BLANCHARD FUNDS
THE BLANCHARD ASSET ALLOCATION
FUND 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, 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
GENERAL INFORMATION II
INVESTMENT INFORMATION II
INVESTMENT OBJECTIVE II
INVESTMENT POLICIES III
ADDITIONAL RISK CONSIDERATIONS
XXV
INVESTMENT RISKS ASSOCIATED
WITH INVESTMENT IN EQUITY AND
DEBT SECURITIES XXVI
BLANCHARD FUNDS INFORMATION XXVI
MANAGEMENT OF THE FUND XXVI
DISTRIBUTION OF FUND SHARES XXIX
ADMINISTRATION OF THE FUNDS XXX
EXPENSES OF THE FUND XXXI
NET ASSET VALUE XXXII
HOW TO INVEST XXXII
PURCHASES BY MAIL XXXIII
GENERAL INFORMATION XXXIV
INVESTOR SERVICES XXXV
AUTOMATIC WITHDRAWAL PLAN XXXV
RETIREMENT PLANS XXXV
EXCHANGE PRIVILEGE XXXV
HOW TO REDEEM XXXVI
GENERAL INFORMATION XXXVIII
SHAREHOLDER INFORMATION XXXIX
VOTING RIGHTSXXXIX
MASSACHUSETTS PARTNERSHIP LAW XXXIX
EFFECT OF BANKING LAWS XL
TAX INFORMATION XLI
FEDERAL INCOME TAX XLI
PERFORMANCE INFORMATION XLI
TOTAL RETURNXLI
YIELD INFORMATION XLII
DISTRIBUTION RATEXLII
COMPARATIVE RESULTS XLII
ADDRESSES XLIV
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 the Investment Adviser. The Adviser 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 April 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 6.74%, ^
absent the ^voluntary waiver of the ^ advisory fees, administrative fees
and custodian fees.
*Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending April 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.
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 or
foreign security, in any proportion deemed appropriate by the Adviser, except as
noted below. In addition, the Fund may invest in options and futures contracts.
The 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 Adviser, enabling the Adviser to allocate the Fund's
investments among a wide variety of investment choices.
In seeking to maximize total return, the Adviser allocates the Fund's
investments principally among three major asset classes (as discussed below):
stocks, bonds, and short-term instruments.
The Adviser regularly reviews the Fund's investment allocation, and will vary
such allocation to favor emphasize the asset classes that, in the 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 Adviser perceives those asset classes to
offer the most favorable total return outlook.
In making asset allocation decisions, the Adviser will evaluate projections of
risk, market conditions, economic conditions, volatility, yields, and returns,
among others. The Adviser seeks to diversify the Fund's holdings within each
asset class, in order to moderate risks. The 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.
Because the Fund seeks total return over the long term, the Adviser does not
intend to make major short-term reallocations of the Fund's assets; rather,
asset shifts among classes will be made at the Adviser's discretion.
The short-term class includes all types of domestic and foreign securities and
short-term instruments with remaining maturities of three years or less. The
Adviser will seek to maximize total return within the short-term asset class by
taking advantage of yield differentials between different instruments, issuers,
and currencies. Short-Term instruments may include corporate debt securities
such as commercial paper and notes; government securities issued by United
States or foreign governments or their 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 may be denominated in United States dollars or foreign currency.
The bond class includes all varieties of domestic and foreign fixed-income
securities. The 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 and foreign government and
government agency securities, zero coupon bonds, and other intermediate and
long-term securities. As with the short-term class, these securities may be
denominated in United States dollars or foreign currency.
At no time will more than 10% of the Fund's assets in any asset category be
invested in foreign securities.
The stock class includes ^ a diversified portfolio of common stocks selected by
the Adviser from those stocks which comprise the Standard & Poor's 500 Composite
Stock Price Index. *
* `Standard & Poor'sR", ``S&PR``, and ``S&P 500R" and "Standard & Poor's 500"
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are trademarks of McGraw Hill, Inc. and have been licensed for use by Mellon
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Capital Management Corporation (`MCM'').
