THE BLANCHARD ASSET ALLOCATION FUND
(A PORTFOLIO OF BLANCHARD FUNDS)
PROSPECTUS
The shares of Blanchard Asset Allocation Fund (the "Fund") offered by
this prospectus represent interests in a diversified portfolio in
Blanchard Funds (the "Trust"), an open-end management investment company
(a mutual fund). The Fund seeks to maximize total return over the long
term by allocating its assets among stocks, bonds, short-term
instruments, and other investments.
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.
This prospectus contains the information you should read and know before
you invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated
December 31, 1995, as revised on May 30, 1996, with the Securities and
Exchange Commission. The information contained in the Statement of
Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional
Information free of charge, obtain other information, or make inquiries
about the Fund by writing to the Trust or calling 1-800-829-3863.
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 December 31, 1995
(Revised May 30, 1996)
SUMMARY OF FUND EXPENSES 1
GENERAL INFORMATION 2
WHO MAY WANT TO INVEST 2
INVESTMENT INFORMATION 2
Investment Objective 2
Investment Policies 2
Additional Risk Considerations15
Investment Risks Associated
with Investment in Equity and
Debt Securities 15
Portfolio Turnover 16
BLANCHARD FUNDS INFORMATION 16
Management of the Fund 16
Distribution of Fund Shares 17
Administration of the Funds 18
Expenses of the Fund 19
NET ASSET VALUE 19
HOW TO INVEST 19
Purchases by Mail 20
General Information 21
INVESTOR SERVICES 21
Automatic Withdrawal Plan 21
Retirement Plans 21
Exchange Privilege 21
HOW TO REDEEM 22
General Information 23
SHAREHOLDER INFORMATION 24
Voting Rights 24
Massachusetts Partnership Law 24
EFFECT OF BANKING LAWS 24
TAX INFORMATION 25
Federal Income Tax 25
PERFORMANCE INFORMATION 25
Total Return 25
Yield Information 26
Distribution Rate 26
Comparative Results 26
ADDRESSES 28
BLANCHARD ASSET ALLOCATION FUND
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) ........................ None
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price) .......... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)
.....................................None
Redemption Fee (as a percentage of amount redeemed,
if applicable) ......................... None
Exchange Fee ............................. None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES*
(AS A PERCENTAGE OF PROJECTED AVERAGE NET ASSETS)
Management Fee (after waiver) (1) ........ 0.00%
12b-1 Fees (2) ........................... 0.00%
Total Other Expenses. .................... 1.00%
Total Annual Fund Operating Expenses (after waiver) (3)
...............................1.00%
(1)
The estimated management fee has been reduced to reflect the
anticipated voluntary waiver by Virtus Capital Management, Inc.
("VCM"), the investment adviser. VCM may terminate this voluntary
waiver at any time at its sole discretion. The maximum management
fee is 1.00%.
(2)
The Fund has no present intention of paying or accruing 12b-1 fees
during the fiscal year ending September 30, 1996. If the Fund were
paying or accruing 12b-1 fees, the Fund would be able to pay up to
0.25% of its average daily net assets.
(3)
Total Annual Fund Operating Expenses are estimated to be 5.90%,
absent the voluntary waiver of the advisory fees, administrative
fees, custodian fees, and assumption of other operating expenses by
VCM.
*Annual Fund Operating Expenses are estimated based on average
expenses expected to be incurred during the fiscal year ending September
30, 1996. During the course of this period, expenses may be more or less
than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "HOW TO INVEST." WIRE-TRANSFERRED
REDEMPTIONS MAY BE SUBJECT TO AN ADDITIONAL FEE.
EXAMPLE 1 year 3 years
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period. The Fund charges no redemption fees.
......................................$ 10 $32
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 24, 1986. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. With
respect to this Fund, as of the date of this prospectus, the Board of
Trustees (the "Board" or "Trustees") has not established separate
classes of shares. A minimum initial investment of $3,000 ($2,000 for
qualified retirement plans, such as IRAs and Keoghs) is required. The
minimum subsequent investment requirement for the Fund is $200. The Fund
is advised by Virtus Capital Management, Inc.
Fund shares are sold and redeemed at net asset value.
WHO MAY WANT TO INVEST
The Fund is designed for long-term investors who are willing to tolerate
market fluctuation in pursuit of potentially high long-term returns. By
using options and futures to gain additional economic exposure to the
stock and bond markets, Fund share prices can fluctuate significantly.
When a shareholder sells his or her shares, they may be worth more or
less than what the shareholder paid for them.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return over
the long term by allocating its assets among stocks, bonds, short-term
instruments, and other instruments. The investment objective cannot be
changed without shareholder approval. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund's investment policies permit investments in any type of
domestic security (and in foreign equity securities that trade on the
United States securities exchanges, and foreign income securities that
are denominated in U.S. dollars), in any proportion deemed appropriate
by Mellon Capital Management Corporation (the "Portfolio Adviser"),
except as noted below. In addition, the Fund may invest in options and
futures contracts. The Portfolio Adviser has broad latitude in selecting
the class of investments and market sectors in which the Fund will
invest. The Fund is not a "balanced" fund and, therefore, will not be
required to continually maintain at least 25% of its assets in fixed
income senior securities. Unlike shareholders of other types of funds, a
shareholder of the Fund confers substantially more investment discretion
on the Portfolio Adviser, enabling the Portfolio Adviser to allocate the
Fund's investments among a wide variety of investment choices.
In seeking to maximize total return, the Portfolio Adviser allocates
the Fund's investments principally among three major asset classes (as
discussed below): stocks, bonds, and short-term instruments. Options and
futures may be used, separately or in combination, to gain additional
economic exposure to an asset class. See "Derivative Contracts and
Securities" and "Futures and Options on Futures."
The Portfolio Adviser regularly reviews the Fund's investment
allocation, and will vary such allocation to emphasize the asset classes
that, in the Portfolio Adviser's then-current judgment, provide the most
favorable total return outlook. While the Fund's investments will
generally be spread among the asset classes in varying proportions,
there is no limitation on the amount that may be invested in any one
asset class, and the Fund may at times be fully invested in stocks,
bonds, or short-term instruments if the Portfolio Adviser perceives
those asset classes to offer the most favorable total return outlook. In
addition, options and futures may be used to gain additional economic
exposure to an asset class.
In making asset allocation decisions, the Portfolio Adviser will
evaluate projections of risk, market conditions, economic conditions,
volatility, yields, and returns, among others. The Portfolio Adviser
seeks to diversify the Fund's holdings within each asset class, in order
to moderate risks. The Portfolio Adviser will use database systems to
help analyze past situations and trends, portfolio management
professionals to determine asset allocation, and its own credit analysis
as well as credit analyses provided by rating services.
The Fund seeks total return over the long term; however, asset shifts
among classes will be made at the Portfolio Adviser's discretion.
The short-term instrument class includes all types of securities and
short-term instruments with remaining maturities of three years or less.
The Portfolio Adviser will seek to maximize total return within the
short-term instrument class by taking advantage of yield differentials
between different instruments and issuers. Short-term instruments may
include corporate debt securities such as commercial paper and notes;
asset-backed securities; government securities issued by the United
States government or its agencies or instrumentalities; bank deposits
and other financial institution obligations; repurchase agreements
involving any type of security; and other similar short-term
instruments. These instruments must be denominated in United States
dollars.
The bond class includes all varieties of domestic fixed-income
securities. The Portfolio Adviser seeks to maximize total returns within
the bond class by adjusting the Fund's investments in securities with
different credit qualities, maturities, and coupon or dividend rates,
and by seeking to take advantage of yield differentials between
securities. Securities in this class may include bonds, notes,
adjustable rate preferred stocks, convertible bonds, mortgage-related
and asset-backed securities, domestic government and government agency
securities, zero coupon bonds, and other intermediate and long-term
securities. As with the short-term class, these securities must be
denominated in United States dollars.
At no time will more than 20% of the Fund's assets in any asset
category be invested in foreign securities.
