
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 less voluntary expense reimbursement of
$9,452. 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. For the fiscal year ended April 30, 1996, the
FUND's investment management fee paid to the prior manager was $28,045 less
voluntary expense reimbursement of $28,045, and the fee paid to VCM was
$94,504 less voluntary expense reimbursement of $94,504.<R/>
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
years ended April 30, 1995 and 1996, the aggregate amounts paid by the prior
manager to the sub-advisers were as follows: Martin Currie, Inc.: $1,740 and
$59,427, and $ , respectively, and OFFITBANK: $0 and $2,703, and $ ,
----- -----
respectively.<R/>
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; formulates 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.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets in
excess of $10 million. There is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be at least $1,000 per
Fund.<R/>
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, 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, 1996, the FUND accrued payments under the Plan
amounting to $49,104.<R/>
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.
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.
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.
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.
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.
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.
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. (1-8) To be filed by amendment.
(2,6)Audited Financial Statements for
the fiscal year ended October 31, 1995
are incorporated herein by reference
to the Annual Report of Shareholders
dated December 31, 1995.
(b) Exhibits
1. (a) Declaration of Trust of Registrant.(1)
(b) Amendment of Declaration of Trust.(7)
2. By-laws of Registrant.(1)
3. Not Applicable
4. Specimen certificate for shares of beneficial
interest of Registrant.(2)
5. (i) Form of Management Contract between
Registrant, on behalf of each of the series,
and Virtus Capital Management, Inc.(19)
(ii) The Registrant incorporates the Forms of Sub-
Advisory Agreements for Global (formerly
Strategic) Growth Fund, Worldwide Emerging
Markets Fund, Short-Term Global Income Fund,
American Equity (formerly Worldwide Bond)
Fund, Flexible Income Fund, Short-Term Bond
Fund, Flexible Tax-Free Bond Fund, and Global
Growth Fund between Virtus Capital
Management, Inc., and Rose & Ehrman,
Investment Advisors, Inc. and Fiduciary
International, Inc.; OFFITBANK; Lombard Odier
International Portfolio Management Limited;
Provident Investment Counsel, Inc.;
OFFITBANK; OFFITBANK; U.S. Trust Company of
New York; Martin Currie Inc.; and Martin
Currie Inc. from Item 5(b)(x)(a)-xviii) of
the Blanchard Funds Registration Statement
filed with the Commission on August 7, 1995.
(File Number 33-3165 and 811-4579).
(iii) The Registrant incorporates the Form of
Global Asset Allocation Agreement between
Virtus Capital Management, Inc. and Fiduciary
International, Inc. for Global (formerly
Strategic) Growth Fund from Item 5(b)(x)(b)
of the Blanchard Funds Registration Statement
filed with the Commission on August 7, 1995.
(File Number 33-3165 and 811-4579).
(iv) The Registrant incorporates the Form of Sub-
Advisory Agreement between Lombard Odier
International Portfolio Management Limited
and WLO Global Management for Short-Term
Global Income Fund from Item 5(b)(xix) of the
Blanchard Funds Registration Statement filed
with the Commission on August 7, 1995. (File
Number 33-3165 and 811-4579).
6. (i) Conformed copy of Distributor's Contract
between Registrant, on behalf of each of the
series, and Federated Securities Corp.(19)
7. Not Applicable.
8. (i) Form of Custodian Contract between
Registrant, on behalf of each series and
Signet Trust Company.(17)
(ii) Form of Agreement for Fund Accounting,
Shareholder Recordkeeping and Custody
Services Procurement between Registrant, on
behalf of each series and Federated Services
Company.(17)
9. (i) Conformed copy of Administrative Services
Agreement between Registrant, on behalf of
each series, and Federated Administrative
Services.(19)
(ii) Form of Transfer Agency and Fund Accounting
and Pricing Services Agreements for Growth &
Income Fund.(18)
10. None.
11. Conformed copy of consent of Price Waterhouse
LLP.(20)
