1933 Act File No. 33-3165
1940 Act File No. 811-4579
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ..........
Post-Effective Amendment No. 41 ............ X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 39 ........................... X
Blanchard Funds
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on November 30, 1996 pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
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If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
filed the Notice required by that Rule on ; or
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intends to file the Notice required by that Rule on or about
; or
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X during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies To:
Matthew G. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of Blanchard Funds, which
consists of seven investment portfolios: (1) Blanchard Asset Allocation
Fund; (2) Blanchard Capital Growth Fund; (3) Blanchard Flexible Income
Fund; (4) Blanchard Flexible Tax-Free Bond Fund; (5) Blanchard Global
Growth Fund; (6) Blanchard Growth & Income Fund; and (7) Blanchard Short-
Term Flexible Income Fund; relates only to Blanchard Capital Growth Fund,
and Blanchard Growth & Income Fund and is comprised of the following:
Part A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. (2,6) Cover Page.
Item 2. (2,6) Not applicable.
Item 3. (2,6) Financial Highlights.
Item 4. (2,6) Investment Objectives and Policies; Additional
Information on Investment Policies, Techniques and
Risk Factors;
General Information; Investment Information;
Item 5. (2,6) Management of the Fund; Portfolio Advisory
Services.
Item 5 A. (2,6) Performance of the Portfolio Adviser;
Performance Computation Information.
Item 6. (2,6) Additional Information about the Fund; Other
Information; Shareholder Inquiries; Tax Matters;
Unique Characteristics of the Find and Portfolio
Structure.
Expenses of the Fund; General Information;
Shareholder Information; Voting Rights; Tax
Information; Federal Income Tax.
Item 7. (2,6) How to Invest; Investor Services; Distribution
of Shares of the Fund.
(2,6) Net Asset Value; How to Invest; Purchases by
Mail; Investors Services; Automatic Withdrawal Plan.
Item 8. (2,6) How to Redeem; By Telephone; By Mail.
Item 9. (2,6) Not Applicable
Part B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION
Item 10. (2,6) Cover Page.
Item 11. (2,6) Table of Contents.
Item 12. (2,6) General Information About the Fund;
Item 13. (2,6) Investment Objective; Policies and
Restrictions; Portfolio Transactions.
Item 14. (2,6) The Management of the Fund; Trustee
Compensation.
Item 15. (2,6) Share Ownership.
Item 16. (2,6) Investment Advisory Services; Administrative
Services; Transfer Agent, Custodian, Auditor.
Item 17. (2,6) Portfolio Transactions.
Item 18. (2,6) See Prospectus.
Item 19. (2,6) See Prospectus; Computation of Net Asset
Value.
Purchasing Shares; Determining Net Asset Value;
Redeeming Shares; Redemption in Kind.
Item 20. (2,6) Tax Matters.
Item 21. (2,6) Not Applicable
Item 22. (2,6) Performance Information.
Total Return; Yield; Performance Comparisons.
Item 23. (2,6) Financial Statements to be filed by
amendment.
THE BLANCHARD GROUP OF FUNDS
BLANCHARD CAPITAL GROWTH FUND
Prospectus
Blanchard Capital Growth Fund (the `Fund'') seeks long-term capital
growth. The Fund, unlike many other investment companies which directly
acquire and manage their own portfolios of securities, seeks its investment
objective by investing all of its investable assets in Capital Growth
Portfolio (the `Portfolio''), an open-end management investment company
with an investment objective identical to that of the Fund. Investors
should carefully consider this investment approach. For additional
information regarding this investment structure, see `Unique
Characteristics of the Fund and Portfolio Structure'.
Blanchard Funds (the `Trust''), which currently consists of seven
investment portfolios, and Blanchard Precious Metals Fund, Inc., which
currently consists of one investment portfolio (each portfolio individually
referred to as a `Fund'' and collectively as the ``Funds'') are open-end
management investment companies, which offer separate investment
alternatives for different investor needs. Virtus Capital Management, Inc.
(`VCM'') is the Funds' overall investment manager. There is no guarantee
that the Fund will achieve its investment objective.
Please read this Prospectus carefully and retain it for future
reference. The Fund's Statement of Additional Information, dated February
, 1997, has been filed with the Securities and Exchange Commission (the
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`SEC'') and is incorporated herein by reference. You may request a copy of
the Statement of Additional Information or a paper copy of this prospectus,
if you have received your prospectus electronically, by calling the Fund at
1-800-829-3863.
Investment in the Fund is subject to risk including possible loss of
principal and will fluctuate in value. Shares of the Fund are not bank
deposits or obligations of, or guaranteed or endorsed by, Signet Bank or
The Chase Manhattan Bank or any of their respective affiliates and are not
insured by, obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated February , 1997
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HIGHLIGHTS
The Fund's Objective.
The Fund, which is an open-end management investment company, invests
in the Portfolio which, in turn, invests in securities in accordance with
investment objectives, policies and restrictions identical to those of the
Fund. The Portfolio seeks to provide long-term capital growth. See
`Investment Objective and Policies'' and ``Additional Information on
Investment Policies, Techniques and Risk Factors''(pages and ).