The stock class consists of a diversified portfolio of common stocks
selected by the Portfolio Adviser from those stocks which trade on the
United States securities exchanges, including those stocks which
comprise the Standard & Poor's 500 Composite Stock Price Index *
(the "S&P 500 Index"), although the Fund does not track the S&P 500
Index or attempt to track the S&P 500 Index's returns by holding a
representative sample of this Index.
The Fund may buy and sell options and futures contracts to manage its
exposure to changing security prices, as an efficient means of managing
allocations between asset classes and as a means of increasing total
return. The Fund may invest in options and futures based on any type of
security or index, including options and futures not traded on
exchanges.
Some options and futures strategies, including selling futures, buying
puts, and writing calls, tend to hedge the Fund's investments against
price fluctuations. Other strategies including buying futures, writing
puts, and buying calls, tend to increase market exposure. Options and
futures may be combined with each other or with forward contracts, in
order to adjust the risk and return characteristics of an overall
strategy.
In addition to strategies designed to hedge its portfolio, the Fund
may purchase put options or write call options on United States stock
indexes and government securities to attempt to profit from declines in
stock or bond prices. The Adviser may enter into these strategies when
it anticipates negative returns from the underlying stock or bond
markets. If prices do not decline as anticipated, the Fund may
experience losses from short strategies that are not offset by gains
from its other investments.
* "Standard & Poor'sR," "S&PR" and "S&P 500R" and "Standard & Poor's 500" are
trademarks of McGraw Hill, Inc. and have been licensed for use by Mellon Capital
Management Corporation ("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 of 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 calculating
the S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amounts 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 not 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, OMMISSIONS, 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 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.
CORPORATE DEBT SECURITIES. The corporate bonds, notes, and convertible
debt securities in which the Fund may invest must be rated, at the time
of purchase, BBB or better by Standard and Poor's Ratings Group ("S&P"),
or Fitch Investors Services ("Fitch"), or Baa or better by Moody's
Investors Service, Inc. (Moody's), or, if unrated, of comparable quality
as determined by the Fund's adviser. (If a security's rating is reduced
below the required minimum after the Fund has purchased it, the Fund is
not required to sell the security, but may consider doing so.) Bonds
rated "BBB" by Standard & Poor's or Fitch or "Baa" by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than higher rated bonds.
COMMERCIAL PAPER. The Fund may invest in commercial paper rated A-1 by
S&P, or Prime-1 by Moody's, or F-1 by Fitch and money market instruments
(including commercial paper) which are unrated but of comparable
quality, including Canadian Commercial Paper ("CCPs") and Europaper.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon bonds and
zero coupon convertible securities. The Fund may invest in zero coupon
bonds in order to receive the rate of return through the appreciation of
the bond. This application is extremely attractive in a falling rate
environment as the price of the bond rises rapidly in value as opposed
to regular coupon bonds. A zero coupon bond makes no periodic interest
payments and the entire obligation becomes due only upon maturity.
Zero coupon convertible securities are debt securities which are issued
at a discount to their face amount and do no entitle the holder to any
periodic payments of interest prior to maturity. Rather, interest earned
on zero coupon convertible securities accretes at a stated yield until
the security reaches its face amount at maturity. Zero coupon
convertible securities are convertible into a specific number of shares
of the issuer's common stock. In addition, zero coupon convertible
securities usually have put features that provide the holder with the
opportunity to sell the bonds to the issuer at a stated price before
maturity.
Generally, the price of zero coupon securities are more sensitive to
fluctuations in interest than are conventional bonds and convertible
securities. In addition, federal tax law requires the holder of a zero
coupon security to recognize income from the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and to avoid liability of federal income taxes, the
Fund will be required to distribute income accrued from zero coupon
securities which it owns, and may have to sell portfolio securities
(perhaps at disadvantageous times) in order to generate cash to satisfy
these distribution requirements.
BANK INSTRUMENTS. The Fund may invest in instruments of domestic and
foreign banks and savings and loans (such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances) if
they have capital, surplus, and undivided profits over $100,000,000, or
if the principal amount of the instrument is insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC") or the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. These instruments may
include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates
of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs").
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). The Fund may invest in ADRs. ADRs
are receipts typically issued by an American bank or trust company that
evidences ownership of underlying securities issued by a foreign issuer.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects to invest
in floating rate corporate debt obligations, including increasing rate
securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every
90 days) to an increment over some predetermined interest rate index.
Commonly utilized indices include the three-month Treasury bill rate,
the six-month Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial
paper rates, or the longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered
at an initial interest rate which is at or above prevailing market
rates. Interest rates are reset periodically (most commonly every 90
days) at different levels on a predetermined scale. These levels of
interest are ordinarily set at progressively higher increments over
time. Some increasing rate securities may, by agreement, revert to a
fixed rate status. These securities may also contain features which
allow the issuer the option to convert the increasing rate of interest
to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in
fixed rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics
are long-term debt obligations but are treated in the market as having
short maturities because call features of the securities may make them
callable within a short period of time. A fixed rate security with
short-term characteristics would include a fixed income security priced
close to call or redemption price or a fixed income security approaching
maturity, where the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times
of rising or falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as described
above, behave like short-term instruments in that the rate of interest
they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest
and are more sensitive to fluctuating interest rates. In periods of
rising interest rates, the value of a fixed rate security is likely to
fall. Fixed rate securities with short-term characteristics are not
subject to the same price volatility as fixed rate securities without
such characteristics. Therefore, they behave more like floating rate
securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES. The Fund may purchase variable rate demand
notes. Variable rate demand notes are long-term corporate debt
instruments that have variable or floating interest rates and provide
the Fund with the right to tender the security for repurchase at its
stated principal amount plus accrued interest. Such securities typically
bear interest at a rate that is intended to cause the securities to
trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate
demand notes allow the Fund to demand the repurchase of the security on
not more than seven days prior notice. Other notes only permit the Fund
to tender the security at the time of each interest rate adjustment or
at other fixed intervals. See "Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government
securities, which generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations
(including mortgage-backed securities, bonds, notes and discount notes)
issued or guaranteed by the following U.S. government agencies or
instrumentalities: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers
Home Administration; Federal Home Loan Banks; Federal Home Loan Mortgage
Corporation; Federal National Mortgage Association; Government National
Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S.
Treasury; the issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality
issuing the obligations.
Examples of agencies and instrumentalities, the securities of which are
permissible investments which may not always receive financial support
from the U.S. government are: Farm Credit System, including the National
Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Federal Home Loan Banks; Federal National Mortgage Association; Student
Loan Marketing Association; and Federal Home Loan Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities rated BBB or Baa or better by a nationally recognized
statistical rating organization, or which are of comparable quality in
the judgment of the Adviser. 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.) There are
currently four basic types of mortgage-backed securities: (i) those
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae")
and Federal Home Loan Mortgage Corporation ("Freddie Mac"); (ii) those
issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; (iii) those
issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a
government guarantee but usually having some form private credit
enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and/or principal. The interest
portion of these payments will be distributed by the Fund as income, and
the capital portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). The Fund may invest in
ARMS. ARMS are pass-through mortgage-backed securities with
adjustable rather than fixed interest rates. The ARMS in which the
Fund invests are issued by Ginnie Mae, Fannie Mae, and Freddie Mac
and are actively traded. The underlying mortgages which
collateralize ARMS issued by Ginnie Mae are fully guaranteed by the
Federal Housing Administration or Veterans Administration, while
those collateralizing ARMS issued by Fannie Mae or Freddie Mac are
typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Fund may invest in
CMOs. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized
by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities.
CMOs may have fixed or floating rates of interest.
The Fund will invest only in CMOs that are rated BBB or Baa or
better by a nationally recognized statistical rating organization.