12. Not applicable.
13. Agreement re: initial $100,000 capital.(3)
14. Copies of model tax-sheltered retirement
plans.(3)
15. (i) Conformed copy of Distribution Plan.(19)
(ii) Copy of 12b-1 Agreement.(19)
16.(i) Schedule of Performance Quotations for Global
(formerly Strategic) Growth Fund series and
for Blanchard 100% Treasury (formerly
Government) Money Market Fund series.(5)
(ii) Schedule of Performance Quotations for Short-
Term Global Income Fund series(6)
(iii) Schedule of Performance Quotations for
American Equity (formerly Worldwide Bond)
Fund series(9)
(iv) Schedule of Performance Quotations for
Flexible Income Fund series.(10)
(v) Schedule of Performance Quotations for Short-
Term Bond Fund series.(11)
(vi) Schedule of Performance Quotations for
Flexible Tax-Free Bond Fund series.(12)
(vii) Schedule of Performance Quotations for
Emerging Markets Fund (formerly Blanchard
Asset Manager or Blanchard Asset Allocation
Fund) series.(12)
(viii) Forms of computation of performance
quotations for Growth & Income and Capital
Growth series.(18)
17. Copy of Financial Data Schedules.+
18. Not applicable.
19. Conformed Copy of Power of Attorney.(19)
+ All Exhibits Have been filed electronically.
1 Previously filed on February 5, 1986 in the Registrant's Registration
Statement.
2 Previously filed on March 28, 1986 in Pre-Effective Amendment No. I to
the Registrant's Registration Statement.
3 Previously filed on April 23, 1986 in Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement.
5 Previously filed on July 3, 1990 in Post-Effective Amendment No. 6 to
the Registrant's Registration Statement.
6 Previously filed on November 2, 1990 in Post-Effective Amendment No. 7
to the Registrant's Registration Statement.
7 Previously filed on December 21, 1990 in Post-Effective Amendment No. 8
to the Registrant's Registration Statement.
9 Previously filed on June 8, 1992 in Post-Effective Amendment No. 13 to
the Registrant's Registration Statement.
10 Previously filed on September 3, 1992 in Post-Effective Amendment No. 15
to the Registrant's Registration Statement.
11 Previously filed on February 5, 1993 in Post-Effective Amendment No. 16
to the Registrant's Registration Statement.
12 Previously filed on May 25, 1993 in Post-Effective Amendment No. 17 to
the Registrant's Registration Statement.
17 To be filed by amendment.
18 Previously filed on August 7, 1995 in Post-Effective Amendment No. 29 to
the Registrant's Registration Statement.
19 Previously filed on October 17, 1995 in Post-Effective Amendment No. 31
to the Registrant's Registration Statement.
20 Previously filed on February 27, 1996 in Post-Effective Amendment No. 33
to the Registrant's Registration Statement.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
See "The Manager and Management Agreement" in the Prospectus and
Statement of Additional Information.
ITEM 26. Number of Holders or Securities
Number of Record Holders
Title of Class as of June 13, 1996
BCGF 283
BG&IF 1,945
BAAF 3
BWEMF 2,620
BFTFBF 2,173
BSTFIF 16,742
BFIF 37,375
BPMF 12,647
BGGF 14,966
ITEM 27. Indemnification (20)
ITEM 28. Business and Other Connections or Investment Adviser
Describe any other business, profession, vocation or employment of
a substantial nature in which each investment adviser of the Registrant, and
each director, officer or partner of any such investment adviser, is or has
been, at any time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, employee, partner, or
trustee.
For a description of the other business of Virtus Capital
Management, Inc. see "Management of the Funds" in Part A. The officers of
Virtus Capital Management, Inc. are:
Gary M. Allen President and Chief Investment Officer,
Director VCM, since March 1995; Senior Vice
President STC (March 1994 to March
1995); Managing Director of U.S.
Equities (November 1990 to March
1994) and Director, Internal Asset
Management (June 1985 to November
1990) of the Virginia Retirement
System.
E. Christian Goetz Senior Vice President Director of Fixed Income,
and Director VCM, since March 1995; Portfolio
Manager STC (November 1990 to March
1995).