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Fund Management.
VCM provides management services necessary for the Fund's operations.
As of , 1996, VCM had more than $ billion in assets under
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management. VCM receives monthly compensation from the Fund based on the
amount of assets under management. VCM evaluates the performance of the
Fund's Portfolio Adviser. The Portfolio Adviser is responsible for the
selection of the Portfolio's investments. See `Management of the Fund''
(page ).
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The Chase Manhattan Bank (the `Portfolio Adviser'' or ``Chase''), a
wholly owned subsidiary of The Chase Manhattan Corporation, a registered
bank holding company, is a commercial bank offering a wide range of banking
and investment services to customers throughout the United States and
around the world. Its headquarters is at 270 Park Avenue, New York, New
York 10017. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience. See
`Portfolio Advisory Services- The Portfolio Adviser.
How to Invest and Redeem.
You may purchase shares of the Fund directly from Federated Securities
Corp. (the `Distributor'') which is the Fund's principal distributor. You
may also purchase shares from broker-dealers who have entered into a dealer
agreement with the Distributor.
The minimum amount required to open an account in the Fund is $3,000
($2,000 for qualified retirement plans, such as IRAs and Keoghs). The
minimum subsequent investment requirement is $200. The Fund has also
adopted a Distribution Plan which permits the reimbursement of distribution
expenses by the Fund in an amount not to exceed .50% of the average daily
net assets of the Fund on an annual basis. See `How to Invest'' and
`Distribution of Shares of the Fund'' (pages and ).
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You may redeem your shares on any business day at the next determined
net asset value calculated after Federated Shareholder Services Company
(the `Transfer Agent'') has received the redemption request in proper
form. See `How to Redeem'' (page ).
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The Fund reserves the right to cease offering shares to new
shareholders if the Portfolio Adviser believes that the Fund's size may
hamper its effectiveness in managing the Portfolio. In this event, no new
accounts will be accepted until further review. Shareholders who have
established accounts prior to the closure date will be allowed to add to
their investments.
Investor Services and Privileges.
The Fund offers certain investor services and privileges that may be
suited to your particular investment needs, including free Telephone
Exchange Privileges, Investment and Withdrawal Plans and various Retirement
Plans. See `Investor Services'' (page ).
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Dividends.
The Fund intends to declare dividends, if any, at least annually from
net investment income. Dividends, if any, are automatically reinvested in
additional Fund shares at net asset value on the payment date and are
reflected in the statements we send you, unless you elect to receive them
in cash, in which case we will send you a check. See `Tax Matters'' page
).
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Additional Information on Investment Policies, Techniques and Risk Factors.
The Fund is a non-diversified fund and may be invested in a limited
number of issues; thus, there may be greater risk in an investment in the
Fund than in a diversified investment company. Moreover, there are
potential risks associated with certain of the Fund's investments and
additional risk considerations that may be associated with certain
techniques and strategies employed by the Fund, including those relating to
investments in foreign securities and futures and options transactions. See
`Additional Information on Investment Policies, Techniques and Risk
Factors''(page ).
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SUMMARY OF FUND EXPENSES
[TO COME]
FINANCIAL HIGHLIGHTS
[TO COME]
FUND OBJECTIVE
Blanchard Capital Growth Fund seeks long-term capital growth. The Fund is
not intended to be a complete investment program, and there is no assurance
it will achieve its objective.
INVESTMENT POLICIES
INVESTMENT APPROACH
The Fund seeks to achieve its objective by investing all of its investable
assets in the Portfolio. The Portfolio will invest primarily in a broad
portfolio of common stocks. Under normal market conditions, the Portfolio
will invest at least 80% of its total assets in common stocks. The
Portfolio will seek to invest in stocks of companies with capitalizations
of $750 million to $4.0 billion. Current income, if any, is a
consideration incidental to the Portfolio's objective of long-term capital
growth. The Portfolio's advisers intend to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for
positive change.
The Portfolio is classified as a "non-diversified" fund under federal
securities law. The Portfolio's assets may be more concentrated in the
securities of any single issuer or group of issuers than if the Portfolio
were diversified.
The Portfolio may invest any portion of its assets not invested in common
stocks in high quality money market instruments and repurchase agreements.
For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments. At times when the Fund's advisers deem it
advisable to limit the Fund's exposure to the equity markets, the Fund may
invest up to 20% of its total assets in U.S. Government obligations
(exclusive of any investments in money market instruments). To the extent
that the Portfolio departs from its investment policies during temporary
defensive periods, the Fund's investment objective may not be achieved.
FUND STRUCTURE
The Portfolio has an objective identical to that of the Fund. The Fund may
withdraw its investment from the Portfolio at any time if the Trustees
determine that it is in the best interest of the Fund to do so. Upon any
such withdrawal, the Trustees would consider what action might be taken,
including investing all of the Fund's investable assets in another pooled
investment entity having substantially the same objective and policies as
the Fund or retaining an investment adviser to manage the Fund's assets
directly.