The Fund may also invest in certain CMOs which are issued by private
entities such as investment banking firms and companies related to
the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government;
(ii) securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer
and such guarantee is collateralized by U.S. government securities;
(iii) collateralized by pools of mortgages in which payment of
principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other
securities in which the proceeds of the issuance are invested in
mortgage-backed securities and payment of the principal and interest
is supported by the credit of any agency or instrumentality of the
U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). The Fund may
invest in REMICs. REMICs are offerings of multiple class mortgage-
backed securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code, as amended. Issuers of
REMICs may take several forms, such as trust, partnerships,
corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in
the REMIC. A REMIC interest must consist of one or more classes of
"regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." to qualify as
a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are
not mortgage loans or interests in mortgage loans. The Fund may invest
in asset-backed securities rated BBB or Baa or better by a nationally
recognized statistical rating organization including, but not limited
to, interests in pools of receivables, such as motor vehicle installment
obligations and credit card receivables, equipment leases, manufactured
housing (mobile home) leases, or home equity loans. These securities may
be in the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct
or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time
the Fund reinvests the payments and any unscheduled prepayments of
principal received, the Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities
are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage
loans or the collateral supporting asset-backed securities may be
prepaid without penalty or premium. Prepayment risks on mortgage-
backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments
on mortgage-backed securities are also affected by other factors,
such as the frequency with which people sell their homes or elect to
make unscheduled payments on their mortgages. Although asset-backed
securities generally are less likely to experience substantial
prepayments than are mortgage-backed securities, certain factors
that affect the rate of prepayments on mortgage-backed securities
also affect the rate of prepayments on asset-backed securities.
While mortgage-backed securities generally entail less risk of a
decline during periods of rapidly rising interest rates, mortgage-
backed securities may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
mortgage-backed securities are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some
loss of a holder's principal investment to the extent of the premium
paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the related
collateral. 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 e credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities
backed by motor vehicle installment purchase obligations permit the
servicer of such receivables to retain possession of the underlying
obligations. If the servicer sells 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 asset-backed
securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another
state, such re-registration could defeat the original security
interest in the vehicle in certain cases. 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 asset-backed securities backed by automobile receivables may not
have a proper 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.
SHORT-TERM INSTRUMENTS. The Fund may invest in U.S. and foreign
short-term money market instruments, including:
o commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch, and Europaper (dollar-denominated
commercial paper issued outside the United States) rated A-1, A-2,
Prime-1, or Prime-2;
o instruments of domestic and foreign banks and savings and loans
(such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances) if they have capital, surplus,
and undivided profits of over $100,000,000, or if the principal
amount of the instrument is insured by the Bank Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund, which is also
administered by the FDIC. These instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), and Eurodollar Time Deposits ("ETDs");
o obligations of the U.S. government or its agencies or
instrumentalities;
o repurchase agreements;
o securities of other investment companies; and
o other short-term instruments which are not rated but are determined
by the Adviser to be of comparable quality to the other obligations
in which the Fund may invest.
OPTIONS TRANSACTIONS. The Fund may engage in options transactions.
The Fund may purchase and sell options both to increase total return and
to hedge against the effect of changes in the value of portfolio
securities due to anticipated changes in interest rates and market
conditions.
The Fund may write (i.e., sell) covered call options and covered put
options. By writing a call option, the Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon
payment of the exercise price. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised.
All options written by the Fund must be "covered" options. This means
that if, 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
in the case of call options on U.S. Treasury bills, substantially
similar securities) or have the right to obtain such securities without
payment of further consideration (or have the right to sell the
underlying securities without payment of further consideration, or have
segregated cash in the amount of any additional consideration).
The Fund will be considered "covered" with respect to a put option it
writes, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option (or have the right to purchase a put option with an exercise
price equal to or greater than the exercise price of the written put
option).
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the Fund will attempt to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The Fund receives a premium
from writing a call or put option which it retains whether or not the
option is exercised. By writing a call option, the Fund might lose the
potential for gain on the underlying security while the option is open,
and by writing a put option, the Fund might become obligated to purchase
the underlying security for more than its current market price upon
exercise. The Fund will write put options only on securities which the
Fund wishes to have in its portfolio and where the Fund has determined,
as an investment consideration, that it is willing to pay the exercise
price of the option.
The Fund may purchase put options and call options. Such investments in
put and call options may not exceed 5% of the Fund's assets, represented
by the premium paid, and will only relate to specific securities (or
groups of specific securities) in which the Fund may invest. The Fund
may purchase call and put options for the purpose of offsetting
previously written call and put options of the same series. If the Fund
is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised. Put options may also be
purchased to protect against price movements in particular securities in
the Fund's portfolio. A put option gives the Fund, in return for a
premium, the right to sell the underlying securities to the writer
(seller) at a specified price during the term of the option. The Fund
will purchase options only to the extent permitted by the policies of
state securities authorities in states where shares of the Fund is
qualified for offer and sale.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded
options are third-party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-the-
counter options may not.
FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
futures contracts to hedge against the effect of changes in the value of
portfolio securities due to anticipated changes in interest rates and
market conditions. In addition, the Fund may use futures contracts as a
means of increasing total return. Futures contracts call for the
delivery of particular instruments at a certain time in the future.
These instruments may include interest rate instruments, fixed income
securities, Eurodollars, or contracts based on stock indices. The seller
of the contract agrees to make delivery of the type of instrument called
for in the contract, and the buyer agrees to take delivery of the
instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices. An
index future contract is an agreement to which two parties agree to take
or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally
written.
The Fund may also write call options and purchase put options on
futures contracts as a hedge to attempt to protect securities in its
portfolio against decreases in value. When the Fund writes a call option
on a futures contract, it is undertaking the obligation of selling a
futures contract at a fixed price at any time during a specified period
if the option is exercised. Conversely, as purchaser of a put option on
a futures contract, the Fund is entitled (but not obligated) to sell a
futures contract at the fixed price during the life of the option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio
securities. The Fund will use these transactions to attempt to protect
its ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When the
Fund writes a put option on a futures contract, it is undertaking to buy
a particular futures contract at a fixed price at any time during a
specified period if the option is exercised. As a purchaser of a call
option on a futures contract, the Fund is entitled (but not obligated)
to purchase a futures contract at a fixed price at any time during the
life of the option.
The Fund may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total
assets. In addition, certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"), may limit the Fund's use of futures
contracts and options. When the Fund purchases futures contracts, an
amount of cash and cash equivalents, equal to the underlying commodity
value of the futures contracts (less any related margin deposits), will
be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. When the
Fund sells futures contracts, it will either own or have the right to
receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices
of the securities in the Fund's portfolio. This may cause the
futures contract and any related options to react differently than
the portfolio securities to market changes. In addition, the Funds
investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as stock price movements.
In these events, the Fund may lose money on the futures contract or
option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the
investment adviser will consider liquidity before entering into
these transactions, there is no assurance that a liquid secondary
market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. A Fund's ability
to establish and close out futures and options positions depends on
this secondary market.
SHORT SELLING. The Fund may make short sales with respect to
futures, pursuant to a fundamental policy. Short sales are transactions
in which the Fund sells a security it does not own in anticipation of a
decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price
at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest
which accrue during the period of the loan. To borrow the security, the
Fund also may be required to pay a premium, which would increase the
cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will be required to maintain a daily segregated account,
containing cash or U.S. government securities, at such a level that (i)
the amount deposited in the account plus the amount deposited with the
broker as collateral will at all times equal to at least 100% of the
current value of the security sold short and (ii) the amount deposited
in the segregated account plus the amount deposited with the broker as
collateral will not be less than the market value of the security at the
time it was sold short.
SPECIAL RISKS ASSOCIATED WITH SHORT SELLING. The Fund will incur a
loss as a result of the short sale if the price of the security
increases between the date of the short sale and the date on which
the Fund replaces the borrowed security; conversely, the Fund will
realize a gain if the security declines in price between those dates.