Tanya Orr Bird Vice President and Director of Client Services,
Director VCM, since March 1995; Vice
President of Client Services, STC
(October 1994 to March 1995);
Consultant, William M. Mercer Asset
Planning Inc., 1989 to October
1994.
Kevin M. Lewis Vice President and Senior Equity Manager, VCM,
Director since March 1995; Equity Manager,
STC, from 1987 to March 1995.
ITEM 29. Principal Underwriters
(a) 111 Corcoran Funds; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; BayFunds; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated
GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance Series;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.;
High Yield Cash Trust; Independence One Mutual Funds; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash Trust;
Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Biltmore Funds; The Biltmore Municipal Funds; The
Monitor Funds; The Planters Funds; The Starburst Funds; The Starburst Funds
II; The Virtus Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.;
and World Investment Series, Inc.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President,Secretary
Pittsburgh, PA 15222-3779 and Treasurer
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
David M. Taylor Assistant Secretary,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) not applicable
ITEM 30. Location of Accounts and Records
The accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Blanchard Funds Federated Investors Tower
Pittsburgh, PA
Federated Shareholder Services P.O. Box 8600
Company (Transfer Agent,Dividend Boston, MA
Disbursing Agent and
Portfolio Recordkeeper)
Federated Administrative Federated Investors Tower
Services (Administrator) Pittsburgh, PA
Virtus Capital Management, Inc. 707 East Main Street
(Adviser) Suite 1300
Richmond, VA
Signet Trust Company 7 North Eighth Street
(Custodian) Richmond, VA
ITEM 31. Management Services
Not applicable.
ITEM 32. Undertakings
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of Trustees and the
calling of special shareholder meetings by shareholders.
Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of the latest annual report to shareholders, upon request
and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, BLANCHARD FUNDS, has duly
caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Pittsburgh
and Commonwealth of Pennsylvania, on the 21st day of June, 1996.
BLANCHARD FUNDS
BY: /s/C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue
June 21, 1996
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person
in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/C. Grant Anderson
C. Grant Anderson Attorney In Fact June 21, 1996
ASSISTANT SECRETARY For the Persons
Listed Below
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Edward C. Gonzales* President, Treasurer and
Trustee
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> Blanchard Funds
Blanchard Flexible Income Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 212,541,896
<INVESTMENTS-AT-VALUE> 210,922,450
<RECEIVABLES> 55,860,132
<ASSETS-OTHER> (909,350)
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 265,873,232
<PAYABLE-FOR-SECURITIES> 6,815,764
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,822,328
<TOTAL-LIABILITIES> 59,638,092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 227,074,810
<SHARES-COMMON-STOCK> 43,152,970
<SHARES-COMMON-PRIOR> 55,757,152
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (281,300)
<ACCUMULATED-NET-GAINS> (19,361,198)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,197,172)
<NET-ASSETS> 206,235,140
<DIVIDEND-INCOME> 2,977
<INTEREST-INCOME> 19,561,663
<OTHER-INCOME> 0
<EXPENSES-NET> 3,743,569
<NET-INVESTMENT-INCOME> 15,821,071
<REALIZED-GAINS-CURRENT> (801,535)
<APPREC-INCREASE-CURRENT> 5,042,160
<NET-CHANGE-FROM-OPS> 20,061,696
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,359,777