OTHER INVESTMENT PRACTICES
The Portfolio may also engage in the following investment practices, when
consistent with the Portfolio's overall objective and policies. These
practices, and certain associated risks, are more fully described in the
Statement of Additional Information.
FOREIGN SECURITIES. The Portfolio may invest up to 20% of its total assets
in foreign securities, including Depositary Receipts. Since foreign
securities are normally denominated and traded in foreign currencies, the
values of the Portfolio's foreign investments may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations.
There may be less information publicly available about foreign companies
than U.S. companies, and they are not generally subject to accounting,
auditing and financial reporting standards and practices comparable to
those in the U.S. Foreign securities may be less liquid and more volatile
than comparable U.S. securities. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment or delivery
of securities or in the recovery of the Portfolio's assets held abroad) and
expenses. It is possible that nationalization or expropriation of assets,
imposition of currency exchange controls, confiscatory taxation, political
or financial instability and diplomatic developments could affect the value
of the Portfolio's investments in certain foreign countries. Foreign laws
may restrict the ability to invest in certain countries or issuers and
special tax considerations will apply to foreign securities. The risks can
increase if the Portfolio invests in securities of issuers in emerging
markets.
The Portfolio may invest its assets in securities of foreign issuers in the
form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other similar securities representing securities of
foreign issuers (collectively, "Depositary Receipts"). The Portfolio
treats Depositary Receipts as interests in the underlying securities for
purposes of its investment policies. The Portfolio will limit its
investment in Depositary Receipts not sponsored by the issuer of the
underlying securities to no more than 5% of the value of its net assets (at
the time of investment).
U. S. GOVERNMENT OBLIGATIONS. U. S. Government Obligations include
obligations issued or guaranteed by the U. S. Government, its agencies or
instrumentalities.
MONEY MARKET INSTRUMENTS. The Portfolio may invest in cash or high-
quality, short-term money market instruments. Such instruments may include
U.S. Government securities, commercial paper of domestic and foreign
issuers and obligations of domestic and foreign banks. Investments in
foreign money market instruments may involve certain risks associated with
foreign investment.
REPURCHASE AGREEMENTS, SECURITIES LOANS AND FORWARD COMMITMENTS. The
Portfolio may enter into agreements to purchase and resell securities at an
agreed-upon price and time. The Portfolio also has the ability to lend
portfolio securities in an amount equal to not more than 30% of its total
assets to generate additional income. These transactions must be fully
collateralized at all times. The Portfolio may purchase securities for
delivery at a future date, which may increase its overall investment
exposure and involves a risk of loss if the value of the securities
declines prior to the settlement date. These transactions involve some
risk to the Portfolio if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral or
completing the transaction.
BORROWING AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may borrow
money from banks for temporary or short-term purposes, but will not borrow
for leveraging purposes. The Portfolio may also sell and simultaneously
commit to repurchase a portfolio security at an agreed-upon price and time,
to avoid selling securities during unfavorable market conditions in order
to meet redemptions. Whenever the Portfolio enters into a reverse
repurchase agreement, it will establish a segregated account in which it
will maintain liquid assets on a daily basis in an amount at least equal to
the repurchase price (including accrued interest). The Portfolio would be
required to pay interest on amounts obtained through reverse repurchase
agreements, which are considered borrowing under federal securities laws.
STAND-BY COMMITMENTS. The Portfolio may enter into put transactions,
including transactions sometimes referred to as stand-by commitments, with
respect to securities in its portfolio. In these transactions, the
Portfolio would acquire the right to sell a security at an agreed upon
price within a specified period prior to its maturity date. These
transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. Acquisition of
puts will have the effect of increasing the cost of the securities subject
to the put and thereby reducing the yields otherwise available from such
securities.
CONVERTIBLE SECURITIES. The Portfolio may invest up to 20% of its net
assets in convertible securities, which are securities generally offering
fixed interest or dividend yields which may be converted either at a stated
price or stated rate for common or preferred stock. Although to a lesser
extent than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase, and
increase as interest rates decline. Because of the conversion feature, the
market value of convertible securities also tends to vary with fluctuations
in the market value of the underlying common or preferred stock.
OTHER INVESTMENT COMPANIES. The Portfolio may invest up to 10% of its
total assets in shares of other investment companies when consistent with
its investment objective and policies, subject to applicable regulatory
limitations. Additional fees may be charged by other investment companies.
STRIPS. The Portfolio may invest up to 20% of its total assets in strips
obligations (i.e., separately traded principal and interest components of
securities) where the underlying obligations are backed by the full faith
and credit of the U.S. Government, including instruments known as
"STRIPS". The value of these instruments tends to fluctuate more in
response to changes in interest rates than the value of ordinary interest-
paying debt securities with similar maturities. The risk is greater when
the period to maturity is longer.
DERIVATIVES AND RELATED INSTRUMENTS. The Portfolio may invest its assets
in derivative and related instruments to hedge various market risks or to
increase the Portfolio's income or gain. Some of these instruments will be
subject to asset segregation requirements to cover the Portfolio's
obligations. The Portfolio may (i) purchase, write and exercise call and
put options on securities and securities indexes (including using options
in combination with securities, other options or derivative instruments);
(ii) enter into swaps, futures contracts and options on futures contracts;
(iii) employ forward currency contracts; and (iv) purchase and sell
structured products, which are instruments designed to restructure or
reflect the characteristics of certain other investments.