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The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
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("S&P"). S&P makes no representation or warranty, express or implied, to
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the owners of the Fund or any member of the public regarding the
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advisability of investing in securities generally or in the Fund
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particularly or the ability of the S&P 500 Index to track general stock
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market performance. S&P's only relationship to MCM is the licensing of
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certain trademarks and trade names of S&P and of the S&P 500 Index which is
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determined, composed and calculated by S&P without regard to MCM or the
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Fund. S&P has no obligation to take the needs of MCM or the owners of the
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Fund into consideration in determining, composing or calculating the S&P
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500 Index. S&P is not responsible for and has not participated in the
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determination of the prices and amount of the Fund or the timing of the
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issuance or sale of the Fund or in the determination or calculation of the
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equation by which the Fund is to be converted into cash. S&P has no
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obligation or liability in connection with the administration, marketing or
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trading of the Fund.
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S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
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INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
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ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY,
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EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY MCM, OWNERS OF THE
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FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR
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ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
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EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
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PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
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INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
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To manage exposure to currency fluctuations, the Fund may enter into forward
currency exchange contracts (agreements to exchange one currency for another at
a future date), may buy and sell options and futures contracts relating to
foreign currencies, and may purchase securities indexed to foreign currencies.
The Fund will use currency exchange contracts in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies. Other currency management strategies allow
the Adviser to hedge portfolio securities, to shift investment exposure from one
currency to another, or to attempt to profit from anticipated increases or
declines in the value of currencies relative to each other or to the United
States dollar. The Fund will only use these investment strategies for the
purpose of hedging its investments in foreign securities.
The Fund may buy and sell options and futures contracts to manage its exposure
to changing security price and currency exchange rates, and as an efficient
means of managing allocations between asset classes. The Fund may invest in
options and futures based on any type of security or index, including options
and futures traded on foreign exchanges and options not traded on exchanges. In
addition, the Fund may invest in options and futures relating to precious
metals, to increase or decrease its exposure to commodity prices.
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 on United States or foreign stock indexes and government securities
to attempt to profit from declines in stock or bond prices. The Adviser may
S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
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CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
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POSSIBILITY OF SUCH DAMAGES.
---------------------------
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.
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.
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 purchase 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.
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."
MONEY MARKET INSTRUMENTS. For temporary defensive purposes (up to 100% of total
assets) and to maintain liquidity (up to 35% of total assets), 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.
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
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.
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 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. 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 no
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. 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.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle transactions. Currency
transactions may be conducted either on a spot or cash basis at prevailing rates
or through forward foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although,
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies and might, in certain cases, result in
losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract ("forward contract") is an obligation to purchase or sell an amount of
a particular currency at a specific price and on a future date agreed upon by
the parties.
Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency.
SHORT SELLING. The Fund may make short sales 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. The Adviser 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 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 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 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 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 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 be
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 securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of the Fund's assets and income
may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily. When the Fund converts
its holdings to another currency, it may incur currency conversion costs.
Foreign exchange dealers realize a profit on the difference between the prices
at which they buy and sell currencies.
FOREIGN COMPANIES. Other 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.
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. Virtus Capital Management, Inc. ("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, manages, in
addition to the Funds, three equity common trust funds with $39 million in
assets and three fixed income common trust funds with $221 million in assets. As
part of 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 Sub-Adviser pursuant to the sub-advisory
agreement, the Sub-Adviser is entitled to receive an annual sub-advisory
fee equal to ^ .375% of the Fund's average daily net assets up to $100
million; .35% on net assets between $100 million and $150 million, and
.325% on net assets in excess of $150 million, payable by the Manager, in
quarterly installments. The Sub-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
Sub-Adviser for its services to the Manager.
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 the Adviser 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' money market
portfolios, which consist of The Money Market Fund, The Treasury Money Market
Fund, and The Tax-Free Money Market Fund, 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 Funds may cite
certain performance and ranking information and may make performance comparisons
to other Funds or to relevant indices, as described below. In addition, the
Funds' Portfolio Advisers and other outside analysts may, from time to time,
report on the market outlook for their investments as well as comment on the
historical reasons for these investments including as a hedge against inflation.