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,498,920
<NUMBER-OF-SHARES-REDEEMED> 27,527,713
<SHARES-REINVESTED> 2,424,612
<NET-CHANGE-IN-ASSETS> (56,187,944)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,559,663)
<OVERDISTRIB-NII-PRIOR> (742,594)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,795,137
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,743,569
<AVERAGE-NET-ASSETS> 239,928,412
<PER-SHARE-NAV-BEGIN> 4.710
<PER-SHARE-NII> 0.300
<PER-SHARE-GAIN-APPREC> 0.080
<PER-SHARE-DIVIDEND> 0.310
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 4.780
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> Blanchard Funds
Blanchard Flexible Tax-Free Bond Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 22,587,329
<INVESTMENTS-AT-VALUE> 22,534,419
<RECEIVABLES> 448,839
<ASSETS-OTHER> 43,142
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,026,400
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 383,900
<TOTAL-LIABILITIES> 383,900
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,408,323
<SHARES-COMMON-STOCK> 4,388,959
<SHARES-COMMON-PRIOR> 3,877,709
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (20,979)
<ACCUMULATED-NET-GAINS> (691,935)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (52,909)
<NET-ASSETS> 22,642,500
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,188,980
<OTHER-INCOME> 0
<EXPENSES-NET> 228,638
<NET-INVESTMENT-INCOME> 960,342
<REALIZED-GAINS-CURRENT> 891,432
<APPREC-INCREASE-CURRENT> (406,293)
<NET-CHANGE-FROM-OPS> 1,445,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 960,342
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 8,706
<NUMBER-OF-SHARES-SOLD> 5,015,985
<NUMBER-OF-SHARES-REDEEMED> 4,631,991
<SHARES-REINVESTED> 127,256
<NET-CHANGE-IN-ASSETS> 3,146,938
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,583,367)
<OVERDISTRIB-NII-PRIOR> (12,875)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 162,655
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 499,911
<AVERAGE-NET-ASSETS> 21,448,504
<PER-SHARE-NAV-BEGIN> 5.030
<PER-SHARE-NII> 0.220
<PER-SHARE-GAIN-APPREC> 0.130
<PER-SHARE-DIVIDEND> 0.220
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 5.160
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> Blanchard Funds
Blanchard Global Growth Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 62,878,225
<INVESTMENTS-AT-VALUE> 70,852,140
<RECEIVABLES> 23,542,227
<ASSETS-OTHER> 1,040,074
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,434,441
<PAYABLE-FOR-SECURITIES> 2,322,252
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,930,618
<TOTAL-LIABILITIES> 24,252,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,952,944
<SHARES-COMMON-STOCK> 6,171,216
<SHARES-COMMON-PRIOR> 8,972,356
<ACCUMULATED-NII-CURRENT> 1,373,010
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,918,725
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,936,892
<NET-ASSETS> 71,181,571
<DIVIDEND-INCOME> 1,333,099
<INTEREST-INCOME> 957,033
<OTHER-INCOME> 0
<EXPENSES-NET> 1,991,230
<NET-INVESTMENT-INCOME> 298,902
<REALIZED-GAINS-CURRENT> 8,016,773
<APPREC-INCREASE-CURRENT> 5,636,916
<NET-CHANGE-FROM-OPS> 13,952,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 570,592
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 559,635
<NUMBER-OF-SHARES-REDEEMED> 3,413,086
<SHARES-REINVESTED> 52,311
<NET-CHANGE-IN-ASSETS> (15,906,306)
<ACCUMULATED-NII-PRIOR> 1,644,700
<ACCUMULATED-GAINS-PRIOR> (4,098,048)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 783,420
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,991,230
<AVERAGE-NET-ASSETS> 73,556,892
<PER-SHARE-NAV-BEGIN> 9.710
<PER-SHARE-NII> 0.120
<PER-SHARE-GAIN-APPREC> 1.780
<PER-SHARE-DIVIDEND> 0.080
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.530
<EXPENSE-RATIO> 2.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Blanchard Precious Metals Fund, Inc.