This result is the opposite of what one would expect from a cash
purchase of a long position in a security. The amount of any gain
will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of interest the Fund may be
required to pay in connection with a short sale.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes
pursuant to a fundamental policy. This borrowing, which is known as
leveraging, generally will be unsecured, except to the extent the Fund
enters into the reverse repurchase agreements described below. The
Investment Company Act of 1940 requires the Fund to maintain continuous
asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If
the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
SPECIAL RISKS ASSOCIATED WITH LEVERAGING. Borrowing by the Fund
creates an opportunity for increased net income but, at the same
time, creates special risk considerations. For example, leveraging
may exaggerate the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. To the extent
the income derived from securities purchased with borrowed funds
exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely,
if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the
Fund will be less than if borrowing were not used, and, therefore,
the amount available for distribution to shareholders as dividends
will be reduced. The Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the
stated interest rate.
Among the forms of borrowing in which the Fund may engage is the entry
into reverse repurchase agreements with banks, brokers or dealers. These
transactions involve the transfer by the Fund of an underlying debt
instrument in return for cash proceeds based on a percentage of the
value of the security. The Fund retains the right to receive interest
and principal payments on the security. At an agreed upon future date,
the Fund repurchases the security at an agreed-upon price. In certain
types of agreements, there is no agreed upon repurchase date, and
interest payments are calculated daily, often based on the prevailing
U.S. government securities or other high-quality liquid debt securities
at least equal to the aggregate amount of its reverse repurchase
obligations, plus accrued interest, in certain cases, in accordance with
releases promulgated by the Securities and Exchange Commission. The
Securities and Exchange Commission views reverse repurchase transactions
as collateralized borrowings by the Fund. These agreements, which are
treated as if reestablished each day, are expected to provide the Fund
with a flexible borrowing tool.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized
financial institutions sell securities to the Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price. To
the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on
any sale of such securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may
invest in the securities of other investment companies, but will not own
more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of total assets in any one investment
company, or invest more than 10% of total assets in investment companies
in general. The Fund will invest in other investment companies primarily
for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. It should be noted that
investment companies incur certain expenses such as management fees and,
therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. VCM will waive its
investment advisory fee on assets invested in securities of open-end
investment companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a
price or yield considered to be advantageous. Settlement dates may be a
month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the
Portfolio Adviser deems it appropriate to do so. In addition, the Fund
may enter into transactions to sell its purchase commitments to third
parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. The Fund may
realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the Fund may lend portfolio securities on a short-term or long-
term basis, to broker/dealers, banks, or other institutional borrowers
of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the Portfolio Adviser
has determined are creditworthy under guidelines established by the
Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the
securities loaned at all times. This policy is fundamental and cannot be
changed without the approval of holders of a majority of the Fund's
shares.
There is the risk that when lending portfolio securities, the securities
may not be available to the Fund on a timely basis and the Fund may,
therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would
file for bankruptcy or become insolvent, disposition of the securities
may be delayed pending court action.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund
may otherwise invest pursuant to its investment objective and policies
but which are subject to restrictions on resale under federal securities
law. However, the Fund will limit investments in illiquid securities,
including (where applicable) restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than
seven days after notice, to 15% of its net asset.
BORROWING MONEY. The Fund will not borrow money directly or through
reverse repurchase agreements (arrangements in which the Fund sells a
portfolio instrument for a percentage of its cash value with an
agreement to buy it back on a set date) or pledge securities except,
under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge assets as necessary to secure such
borrowings. This policy is fundamental and cannot be changed without the
approval of holders of a majority of the Fund's shares.
DIVERSIFICATION. With respect to 75% of the value of total assets,
the Fund will not invest more than 5% in securities of any one issuer,
other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by U.S. government securities or
acquire more than 10% of the outstanding voting securities of any one
issuer. This policy is fundamental and cannot be changed without the
approval of holders of a majority of the Fund's shares.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has
traditionally been applied to certain contracts (including, futures,
forward, option and swap contracts) that "derive" their value from
changes in the value of an underlying security, currency, commodity or
index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as
"derivatives." The term has also been applied to securities "derived"
from the cash flows from underlying securities, mortgages or other
obligations.
Derivative contracts and securities can be used to reduce or increase
the volatility of an investment portfolio's total performance. While the
response of certain derivative contracts and securities to market
changes may differ from traditional investments, such as stock and
bonds, derivatives do not necessarily present greater market risks than
traditional investments. The Fund will only use derivative contracts for
the purposes disclosed in the applicable prospectus sections above. To
the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent
with its investment objectives, policies and limitations.
ADDITIONAL RISK CONSIDERATIONS
FOREIGN SECURITIES. The Fund may invest in foreign securities.
Investing in foreign securities can carry higher returns and risks than
those associated with domestic investments.
FOREIGN COMPANIES. Differences between investing in foreign
and U.S. companies include:
o less publicly available information about foreign companies;
o the lack of uniform financial accounting standards applicable to
foreign companies;
o less readily available market quotations on foreign companies;
o differences in government regulation and supervision of foreign
securities exchanges, brokers, listed companies, and banks;
o generally lower foreign securities market volume;
o the likelihood that foreign securities may be less liquid or more
volatile;
o generally higher foreign brokerage commissions;
o possible difficulty in enforcing contractual obligations or
obtaining court judgments abroad because of differences in the
legal systems;
o unreliable mail service between countries; and
o political or financial changes which adversely affect investments
in some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad. Although the Fund
is unaware of any current restrictions which would materially adversely
affect its ability to meet its investment objective and policies,
investors are advised that these U.S. government policies could be
reinstituted.
INVESTMENT RISKS ASSOCIATED WITH INVESTMENT IN EQUITY AND DEBT
SECURITIES
As with other mutual funds that invest in equity securities, the Fund is
subject to market risks. That is, the possibility exists that common
stocks will decline over short or even extended periods of time. The
United States equity market tends to be cyclical, experiencing both
periods when stock prices generally increase and periods when stock
prices generally decrease.
In addition, with respect to fixed income securities, investors should
be aware that prices of fixed income securities generally fluctuate
inversely to the direction of interest rates.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever
the Portfolio Adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Portfolio Adviser does not
anticipate that the Fund's annual turnover rate will exceed 200% under
normal market conditions. A higher rate of portfolio turnover may lead
to increased costs and may also result in higher taxes paid by the
Fund's shareholders.
BLANCHARD FUNDS INFORMATION
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees")
is responsible for managing the business affairs of the Trust and for
exercising all of the powers of the Fund except those reserved for the
shareholders. The Executive Committee of the Board of Trustees handles
the Board's responsibilities between meetings of the Board.
MANAGER. VCM, the Fund's Manager, is responsible for managing the
Fund and overseeing the investment of its assets. In addition, VCM
selects, monitors, and evaluates the Fund's Portfolio Adviser. VCM will
review the Portfolio Adviser's performance record periodically, and will
make exchanges, if necessary, subject to Board and shareholder
approval.
MANAGEMENT FEES. VCM receives an annual management fee of 1.00% of the
Fund's average net assets. The fee paid by the Fund, while higher than
the management fee paid by other mutual funds in general, is comparable
to fees paid by other mutual funds with similar objectives and policies.
The management contract provides for the voluntary waiver of expenses by
the VCM from time to time. VCM can terminate this voluntary waiver of
expenses at any time at its sole discretion. VCM has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.
VCM'S BACKGROUND. VCM, 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, had more than $2.3 billion in assets
under management as of January 31, 1996. As part of its regular banking
operations, Signet Bank may make loans to public companies. Thus, it may
be possible, from time to time, for the Fund to hold or acquire the
securities of issuers which are also lending clients of Signet Bank. The
lending relationship will not be a factor in the selection of
securities.