There are a number of risks associated with the use of derivatives and
related instruments and no assurance can be given that any strategy will
succeed. The value of certain derivatives or related instruments in which
the Portfolio invests may be particularly sensitive to changes in
prevailing economic conditions and market value. The ability of the
Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Portfolio's advisers to forecast these factors
correctly. Inaccurate forecasts could expose the Portfolio to a risk of
loss. There can be no guarantee that there will be a correlation between
price movements in a hedging instrument and in the portfolio assets being
hedged. The Portfolio is not required to use any hedging strategies.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. Derivatives transactions not involving hedging may
have speculative characteristics, involve leverage and result in losses
that may exceed the original investment of the Fund. There can be no
assurance that a liquid market will exist at a time when the Portfolio
seeks to close out a derivatives position. Activities of large traders in
the futures and securities markets involving arbitrage, "program trading,"
and other investment strategies may cause price distortions in derivatives
markets. In certain instances, particularly those involving over-the-
counter transactions or forward contracts, there is a greater potential
that a counterparty or broker may default. In the event of a default, the
Portfolio may experience a loss. For additional information concerning
derivatives, related instruments and the associated risks, see the
Statement of Additional Information.
PORTFOLIO TURNOVER. The frequency of the Portfolio's portfolio
transactions will vary from year to year. The Portfolio's investment
policies may lead to frequent changes in investments, particularly in
periods of rapidly changing market conditions. High portfolio turnover
rates would generally result in high transaction costs, including brokerage
commissions or dealer mark-ups, and would make it more difficult for the
Portfolio to qualify as a regulated investment company under federal tax
law.
LIMITING INVESTMENT RISKS
Specific investment restrictions help the Portfolio limit investment risks
for the Fund's shareholders. These restrictions prohibit the Portfolio
from: (a) investing more than 15% of its net assets in illiquid securities
(which include securities restricted as to resale unless they are
determined to be readily marketable in accordance with procedures
established by the Board of Trustees of the Portfolio); or (b) investing
more than 25% of its total assets in any one industry. A complete
description of these and other investment policies is included in the
Statement of Additional Information. Except for restriction (c) above and
investment policies designated as fundamental in the Statement of
Additional Information, the investment objective and policies of the
Portfolio and the investment policies of the Fund are not fundamental.
Shareholder approval is not required to change any non-fundamental
investment policy. However, in the event of a change in the Fund's or
Portfolio's investment objective or policies, shareholders will be given at
least 30 days' prior written notice.
RISK FACTORS
The Fund does not constitute a balanced or complete investment program, and
the net asset value of the shares of the Fund can be expected to fluctuate
based on the value of the securities held by the Portfolio. The Portfolio
is subject to the general risks and considerations associated with equity
investing, as well as the risks discussed herein.
Because the Portfolio is "non-diversified," the value of the Fund's shares
is more susceptible to developments affecting issuers in which the
Portfolio invests.
For a discussion of certain other risks associated with the Portfolio's
additional investment activities, see "Other Investment Practices" above.
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 Fund
and for exercising all of the powers of the Fund except those reserved for
the shareholders. The Executive Committee of the Board of Trustees handles
the Board's responsibilities between meetings of the Board.
MANAGER. VCM is responsible for managing the Fund and overseeing the
investment of its assets, subject at all times to the supervision of the
Board members. In addition, VCM selects, monitors and evaluates the
Portfolio Adviser. VCM will review the Portfolio Adviser's performance
record periodically, and will make changes if necessary, subject to Board
member and shareholder approval.
MANAGEMENT FEES. Under the terms of the management contract, VCM
receives a monthly fee of .70% of the Fund's average daily net assets and
the Portfolio Adviser receives .40% per annum of the Fund's average daily
net assets directly from the Portfolio, as described below. The total fee
of 1.10% is higher than the fees paid by most investment companies.
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The management contract provides for the voluntary waiver of expenses
by VCM from time to time. VCM can terminate this voluntary waiver of
expenses at any time with respect to the Fund at its sole discretion. VCM
has also undertaken to reimburse the Fund for operating expenses in excess
of limitations established by certain states.
The Portfolio pays for all its expenses including legal and auditing
expenses; registration fees; taxes on the sales of portfolio securities;
brokerage commissions; Portfolio trustee fees; expenses connected with the
execution, recording and settlement of security transactions; fees and
expenses of the Portfolio's custodian for all services to the Portfolio;
expenses of preparing and mailing reports to investors and to government
agencies and commissions; expenses of meetings of investors and the
advisory fees of .40% of the Portfolio's average daily net assets payable
to the Portfolio Adviser under the Investment Advisory Agreement. In
addition, the Portfolio pays an administrative fee to The Chase Manhattan
Bank, N.A. at an annual rate of .05% of the Portfolio's average daily net
assets pursuant to an Administration Agreement wherein Chase provides
facilities and personnel necessary to operate the Portfolio.''