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 124,476,951
<INVESTMENTS-AT-VALUE> 132,641,155
<RECEIVABLES> 3,320,306
<ASSETS-OTHER> 2,813,046
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,774,507
<PAYABLE-FOR-SECURITIES> 8,007,786
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,477,345
<TOTAL-LIABILITIES> 9,485,131
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,762,700
<SHARES-COMMON-STOCK> 13,231,394
<SHARES-COMMON-PRIOR> 10,570,288
<ACCUMULATED-NII-CURRENT> 1,904,789
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,458,542
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,163,345
<NET-ASSETS> 129,289,376
<DIVIDEND-INCOME> 550,325
<INTEREST-INCOME> 362,660
<OTHER-INCOME> 0
<EXPENSES-NET> 1,982,913
<NET-INVESTMENT-INCOME> (1,069,928)
<REALIZED-GAINS-CURRENT> 13,950,013
<APPREC-INCREASE-CURRENT> 13,616,081
<NET-CHANGE-FROM-OPS> 26,496,166
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,891,108
<NUMBER-OF-SHARES-REDEEMED> 9,230,002
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 54,007,515
<ACCUMULATED-NII-PRIOR> (166,448)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 2,402,669
<GROSS-ADVISORY-FEES> 840,942
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,982,913
<AVERAGE-NET-ASSETS> 85,174,763
<PER-SHARE-NAV-BEGIN> 7.120
<PER-SHARE-NII> (0.100)
<PER-SHARE-GAIN-APPREC> 2.750
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.770
<EXPENSE-RATIO> 2.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 06
<NAME> Blanchard Funds
Blanchard Short-Term Flexible Income Fund
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 175,805,360
<INVESTMENTS-AT-VALUE> 175,789,613
<RECEIVABLES> 48,126,218
<ASSETS-OTHER> 37,468
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,953,299
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,186,830
<TOTAL-LIABILITIES> 46,186,830
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,414,368
<SHARES-COMMON-STOCK> 59,529,291
<SHARES-COMMON-PRIOR> 7,985,358
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 55,728
<ACCUMULATED-NET-GAINS> (169,968)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 577,797
<NET-ASSETS> 177,766,469
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,907,738
<OTHER-INCOME> 0
<EXPENSES-NET> 811,630
<NET-INVESTMENT-INCOME> 3,096,108
<REALIZED-GAINS-CURRENT> 493,015
<APPREC-INCREASE-CURRENT> 767,013
<NET-CHANGE-FROM-OPS> 4,356,136
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,093,140
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 62,347,091
<NUMBER-OF-SHARES-REDEEMED> 11,691,202
<SHARES-REINVESTED> 888,044
<NET-CHANGE-IN-ASSETS> 154,321,962
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (662,983)
<OVERDISTRIB-NII-PRIOR> 58,696
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 421,853
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,035,791
<AVERAGE-NET-ASSETS> 58,659,856
<PER-SHARE-NAV-BEGIN> 2.940
<PER-SHARE-NII> 0.180
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.170
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 2.990
<EXPENSE-RATIO> 1.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> Blanchard Funds
Blanchard Worldwide Emerging Markets Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 8,285,142
<INVESTMENTS-AT-VALUE> 7,890,979
<RECEIVABLES> 377,383
<ASSETS-OTHER> 90,548
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,358,910
<PAYABLE-FOR-SECURITIES> 4,317
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 417,165
<TOTAL-LIABILITIES> 421,482
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,921,482
<SHARES-COMMON-STOCK> 1,213,145
<SHARES-COMMON-PRIOR> 1,895,181
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (417,317)
<ACCUMULATED-NET-GAINS> (3,171,839)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (394,898)
<NET-ASSETS> 7,937,428
<DIVIDEND-INCOME> 98,386
<INTEREST-INCOME> 8,877
<OTHER-INCOME> 0
<EXPENSES-NET> 352,162
<NET-INVESTMENT-INCOME> (244,899)
<REALIZED-GAINS-CURRENT> (619,467)
<APPREC-INCREASE-CURRENT> 998,146
<NET-CHANGE-FROM-OPS> 133,780
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 57,171
<NUMBER-OF-SHARES-SOLD> 970,744
<NUMBER-OF-SHARES-REDEEMED> 1,662,092
<SHARES-REINVESTED> 9,312
<NET-CHANGE-IN-ASSETS> (4,200,624)
<ACCUMULATED-NII-PRIOR> (115,247)
<ACCUMULATED-GAINS-PRIOR> (2,552,372)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 122,549
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 522,207
<AVERAGE-NET-ASSETS> 10,391,958
<PER-SHARE-NAV-BEGIN> 6.400
<PER-SHARE-NII> (0.250)
<PER-SHARE-GAIN-APPREC> 0.430
<PER-SHARE-DIVIDEND> 0.040
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 6.540
<EXPENSE-RATIO> 3.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