THE PORTFOLIO ADVISER. Pursuant to the terms of an investment sub-
advisory agreement between the Fund's Manager, VCM, and Mellon Capital
Management Corporation, a Delaware corporation (the "Portfolio Adviser
"), the Portfolio Adviser furnishes portfolio advisory services for the
Fund. Under the terms of the 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 the 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. For the services provided and the expenses incurred
by the Portfolio Adviser pursuant to the sub-advisory agreement, the
Portfolio Adviser is entitled to receive an annual sub-advisory fee
equal to .50% of the Fund's average daily net assets up to $50 million;
.375% on net assets between $50 million and $200 million, and .25% on
net assets in excess of $200 million, payable by VCM, in quarterly
installments. The Portfolio Adviser may elect to waive some or all of
its fee. In no event shall the Fund be responsible for any fees due to
the Portfolio Adviser for its services to VCM.
THE PORTFOLIO ADVISER `S BACKGROUND. The Portfolio Adviser, which is
located at 595 Market Street, 30th Floor, San Francisco, CA 94105, is a
registered investment advisory firm founded in 1983. The Portfolio
Adviser manages assets of approximately $40 billion. The Portfolio
Adviser is an indirect, wholly-owned subsidiary of Mellon Bank
Corporation.
Dr. Tom Hazuka and Dr. Charles Jacklin are responsible for the day-to-
day management of the Fund.
Dr. Tom Hazuka is Executive Vice President of Mellon Capital Management
Corporation. As Chief Investment Officer, he is responsible for the
portfolio management and trading of domestic and international equities
and fixed income, as well as Tactical Asset Allocation strategies. Dr.
Hazuka joined Mellon Capital Management in 1986, as Manager of Fixed
Income, in order to create a fixed income capability. He was also given
responsibility for Equity Portfolio Management in 1988, and for Equity
Arbitrage Trading in 1989. Dr. Hazuka worked at Wells Fargo Investment
Advisors from 1981 through 1986 primarily in a research capacity. Dr.
Hazuka received his Ph.D. In Finance from Stanford University in 1981.
He received an M.B.A. from the University of Connecticut in 1973, and a
B.S. in Electrical Engineering from Stevens Institute of Technology in
1966.
Dr. Jacklin is Senior Vice President and Director of Asset Allocation
Strategies at Mellon Capital Management Corporation. He is responsible
for overseeing domestic, international and global asset allocation
strategies. Prior to joining Mellon Capital Management Corporation, Dr.
Jacklin was on the finance faculty of Stanford University's Graduate
School of Business. In addition, he has been an instructor for the
Stanford - London Business School International Investment Management
Program, the Stanford Financial Management Program, and the Pacific
Coast Banking School. For the academic year 1990-1991, Dr. Jacklin
served as Senior Staff Economist for Financial Markets and Banking for
the President's Council of Economic Advisers in Washington D.C. While at
the Council, he had primary responsibility for all matters related to
financial markets and banking. Prior to joining Stanford in 1987, Dr.
Jacklin also served on the finance faculty at the University of
Chicago's Graduate School of Business. From 1978 through 1980, Dr.
Jacklin worked as a consultant with Ernst & Ernst. Dr. Jacklin received
his Ph.D. in Finance from Stanford University in 1985, and M.B.A. from
the University of Illinois in 1978, and a B.S. in Mathematics, cum
laude, from the University of Maryland in 1976.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of
the Fund. 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. Under a distribution plan adopted in accordance with
Investment Company Act Rule 12b-1 on behalf of the Fund (the "Plan"),
the distributor may select financial institutions such as fiduciaries,
custodians for public funds, investment advisers and brokers/dealers to
provide distribution and/or administrative services as agents for their
clients or customers. 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 the Fund;
assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonable
requests for its shares.
The distributor will pay financial institutions a fee based upon shares
subject to the Plan and 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 Trustees, provided that for
any period the total amount of these fees shall not exceed an annual
rate of .25 of 1% of the average net asset value of shares of the Fund
subject to the Plan held during the period by clients or customers of
financial institutions. Any fees paid by the distributor under the Plan
will be reimbursed from the assets of the 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
Fund. Such payments will be predicted upon the amount of shares of the
Fund that are sold by the dealers.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial
institutions a fee based upon the average net asset value of shares of
the Fund of their customers invested in the Trust for providing
administrative services. This fee, if paid, will be reimbursed by VCM
and not the Trust.
GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository
institution (such as a commercial bank or a savings and loan
association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities
described above or should Congress relax current restrictions on
depository institutions, the Board of Trustees will consider appropriate
changes in the administrative services.
State securities laws governing the ability of depository institutions
to act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks
and financial institutions may be required to register as dealers
pursuant to state law.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary
of Federated Investors, provides the Fund with certain administrative
personnel and services necessary to operate the Fund. Such services
include shareholder servicing and certain legal and accounting services.
Federated Administrative Services provides these at an annual rate as
specified below:
Maximum Average Aggregate Daily Net
Administrative Fee Assets the Trust
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 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. Federated Administrative Services may voluntarily waive a
portion of its fee.
CUSTODIAN. Signet Trust Company, Richmond, Virginia, is custodian for
the securities and cash of the Fund. Under the Custodian Agreement,
Signet Trust Company holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to
its duties.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the shares of
the Fund and dividend disbursing agent for the Fund.
INDEPENDENT ACCOUNTANTS. The independent accountants for the Fund are
Price Waterhouse, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of the
Trust's expenses. These expenses include, but are not limited to: the
cost of organizing the Trust and continuing its existence; Trustees
fees; investment advisory and administrative services; printing
prospectuses and other Fund documents for shareholders; registering the
Trust and the Fund; taxes and commissions; issuing purchasing,
repurchasing and redeeming shares; fees for custodian, transfer agent,
dividend disbursing agent, shareholders servicing agents, and
registrars; printing, mailing, auditing, accounting, and legal expenses;
reports to shareholders and government agencies; meeting of Trustees and
shareholders and proxy solicitations therefore; insurance premiums;
association membership dues; and such nonrecurring and extraordinary
expenses as may arise. However, the adviser may voluntarily waiver
and/or reimburse some expenses.
BROKERAGE TRANSACTIONS. Subject to the supervision of the Board and VCM,
decisions to buy and sell specific securities for the Fund are made by
its Portfolio Adviser. The Portfolio Adviser is 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 has also authorized the Fund to
allocate brokerage to the Portfolio Adviser 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 Fund has adopted certain procedures
incorporating the standards of Rule 17e-1 of the 1940 Act, which require
that the commissions paid to the 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, the 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 the Fund. Transactions are allocated to various
dealers selected by VCM or the Portfolio Adviser 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 Fund has
determined that the foregoing arrangements are in the best interest of
the Fund's shareholders.
NET ASSET VALUE
The Fund's net asset value per share fluctuates. It is determined by
dividing the sum of the market value of all securities and other assets,
less liabilities, by the number of shares outstanding.
HOW TO INVEST
You may purchase shares of any Fund from Federated Securities Corp., the
Fund's 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., New York 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 of the next business day. The 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.
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 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 the 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, Massachusetts
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 canceled and you could be liable for any losses or fees
incurred. Payments transmitted by check are accepted subject to
collection at full face amount.
Order 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.
PURCHASE 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.
You should instruct your bank to wire Federal funds: State Street Bank
and Trust Company of New York, ABA # 011000028, DDA # 0627-975-6,
Boston, MA indicating the name of the Fund, your account number and the
account registration.
AUTOMATIC INVESTMENT PLANS. Regular monthly purchases of shares may be
made by direct deposit of Social Security and certain other government
checks into your account. Fund shares may be purchased at regular
intervals selected by you by automatic transferal 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 section 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 ten business days after the form is received.
GENERAL INFORMATION
Dividends on the Fund are declared and paid annually. Capital gains
realized by the Fund, if any, will be distributed once every 12 months.
All ordinary income, dividends and capital gains 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 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 the 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 the 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 The Virtus Funds,
on the basis of relative net asset values per share at the time of
exchange. No fees are charged when you exchange from one Fund to another
within the Blanchard Group of Funds or into one of the aforementioned
portfolios of The Virtus Funds. Before making an exchange, you should
read the Prospectus concerning the Fund into which your exchange is
being made.