VCM'S BACKGROUND. Virtus Capital Management, Inc., a Maryland
corporation formed in 1995, is a wholly owned subsidiary of Signet Banking
Corporation. Signet Banking Corporation is a multi-state, multi-bank
holding company which has provided investment management services since
1956. VCM, which is a registered investment adviser, manages, in addition
to the Funds, The Virtus Funds, three fixed income common trust funds with
$217 million in assets. As part of their regular banking operations, Signet
Bank may make loans to public companies.
PORTFOLIO ADVISORY SERVICES
Chase acts as investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement and has overall responsibility for investment decisions
of the Portfolio, subject to the oversight of the Board of Trustees. Chase
is a wholly owned subsidiary of The Chase Manhattan Corporation, a bank
holding company. Chase and its predecessors have over 100 years of money
management experience. For its investment advisory services to the
Portfolio, Chase is entitled to receive an annual fee computed daily and
paid monthly based at an annual rate equal to 0.40% of the Portfolio's
average daily net assets. Chase is located at 270 Park Avenue, New York,
New York 10017.
Chase Asset Management, Inc. (`CAM''), a registered investment adviser, is
the sub-investment adviser to the Portfolio pursuant to a Sub-Investment
Advisory Agreement between CAM and Chase. CAM is a wholly-owned operating
subsidiary of Chase. CAM makes investment decisions for the Portfolio on a
day-to-day basis. For these services, CAM is entitled to receive a fee,
payable by Chase from its advisory fee, at an annual rate equal to 0.20% of
the Portfolio's average daily net assets. CAM was recently formed for the
purpose of providing discretionary investment advisory services to
institutional clients and to consolidate Chase's investment management
function. The same individuals who serve as portfolio managers for Chase
also serve as portfolio managers for CAM. CAM is located at 1211 Avenue of
the Americas, New York, New York 10036.
PORTFOLIO MANAGER. Dave Klassen, Director of Domestic Equity Management at
Chase, and Tony Gleason, Vice President of Chase, have been responsible for
the day-to-day management of the Portfolio since September, 1995. Mr.
Klassen joined Chase in March 1992 and, in addition to managing the Capital
Growth Portfolio, is a manager of the Vista Small Cap Equity Fund and the
Growth and Income Portfolio. Prior to joining Chase, Mr. Klassen was a
Vice-President and portfolio manager at Dean Witter Reynolds, responsible
for managing several mutual funds and other accounts. Mr. Gleason is also
responsible for managing the Vista Equity Income Fund. Mr. Gleason joined
Chase in 1995 with 10 years of investment experience.
EFFECT OF BANKING LAWS
The Portfolio Adviser has received the opinion of its legal counsel
that it may provide services described in its Investment Advisory Agreement
and Custodian Agreement with the Portfolio, without violating the federal
banking law commonly known as the Glass-Steagall Act. Similarly, VCM
believes, based on advice of its counsel, that VCM may perform services
described in its management contract with the Fund, without violating the
Act. The Act generally bars banks from publicly underwriting or
distributing certain securities.
Decisions of the U.S. Supreme Court and banking regulators support the
position that a bank may act as investment adviser to a registered, open-
ended investment company. Based on the advice of its counsel, the Portfolio
Adviser and VCM each believe that it may serve as investment adviser to a
registered, open-end investment company.
Regarding the performance of custodial activities, the staff of the
Office of the Comptroller of the Currency, which supervises national banks,
has issued opinion letters stating that national banks may engage in
custodial activities. Therefore, the Portfolio Adviser believes, based on
advice of counsel, that it may serve as Custodian to the Portfolio as an
appropriate, incidental national banking function and as a proper adjunct
to its serving as Portfolio Adviser to the Portfolio.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent the
Portfolio Adviser from continuing to perform investment advisory or
custodial services for the Portfolio, and could prevent VCM from continuing
to perform management services for the Fund. If that occurred, the Fund's
trustees would then consider what action would be in the best interest of
the Fund's shareholders. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and
banks and financial institutions may be required to register as dealers
pursuant to state law.
HOW TO INVEST
You may purchase shares of the Fund from Federated Securities Corp.,
the Fund's principal Distributor. Federated Securities Corp. is a
subsidiary of Federated Investors. You may also purchase shares from
broker-dealers who have entered into a dealer agreement with the
Distributor at net asset value which is computed once daily as of the close
of the options exchanges (normally 4:15 P.M. New York time). If your order
is received after the above time, your shares will be purchased at the net
asset value on the next business day. The Fund's net asset value per share
is determined by dividing the value of the Fund's net assets by the total
number of its shares outstanding. 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.
For your initial investment, there is a $3,000 minimum requirement.
The minimum initial investment requirement for qualified pension plans
(IRAs, Keoghs, etc.) is $2,000. The minimum investment requirement for
additional investments in the Fund is at least $200 per investment. (The
foregoing minimum investment requirements may be modified or waived at any
time at our discretion.) We charge no redemption fee when you redeem your
shares and there is no fee on reinvestment of any dividends or
distributions.