The Funds' performance may be calculated both in terms of total return and on
the basis of current yield over any period of time and may include a computation
of 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 Funds 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 Funds may also quote distribution rates and/or effective distribution rates
in sales literature or other shareholders communications. A Fund's distribution
rate is computed by dividing the most recent monthly distribution per share
annualized by dividing the distribution rate by the ratio used to annualize the
distribution and reinvesting the resulting amount for a full year on the basis
of such ration. The effective distribution rate will be higher than the
distribution rate because of the compounding effect of the assumed reinvestment.
A Fund's distribution rate may differ from its yield because the distribution
rate may contain net investment income and other items of income (such as
returns of capital), while yield reflects only earned interest and dividend
items of income.
COMPARATIVE RESULTS
From time to time in advertisements or sales material, 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. A Fund may also discuss the past performance and ranking of it
Portfolio Adviser, and compare its performance to various investment indexes.
The Funds may use performance information as reported in publications of general
interest, national, financial and industry publications such as Forbes or Money
Magazine and various investment newsletters such as Donoghue's Money Letter. In
addition, the Funds may compare their total return to the total return of
indexes of U.S. markets or world markets, to that of other mutual funds,
individual country indexes, or other recognized indexes.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various invests, performance indexes of those investments are economic
indicators. In addition, the Funds may reprint articles about the Fund and
provide them to prospective shareholders. The Distributor may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparisons
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
Performance information will vary from time to time and past results are not
necessarily representative of future results. You should remember that 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
Investment Adviser
Virtus Capital Management, Inc. 707 East Main
Street
Suite 1300
Richmond, Virginia 23219
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. 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
VIRTUS CAPITAL MANAGEMENT, INC.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
GENERAL INFORMATION ABOUT THE FUND1
INVESTMENT OBJECTIVES AND POLICIES1
Warrants 1
Convertible Securities 2
Collateralized Mortgage Obligations
("CMOs") 4
When-Issued and Delayed Delivery
Transactions5
Repurchase Agreements 5
Lending of Portfolio Securities 6
Restricted and Illiquid Securities
6
Futures Contracts 8
"Margin" in Futures Transactions 8
Put Options on Futures Contracts 9
Call Options on Futures Contracts10
Stock Index Options 12
Over-the-Counter Options 13
Reverse Repurchase Agreements 13
INVESTMENT LIMITATIONS 14
BLANCHARD ASSET ALLOCATION FUND MANAGEMENT
20
Fund Ownership 31
Trustees Compensation 31
Trustee Liability 33
INVESTMENT ADVISORY SERVICES 33
Adviser to the Fund 33
Advisory Fees 33
ADMINISTRATIVE SERVICES 34
CUSTODIAN 35
BROKERAGE TRANSACTIONS 35
PURCHASING SHARES 36
Distribution Plan 36
Administrative Arrangements 37
Conversion to Federal Funds 37
DETERMINING NET ASSET VALUE 37
Determining Market Value of Securities
38
Trading in Foreign Securities 39
EXCHANGE PRIVILEGE 39
Requirements for Exchange 39
Making an Exchange 40
REDEEMING SHARES 40
Redemption in Kind 40
TAX STATUS 41
The Fund's Tax Status 41
Foreign Taxes 42
Shareholders' Tax Status 42
TOTAL RETURN 43
YIELD 43
PERFORMANCE COMPARISONS 44
APPENDIX 45
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.
"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 onfutures contracts to protect against
rising purchase prices of portfolio secutiries.
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.
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).
The above investment limitations 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, 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, Trustee, or Managing General Partner 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, Trustee, or Managing General Partner 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, Trustee, or Managing General Partner 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,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner 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, Trustee, or Managing General Partner 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,
Trustee, or Managing General Partner 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
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; 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,
Trustee, or Managing General Partner 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, Trustee, or
Managing General Partner 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, Trustee or Managing General Partner 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, Trustee, or Managing General Partner 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, Trustee, or Managing General Partner 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 Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman of the Trust.
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, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Senior Vice President, Federated
Shareholder Services; Vice President, Federated Administrative Services;
Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Services Company; Executive Vice President, Secretary,
and Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive Vice
President and Secretary of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
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
ADVISER TO THE FUND
The Fund's investment adviser 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.
ADVISORY FEES
For its advisory services, VCM receives an annual investment 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, the Adviser has agreed to reimburse the Fund for its expenses
over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory 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 the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory 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