To request an exchange by telephone, simply call 1-800-829-3863, 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 the 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.
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 you shares by telephone by calling 1-800-
829-3863, prior to 4:00 p.m. New York time. All calls will be recorded.
Redemptions of Fund shares can be made in this manner only after you
have executed and filed with the Transfer Agent the telephone redemption
authorization form which may be obtained from your Fund or the Transfer
Agent.
You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your
registered address, to your bank account, or to any other person you may
designate. Should you wish to review these instructions, simply complete
and file a new telephone redemption authorization form. There is no
charge for this service. Neither your Fund nor the Transfer Agent will
be responsible for any claims, losses or expenses for acting on
telephone instructions that they reasonably believe to be genuine. See
"Investor Services - Exchange Privilege," for additional information
with respect to losses resulting from unauthorized telephone
transactions.
You may also request, by placing a call to the applicable telephone
number set forth above, redemption proceeds to be wired directly to the
bank account that you have designated on the authorization form. The
minimum amount that may be redeemed in this manner is $1,000. A check
for proceeds of less than $1,000 will be mailed to your address of
record. The Funds do not impose a charge for this service. However, the
proceeds of a wire redemption may be subject to the usual and customary
charges imposed by United States Trust Company of New York for the
wiring of funds.
Under extraordinary market conditions, it may be difficult for you to
redeem your shares by telephone. Under these circumstances, you should
consider redeeming your shares by mail, as described below.
BY MAIL. All other redemption requests should be made in writing to the
Blanchard Group of Funds, P.O. Box 8612 Boston, MA 02266-8612. Where
share certificates have been issued, the certificates must be endorsed
and must accompany the redemption request. Signatures on redemption
request for any amount 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 1-800-462-9102. Signatures on redemption
requests for any amount must be guaranteed (as described above) if the
proceeds are not to be paid to the registered owner at the registered
address, or the registered address has changed within the previous 60
days. The letter of instruction or a stock assignment must specify the
account number and the exact number of shares or dollar amount to be
redeemed. It must be signed by all registered shareholders in precisely
the same way as originally registered. The letter of instruction must
also include any other supporting legal documents, if required, in the
case of estates, trusts, guardianships, custodianships, corporations,
partnerships, pension or profit sharing plans, or other organizations.
GENERAL INFORMATION
Your redemption request becomes effective when its received in proper
form by the Funds' Transfer Agent prior to 4:00 p.m., New York time, or
your redemption will occur on the following business day. We will make
payment for redeemed shares within seven days after receipt by the
Transfer Agent. However, we may delay the forwarding of redemption
proceeds on shares which were recently purchased until the purchase
check has cleared, which may take up to 7 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, were 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.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All
shares of all classes of each portfolio in the Trust have equal voting
rights, except that in matters affecting only a particular Fund or
class, only shareholders of that Fund or class are entitled to vote. As
a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for
certain changes in the operation of the Trust or the Fund and for the
election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of the shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of
the Trust's outstanding shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable
as partners under Massachusetts law for acts or obligations of the
Trust. To protect shareholders, the Trust has filed legal documents with
Massachusetts that expressly disclaim the liability of shareholders for
such acts or obligations of the Trust. These documents require notice of
this disclaimer to be given in each agreement, obligation, or instrument
the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for
obligations of the Trust, the Trust is required to use its property to
protect or compensate the shareholder. On request, the Trust will defend
any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them
from its assets.
EFFECT OF BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any
bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end
investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, or distributing
securities. However, such banking laws and regulations do not prohibit
such a holding company affiliate or banks generally from acting as
investment adviser, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and
upon the order of such a customer. Signet Trust Company is subject to
such banking laws and regulations.
Signet Trust Company believes, based on the advice of its counsel, that
VCM may perform the services for the Fund contemplated by its advisory
agreement with the Trust without violation of the Glass-Steagall Act or
other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities
of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of such or
future statutes and regulations, could prevent VCM from continuing to
perform all or a part of the above services for its customers and/or the
Fund. If it were prohibited from engaging in these customer-related
activities, the Trustees would consider alternative advisers and means
of continuing available investment services. In such event, changes in
the operation of the Fund may occur, including possible termination of
any automatic or other Fund share investment and redemption services
then being provided by VCM. It is not expected that existing
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to VCM is found) as a result of any of
these occurrences.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded
to such companies.
The Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses
realized by the other portfolios of Blanchard Funds will not be combined
for tax purposes with those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income
tax on any dividends and other distribution, including capital gains,
received. This applies whether dividends and distributions are received
in cash or as additional shares.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local laws.
PERFORMANCE INFORMATION
Advertisements and communications to investors regarding the Fund 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 Fund's Portfolio Adviser 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 Fund's
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 the Fund's distribution rate.
TOTAL RETURN
Cumulative total return data is computed by considering all elements or
return, including reinvestment of dividends and capital gains
distribution, over a state period of time. Cumulative total return
figures are not annualized and represent the aggregate percentage or
dollar value change over the period in question.
Average annual return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods
have not yet elapsed, at the end of a shorter period corresponding to
the life of the Fund for performance purposes). Average annual total
return figures are annualized and, therefore, represent the average
annual percentage change over the period in question.
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 dividend 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 Fund may also quote tax-equivalent yield, which shows
the taxable yield that an investor would have to earn before taxes to
equal the Fund's tax-free yield. The tax-equivalent yield is calculated
by dividing the 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 the Fund's income is tax-exempt only that portion is adjusted
in the calculation.
DISTRIBUTION RATE
The Fund may also quote distribution rates and/or effective
distribution rates in sales literature or other shareholders
communications. The 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
ration. The effective distribution rate will be higher than the
distribution rate because of the compounding effect of the assumed
reinvestment. The 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, the 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., CDS and Morningstar, Inc. The Fund may also
discuss the past performance and ranking of its Portfolio Adviser, and
compare its performance to various investment indexes. The Fund 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 Fund may compare its 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 Fund 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. The Fund may also compare the historical returns on various
investments, performance indexes of those investments and economic
indicators. In addition, the Fund may reprint articles about the Fund
and provide them to prospective shareholders. The Distributor may also
make available economic, financial and investment reports to
shareholders and prospective shareholders. In order to describe these
reports, the Fund 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 Fund, and that such other funds or
market indicators may be comprised of securities that differ
significantly from the Fund's investments.
Performance information will vary from time to time and past results are
not necessarily representative of future results. You should remember
that the Fund's performance is a function of portfolio managers in
selecting the type and quality of securities in which the Fund may
invest, and is affected by operation, distribution and marketing
expenses.