Purchases By Mail
To purchase shares of 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 Fund in payment for the shares.
If you need assistance in completing the application, call 1-800-829-3863.
All purchases must be made in U.S. dollars and checks must be drawn on
a United States bank. Payment for shares may not be made by third party
checks; however, second party checks are acceptable when properly endorsed.
We reserve the right to limit the number of checks for one account
processed at one time. If your check does not clear, your purchase will be
cancelled and you could be liable for any losses or fees incurred. Payments
transmitted by check are accepted subject to collection at full face
amount.
Orders by mail are considered received after payment by check is
converted into Federal funds. This is generally the next business day
after the Transfer Agent receives the check.
PURCHASES BY WIRE. You may also purchase shares by bank wire. For
opening new accounts in this manner, please call 1-800-829-3863 (toll free)
before wiring your funds, and furnish the following information: the
account registration and address, and your taxpayer identification number
(for individuals, a Social Security number). When making additional
investments by wire to your existing accounts, please provide your account
numbers. You must include your name and telephone number, the amount being
wired and the name of the wiring bank with both new and existing account
purchases.
You should instruct your bank to wire Federal funds: State Street Bank
and Trust Company, ABA number 011000028, Account number 0627-975-6, Boston,
Massachusetts 02266, indicating your account number and the account
registration. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to
your shareholder services representative at the telephone number listed on
your account statement.
AUTOMATIC INVESTMENT PLANS. Regular monthly purchases of shares may be
made by direct deposit of Social Security and certain other government
checks into your account. Fund shares may be purchased at regular intervals
selected by you by automatic transferral of funds from a bank checking
account that you may designate. All such purchases require a minimum of
$100 per transaction. Call 1-800-829-3863 for information and forms
required to establish these Plans.
BY TELEPHONE. This service allows you to purchase additional shares
quickly and conveniently through an electronic transfer of money. When you
make an additional purchase by telephone, Blanchard will automatically
debit your pre-designated 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 days after the form is received.
General Information
All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares
unless we receive written notice from you, at least 30 days prior to the
record date of such distribution, requesting that your dividends and
distributions be distributed to you in cash. See `Tax Matters''.
We reserve the right to suspend the offering of Fund shares for a period of
time. We also reserve the right to reject any purchase order.
No share certificates will be issued for shares unless requested in
writing. In order to facilitate redemptions and transfers, most
shareholders elect not to receive certificates. Shares are held in unissued
form by the Transfer Agent. Shares for which certificates have been issued
cannot be redeemed, unless the certificates are received together with the
redemption request in proper form. Share certificates are not issued for
fractional shares.
INVESTOR SERVICES
Automatic Withdrawal Plan
If you purchase $10,000 or more of Fund shares, you may establish an
Automatic Withdrawal Plan to authorize a specified dollar amount to be paid
periodically to a designated payee. Under this Plan, all income dividends
and capital gains distributions will be reinvested in shares in your
account at the applicable payment dates' closing net asset value.
Your specified withdrawal payments are made monthly or quarterly (on
or about the 10th day) in any amount you choose, but not less than $100 per
month or $300 quarterly. Please note that any redemptions of your shares,
which may result in a gain or loss for tax purposes, may involve the use of
principal, and may eventually use up all of the shares in your account.
Such payments do not provide a guaranteed annuity and may be terminated for
any shareholder if the value of the account drops below $10,000 due to
transfer or redemption of shares. In a such a case, the shareholder will be
notified that the withdrawal payments will be terminated.
The cost of administering the Automatic Withdrawal Plan for the
benefit of shareholders is a Fund expense.
Retirement Plans
We offer a Prototype Pension and Profit Sharing Plan, including Keogh
Plans, IRAs, SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan
support services are available by calling 1-800-829-3863.
Exchange Privileges
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 and
such exchanges may be made at net asset value without paying a redemption
fee or sales charge upon such exchange. Before making an exchange, you
should read the Prospectus concerning the participating fund into which
your exchange is being made. The other funds currently offered in the
Blanchard Group of Funds are Blanchard Growth & Income Fund, Blanchard
Global Growth Fund, Blanchard Precious Metals Fund, Inc., Blanchard
American Equity Fund, Blanchard Flexible Income Fund, Blanchard Short-Term
Flexible Income Fund, Blanchard Flexible Tax-Free Bond Fund and Blanchard
Worldwide Emerging Markets Fund. For information on The Virtus Funds,
please call 1-800-829-3863.
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 Fund's policy to mail to you at your address of record,
within five business days after any telephone call transaction, a written
confirmation statement of the transaction. In order to protect itself and
shareholders from liability for unauthorized or fraudulent telephone
transactions, the Fund will use reasonable procedures such as recording
calls in an attempt to verify the identity of a person making a telephone
redemption request. As a result of the Fund's policy, neither the 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. Since you may bear the risk of loss in the event of an
unauthorized telephone transaction, you should verify the accuracy of
telephone transactions immediately upon receipt of your confirmation
statement.
Exchanges can only be made between accounts with identical account
registration and in states where shares of the other fund are qualified for
sale. We do not place any limit on the number of exchanges that may be
made. 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 the Fund to
the disadvantage of other shareholders, we reserve the right to modify or
terminate this Exchange Privilege with respect to any shareholder.
A completed Purchase Application must be received by the Transfer
Agent before the Automatic Withdrawal Plan or Exchange Privilege may be
used.
HOW TO REDEEM
You may redeem your shares on any business day at the next determined
net asset value calculated after your redemption request has been accepted
by the Transfer Agent as described below.
BY TELEPHONE. You may redeem your shares by telephone by calling
1-800-829-3863, prior to 4:00 P.M., Eastern time. All calls will be
recorded. Redemption of Fund shares can be made in this manner only after
you have executed and filed with the Transfer Agent the telephone
redemption authorization form which may be obtained from the Fund or the
Transfer Agent. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative
at the telephone number listed on your account statement.
You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate.
Should you wish to revise these instructions, simply complete and file a
new telephone redemption authorization form. There is no charge for this
service. As long as the identification procedures described above are
followed, neither the 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
Privileges,''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
Fund does 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 the Transfer Agent for the wiring of funds.
Under extraordinary market conditions, it may be difficult for you to
redeem your shares by telephone. Under these circumstances, you should
consider redeeming your shares by mail, as described below.
BY MAIL. All other redemption requests should be made in writing to
the Blanchard Group of Funds, P.O. Box 8612, Boston, Massachusetts 02266-
8612. Where share certificates have been issued, the certificates must be
endorsed and must accompany the redemption request. Signatures on
redemption requests for amounts in excess of $25,000 and endorsed share
certificates submitted for redemption must be accompanied by signature
guarantees from any eligible guarantor institution approved by the Transfer
Agent in accordance with its Standards, Procedures and Guidelines for the
Acceptance of Signature Guarantees (`Signature Guarantee Guidelines'').
Eligible guarantor institutions generally include banks, broker-dealers,
credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents
Medallion Program (`STAMP'') in order to be approved by the Transfer Agent
pursuant to the Signature Guarantee Guidelines. Copies of the Signature
Guarantee Guidelines and information on STAMP can be obtained from the
Transfer Agent at (800) 462-9102. Signatures on redemption requests for any
amount must be guaranteed (as described above) if the proceeds are not to
be paid to the registered owner at the registered address, or the
registered address has changed within the previous 60 days. The letter of
instruction or a stock assignment must specify the account number and the
exact number of shares or dollar amount to be redeemed. It must be signed
by all registered shareholders in precisely the same way as originally
registered. The letter of instruction must also include any other
supporting legal documents, if required, in the case of estates, trusts,
guardianships, custodianships, corporations, partnerships, pension or
profit sharing plans, or other organizations.
General Information.
Your redemption request becomes effective when it is received in
proper form by the Transfer Agent prior to 4:00 P.M. Eastern time, or your
redemption will occur on the following business day. We will make payment
for redeemed shares within seven days after receipt by the Transfer Agent.
However, we may delay the forwarding of redemption proceeds on shares which
were recently purchased until the purchase check has cleared, which may
take up to 7 days or more. We may suspend the right of redemption when the
New York Stock Exchange is closed or when trading on the Exchange is
restricted, and under certain extraordinary circumstances in accordance
with the rules of the SEC. Due to the relatively high cost of handling
small investments, we reserve the right upon 60 days' written notice to
involuntarily redeem, at net asset value, the shares of any shareholder
whose account has a value of less than $1,000, other than as a result of a
decline in the net asset value per share. We do not presently contemplate
making such involuntary redemptions and will not redeem any shares held in
tax-sheltered retirement plans in this category. We also reserve the right
upon notice to shareholders to charge a fee for any services provided
herein that are currently free of charge.
DISTRIBUTION OF SHARES OF THE FUND
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.
DISTRIBUTION PLAN. According to the provisions of a distribution plan
adopted pursuant to Investment Company Act Rule 12b-1, the distributor may
select brokers and dealers to provide distribution and administrative
services as to shares of the Fund. The distributor may also select
administrators (including financial institutions, fiduciaries, custodians
for public funds and investment advisers) to provide administrative
services. Administrative services may include, but are not limited to, the
following functions: providing office space, equipment, telephone
facilities, and various personnel including clerical, supervisory, and
computer, as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries regarding shares; assisting clients in changing dividend
options, account designations, and addresses; and providing such other
services as the Fund reasonably requests for its shares.
Brokers, dealers, and administrators will receive fees based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the Board of Trustees, provided that for any period the total
amount of fees representing an expense to the Trust shall not exceed an
annual rate of .50 of 1% of the average daily net assets of shares of the
Fund held in the accounts during the period for which the brokers, dealers,
and administrators provide services. Any fees paid by the distributor with
respect to shares of the Fund pursuant to the distribution plan will be
reimbursed by the Trust from the assets of the shares 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 predicated upon the amount of shares of the Fund that
are sold by the dealer. Such payments, if made, will be in addition to
amounts paid under the distribution plan and will not be an expense of the
Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial
institutions a fee based upon the average net asset value of shares of
their customers invested in the Trust for providing administrative
services. This fee, if paid, will be reimbursed by VCM and not the Trust.