ADDRESSES
Blanchard Asset Allocation Fund Federated
Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor
Federated Securities Corp. Federated
Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Manager
Virtus Capital Management, Inc. 707 East
Main Street
Suite 1300
Richmond, Virginia 23219
Portfolio Adviser
Mellon Capital Management 595 Market
Street, 30th Floor
Corporation San Francisco, California 94105
Custodian
Signet Trust Company 7 North Eighth Street
Richmond, Virginia 23219
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated
Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Independent Accountants
Price Waterhouse 1177 Avenue of the Americas
New York, New York 10036
BLANCHARD ASSET ALLOCATION FUND
(A PORTFOLIO OF BLANCHARD FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Blanchard Asset Allocation Fund dated December 31,
1995, as revised on May 30, 1996. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write to the Blanchard
Asset Allocation Fund (the "Fund") or call 1-800-829-3863.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1995
(Revised May 30, 1996)
VIRTUS CAPITAL MANAGEMENT, INC.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVES AND POLICIES 1
Warrants 1
Convertible Securities 1
Collateralized Mortgage Obligations ("CMOs")
1
When-Issued and Delayed Delivery Transactions
2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Restricted and Illiquid Securities 2
Futures Contracts 3
"Margin" in Futures Transactions 3
Put Options on Futures Contracts 3
Call Options on Futures Contracts 4
Stock Index Options 4
Over-the-Counter Options 4
Reverse Repurchase Agreements 4
INVESTMENT LIMITATIONS 5
BLANCHARD ASSET ALLOCATION FUND MANAGEMENT 7
Fund Ownership 11
Trustees Compensation 11
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12
Manager of the Fund 12
Management Fees 12
Portfolio Adviser of the Fund 12
Sub-Advisory Fees 12
ADMINISTRATIVE SERVICES 13
CUSTODIAN 13
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 13
Distribution Plan 13
Administrative Arrangements 13
Conversion to Federal Funds 14
DETERMINING NET ASSET VALUE 14
Determining Market Value of Securities 14
Trading in Foreign Securities 14
EXCHANGE PRIVILEGE 14
Requirements for Exchange 14
Making an Exchange 15
REDEEMING SHARES 15
Redemption in Kind 15
TAX STATUS 15
The Fund's Tax Status 15
Foreign Taxes 15
Shareholders' Tax Status 15
TOTAL RETURN 16
YIELD 16
PERFORMANCE COMPARISONS 16
APPENDIX 17
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Blanchard Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of
Trust dated January 24, 1986. The Declaration of Trust permits the Trust
to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to maximize total return over the
long term by allocating its assets among stocks, bonds, short-term
instruments and other instruments. The investment objective cannot be
changed without the approval of shareholders. Unless indicated
otherwise, the policies described below may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less
than a year to twenty years or may be perpetual. However, most warrants
have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's
exercise price during the life of the warrant, the warrant will expire
as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing
them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease
in the market price of the optioned common stock. The Fund will not
invest more than 5% of the value of its total assets in warrants. No
more than 2% of this 5% may be in warrants which are not listed on the
New York or American Stock Exchanges. Warrants required in units or
attached to securities may be deemed to be without value for purposes of
this policy.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds of appropriate rating or
comparable quality (as described in the prospectus) that can be used, in
whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along
with warrants, which are options to buy the common stock, they function
as convertible bonds, except that the warrants generally will expire
before the bond's maturity. Convertible securities are senior to equity
securities and, therefore, have a claim to assets of the corporation
prior to the holders of common stock in the case of liquidation.
However, convertible securities are generally subordinated to similar
nonconvertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but
lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. Otherwise, the Fund will hold or trade the
convertible securities. In selecting convertible securities for the
Fund, the adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible
security, the adviser considers numerous factors, including the economic
and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are
prioritized in the case of CMOs -- most of the CMOs in which the Fund
invests use the same basic structure:
(1)Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: the first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date and the final tranche (Z
bonds) typically receives any excess income from the underlying
investments after payments are made to the other tranches and receives
no principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2)The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3)The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity tranche (or B
bonds). This process continues until all of the tranches have been paid
off.
Because the cash flow is distributed sequentially instead of pro rata,
as with pass-through securities, the cash flows and average lives of
CMOs are more predictable, and there is a period of time during which
the investors in the longer-maturity classes receive no principal
paydowns. One or more of the tranches often bear interest at an
adjustable rate. The interest portion of these payments is distributed
by the Fund as income, and the principal portion is reinvested.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such
a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of
such securities. The Fund will only enter into repurchase agreements
with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
LENDING OF PORTFOLIO SECURITIES
As a fundamental policy of the Fund, the Fund may lend portfolio
securities. The collateral received when the Fund lends portfolio
securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Fund
or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated
portion of the interest earned on the cash or equivalent collateral to
the borrower or placing broker. The Fund would not have the right to
vote securities on loan, but would terminate the loan and regain the
right to vote if that were considered important with respect to the
investment.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to
institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") staff position set forth in the adopting release
for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is
a non-exclusive safe-harbor for certain secondary market transactions
involving registration for resales of otherwise restricted securities to
qualified institutional buyers.
The Rule was expected to further enhance the liquidity of the secondary
market for securities eligible for resale under the Rule. The Fund
believes that the staff of the SEC has left the question of determining
the liquidity of all restricted securities to the Trustees. The Trustees
may consider the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security called for
in the contract ("going short") and the buyer who agrees to take
delivery of the security ("going long") at a certain time in the future.
For example, in the fixed income securities market, prices move
inversely to interest rates. A rise in the rate means a drop in the
price. In order to hedge its holdings of fixed income securities against
a rise in market interest rates, the Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed
income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates. The Fund may use futures contracts for hedging purposes
and to increase total return.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. 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.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sales of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price.
If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the premium
paid for the contract will be lost.
The Fund may also write put options on futures contracts to protect
against rising purchase prices of portfolio securities.
The Fund may use put options on futures contracts for hedging purposes
and to increase total return.
CALL OPTIONS ON FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed and over-the-counter call options on futures contracts to hedge
its portfolio against an increase in market interest rates or a decrease
in stock prices. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any
time during the life of the option if the option is exercised. As stock
prices fall or market interest rates rise, causing the prices of futures
to go down, the Fund's obligation under a call option on a future (to
sell a futures contract) costs less to fulfill, causing the value of the
Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's
portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts to
bring its open futures and options positions within this limitation.
The Fund may also purchase call options on futures contracts as hedges
against rising purchase prices of portfolio securities.
The Fund may use call options on futures contracts for hedging
purposes and to increase total return.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market value of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an
index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a
gain or loss from the purchase of the option on an index depends upon
movements in the level of stock prices in the stock market generally or,
in the case of certain indices, in an industry or market segment, rather
than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject
to the availability of the Fund's adviser to predict correctly movements
in the directions of the stock market generally or of a particular
industry. This requires different skills and techniques than predicting
changes in the prices of individual stocks.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are
not traded on an exchange.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In
a reverse repurchase agreement, the Fund transfers possession of a
portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market
value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund
in a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions,
except that the Fund may make margin payments in connection with its
use of financial futures contracts or related options and transactions.
BORROWING MONEY
The Fund will not issue senior securities, except that (a) the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amount borrowed, either (i) as a temporary, extraordinary, or emergency
measure or to facilitate management of the Fund by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous, or (ii) for investment
purposes. The Fund will not purchase any securities for the purpose
stated under clause "(i)" above while any borrowings in excess of 5% of
its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: (a)
the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-
issued or delayed delivery basis; and (b) collateral arrangement with
respect to (i) the purchase and sale of stock options (and options on
stock indices) and (ii) initial or variation margin for futures
contracts. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of that issuer, or if it would own more than 10% of the
outstanding voting securities of that issuer.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or options
on financial futures contracts.
SELLING SHORT
The Fund will not sell securities short unless (1) it owns, or has a
right to acquire, an equal amount of such securities or (2) if it does
not own the securities, it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. While in a short
position, the Fund will retain the securities, rights, or segregated
assets.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities except for delayed-delivery
and when-issued transactions and futures contracts, each of which might
be considered a senior security.
The above investment limitations are fundamental and cannot be changed
without shareholder approval. The following investment limitations may
be changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in these limitations becomes
effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Trust or the Fund's investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under the Securities
Act of 1933, except for commercial paper issued under Section 4(2) of
the Securities Act of 1933 and certain other restricted securities
which meet the criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of the value of its net assets in
warrants. No more than 2% of this 5% may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on put
option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund
will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its
net assets.
BLANCHARD ASSET ALLOCATION FUND MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates,
present positions with Blanchard Asset Allocation Fund, and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and 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
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director or Trustee of the Funds; formerly,
Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director or Trustee of the Funds;
formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director or Trustee of the Funds; formerly, Vice Chairman and Director,
PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty;
Director, Eat'N Park Restaurants, Inc., and Statewide Settlement Agency,
Inc.; Director or Trustee of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
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
Seacliff
562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director or Trustee of the Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty;
Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, 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
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., and U.S. Space Foundation; Chairman,
Czecho Management Center; Director or Trustee of the Funds; President
Emeritus, University of Pittsburgh; founding Chairman, National Advisory
Council for Environmental Policy and Technology and Federal Emergency
Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-
profit entities; Director or Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President 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 John
F. Donahue, Chairman and Trustee of the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
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
Birthdate: May 17, 1923
Vice President
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.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Assistant Treasurer
Senior Vice President and Trustee, Federated Investors; Vice President,
Federated Shareholder Services; Executive Vice President, Federated
Securities Corp.; Treasurer of some of the Funds.
*
This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@
Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings
of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Equity Funds; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series,
Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund:
3-5 Years; Federated U.S. Government Securities Fund: 5-10 Years; First
Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate
U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash Trust; Insurance
Management Series; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty
Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The
Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government
Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; The Virtus Funds; World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 31, 1995, no shareholder of record owned 5% or more of
the outstanding shares of the Fund.
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*
FROM FUND COMPLEX +
John F. Donahue $0 $0 for the Fund Complex
Thomas G. Bigley $0 $489.00 for the Fund Complex
John T. Conroy, Jr. $0
$2,001.50 for the Fund Complex
William J. Copeland $0
$2,001.50 for the Fund Complex
James E. Dowd $0 $2,001.50 for the Fund Complex
Lawrence D. Ellis, M.D. $0
$1,816.00 for the Fund Complex
Edward L. Flaherty, Jr. $0
$2,001.50 for the Fund Complex
Edward C. Gonzales $0
$0 for the Fund Complex
Peter E. Madden $0 $0 for the Fund Complex
Gregor F. Meyer $0 $1,816.00 for the Fund Complex
John E. Murray, Jr. $0
$0 for the Fund Complex
Wesley W. Posvar $0 $1,816.00 for the Fund Complex
Marjorie P. Smuts$0 $1,816.00 for the Fund Complex
*Information is furnished for the fiscal year ended July 31, 1995.
+The information is provided for the last calendar year.
Fund Complex = Blanchard Funds, Blanchard Precious Metals Fund, Inc. and
The Virtus Funds.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not
liable for errors of judgment or mistakes of fact or law. However, they
are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
MANAGER OF THE FUND
The Fund's manager is Virtus Capital Management, Inc. ("VCM" or
"Adviser"). VCM is a wholly-owned subsidiary of Signet Banking
Corporation. Because of 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 it affiliates'
lending relationships with an issuer.
VCM shall not be liable to the Trust, the Fund, or any shareholder 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 Trust.
MANAGEMENT FEES
For its management services, VCM receives an annual management fee as
described in the prospectus.
PORTFOLIO ADVISER OF THE FUND
The Fund's Portfolio Adviser is Mellon Capital Management Corporation.
The Portfolio Adviser shall not be liable to the Manager, the Trust, the
Fund, or any shareholder of the Fund for any losses that may be
sustained in the purchase, holding, lending, 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 Manager.
SUB-ADVISORY FEES
For its sub-advisory services, the Portfolio Adviser receives an annual
sub-advisory fee as described in the Prospectus.
STATE EXPENSE LIMITATIONS
The Fund has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, VCM has agreed to
reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the management fee paid will be reduced by the amount of
the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount to be reimbursed by VCM will be limited, in any
single fiscal year, by the amount of the management fee.
This arrangement is not part of the management contract and may be
amended or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Fund. Under the Custodian Agreement, Signet Trust Company holds the
Fund's portfolio securities in safekeeping and keeps all necessary
records and documents relating to its duties. The custodian receives an
annual fee equal to .16 of 1% of the Fund's average daily net assets.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser exercises reasonable business judgment in selecting brokers
who offer brokerage and research services to execute securities
transactions. They determine in good faith that commissions charged by
such persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers and dealers may be used by the
Adviser in advising the Fund and other accounts. To the extent that
receipt of these services may supplant services for which the Adviser
might otherwise have paid, it would tend to reduce their expenses.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares
are sold at their net asset value on days the New York Stock Exchange
and the Federal Reserve Wire System are open for business. The minimum
initial investment in the Fund by an investor is $3,000, except for
qualified pension plans (IRAs, Keoghs, etc.), which have a minimum
initial investment of $2,000.
DISTRIBUTION PLAN
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940 (the "Plan"). The Plan
provides for payment of fees to Federated Securities Corp. to finance
any activity which is principally intended to result in the sale of the
Fund's shares subject to the Plan. Such activities may include the
advertising and marketing of shares of the Fund; preparing, printing,
and distributing prospectuses and sales literature to prospective
shareholders, brokers, or administrators; and implementing and operating
the Plan. Pursuant to the Plan, Federated Securities Corp. may pay fees
to brokers and others for such services.
The Trustees expect that the adoption of the Plan will result in the
sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size
of the Fund will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objectives.
ADMINISTRATIVE ARRANGEMENTS
The administrative services include, but are not limited to, providing
office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, as is necessary or
beneficial to establish and maintain shareholders' accounts and records,
process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client
inquiries regarding the Fund, assist clients in changing dividend
options, account designations, and addresses, and providing such other
services as the Fund may reasonably request.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds.
DETERMINING NET ASSET VALUE
The net asset value generally changes each day. The days on which the
net asset value is calculated by the Fund are described in the
prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may reflect:
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 options at their market values established by the
exchanges at the close of option trading on such exchanges unless the
Trustees determine in good faith that another method of valuing option
positions is necessary.
Over-the-counter put options will be valued at the mean between the bid
and the asked prices. Covered call options will be valued at the last
sale price on the national exchange on which such option is traded.
Unlisted call options will be valued at the latest bid price as provided
by brokers.
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
may also be determined at the latest rate prior to me closing 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 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.
EXCHANGE PRIVILEGE
REQUIREMENTS FOR EXCHANGE
Shareholders using the exchange privilege must exchange shares having a
net asset value of at least $1,000. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund. Further information on the exchange privilege and prospectuses may
be obtained by calling 1-800-829-3863.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions
may require a signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the
Funds' transfer agent receives the redemption request. Redemptions will
be made on days on which the Fund computes its net asset value.
Redemption requests cannot be executed on days on which the New York
Stock Exchange is closed or on federal holidays restricting wire
transfers. Redemption procedures are explained in the prospectus under
"How to Redeem."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the respective fund's
portfolio. To satisfy registration requirements in a particular state,
redemption in kind will be made in readily marketable securities to the
extent that such securities are available. If this state's policy
changes, the Fund reserves the right to redeem in kind by delivering
those securities it deems appropriate.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 under which the Trust is obligated to redeem shares
for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the
amount of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent
the distribution represents amounts that would qualify for the dividends
received deduction to the Fund if the Fund were a regular corporation
and to the extent designated by the Fund as so qualifying. These
dividends and any short-term capital gains are taxable as ordinary
income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held Fund
shares.
TOTAL RETURN
Cumulative total return reflects the Fund's total performance over a
specific period of time. This total return assumes and is reduced by the
payment of the maximum sales load. Any applicable redemption fee is
deducted from the ending value of the investment based on the lesser of
the original purchase price or the net asset value of shares redeemed.
YIELD
The yield for the Fund is determined by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering
price per share of the Fund on the last day of the period. This value is
then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every
six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in the Fund, the performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and maximum offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all income dividends and capital gains
distributions, if any. From time to time, the Fund will quote its Lipper
ranking in the "growth" category in advertising and sales literature.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's Index assumes reinvestment of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees
calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in the Fund based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA-Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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 debt in this category than in higher
rated categories.
BB, B-Debt rated BB or B, 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 a low
degree of speculation.
NR-Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
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.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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 fluctuation 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 Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
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.
NR-Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate or municipal 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.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
NR-NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the AAA
category.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1-This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1-Issuers rated Prime-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations.
Prime-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 earning coverage of fixed financial charges
and high internal cash generation; well-established access to a range of
financial markets and assured sources of alternative liquidity.
PRIME-2-Issuers rated Prime-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.
FITCH INVESTORS SERVICE, INC., SHORT-TERM RATINGS
F-1+-EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1-VERY STRONG CREDIT QUALITY. Issues assigned to this rating reflect
an assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2-GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not
as great as the F-1+ and F-1 ratings.