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 OF THE TRUST
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
The administrative fee received during any fiscal year for the Fund
shall be at least $75,000. Federated Administrative Services may
voluntarily waive a portion of its fee.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Shareholder
Services Company, P. O. Box 8600, Boston, Massachusetts, 02266-8600, is the
Fund's Transfer Agent and Dividend Disbursing Agent.
TAX MATTERS
The Fund intends to qualify each year and elect to be treated as a
separate `regulated investment company'' under Subchapter M of the
Internal Revenue Code of 1986, as amended (the `Code''). A regulated
investment company that distributes all of its taxable income to its
shareholders in accordance with the timing requirements imposed by the
Code, which the Fund intends to do, is not subject to Federal income tax on
the amounts so distributed. If for any taxable year the Fund does not
qualify for the treatment as a regulated investment company, all its
taxable income will be subject to tax at regular corporate rates without
any deduction for distributions to its shareholders, and such
distributions, in turn, will be taxable to the shareholders as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits. Because the Fund invests all of its assets in the Portfolio which
is classified as a partnership for Federal income tax purposes, the Fund
will be deemed to own a proportionate share of the income of the Portfolio
in which it invests, for purposes of determining whether it qualifies as a
regulated investment company.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the
Commonwealth of Massachusetts as long as the Fund (and each other series of
the Trust) qualifies as a regulated investment company under the Code.
Distributions by the Fund of its ordinary income (net of expenses) and
the excess, if any, of its net short-term capital gain over its net long-
term capital loss are generally taxable to shareholders as ordinary income.
Such distributions are treated as dividends for Federal income tax
purposes. A portion of the ordinary income dividends paid by the Fund with
respect to a given year (essentially, the portion attributable to
qualifying dividends received by the underlying Portfolio from domestic
corporations during the year) may qualify for the 70% dividends-received
deductions for corporate shareholders. Distributions by the Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss are designated as capital gain dividends and are taxable to
shareholders as long-term capital gains, regardless of their holding
periods in their shares. Ordinary income and capital gain dividends from
the Fund may also be subject to state and local taxes.
Investors should carefully consider the tax implications of purchasing
shares just prior to a dividend record date. Investors purchasing shares
just prior to an ordinary income or capital gain dividend record date will
be taxed on the entire dividend received, even though their cost for shares
already reflected the amount of such dividend.
Distributions to shareholders will be treated in the same manner for
Federal income tax purposes whether received in cash or reinvested in
additional Fund shares. In general, distributions by the Fund are taken
into account by shareholders in the year in which they are made. However,
certain distributions made during January will be treated as having been
paid by the Fund and received by its shareholders on December 31 of the
preceding year. A statement setting forth the Federal income tax status of
all distributions made (or deemed made) during the year, including the
allocation to ordinary income dividends (and any portion thereof which
qualify for the dividends-received deduction for corporations) and capital
gain dividends, will be sent to the Fund's shareholders promptly after the
end of each year.
A shareholder will recognize gains or losses upon the sale or
redemption of shares of the Fund in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. Any loss realized upon a taxable
disposition of shares within six months from the date of their purchase
will be treated as a long-term capital loss to the extent of any capital
gain dividends received on such shares. All or a portion of any loss
realized upon a taxable disposition of shares of the Fund may be disallowed
if other shares of the Fund are purchased within 30 days before or after
such disposition.
Under the back-up withholding rules of the Code, a shareholder may be
subject to 31% withholding of Federal income tax on dividends and
redemption payments made by the Fund. To avoid this back-up withholding,
you must provide the Fund with a correct taxpayer identification number
(which for an individual is usually one's Social Security number) or
certify that you are a corporation or otherwise exempt from or not subject
to back-up withholding.
The foregoing discussion of Federal income tax consequences is based
on tax laws and regulations in effect on the date of this Prospectus and is
subject to change by legislative or administrative action. You should also
review the more detailed discussion of Federal income tax considerations in
the Statement of Additional Information for the Fund. In addition, you
should consult with your own tax advisor as to the tax consequences of
investing in the Fund, including the application of state and local taxes
to you, which may differ from the Federal income tax consequences described
above.
PERFORMANCE COMPUTATION INFORMATION
Advertisements and communications to investors regarding the Fund may
cite certain performance, ranking and rating information of the Fund and
the Portfolio and may make performance comparisons to other funds or to
relevant indices, as described below.
TOTAL RETURN. Cumulative total return data is computed by considering
all elements of return, including reinvestment of dividends and capital
gain distributions, over a stated period of time. Cumulative total return
figures are not annualized and represent the aggregate percentage or dollar
value change over the period in question.
Average annual return will be quoted for at least the one, five and
ten year periods ending on a recent calendar quarter (or if such periods
have not yet elapsed, at the end of a shorter period corresponding to the
life of the Fund for performance purposes). Average annual total return
figures are annualized and, therefore, represent the average annual
percentage change over the period in question.
COMPARATIVE RESULTS. From time to time in advertisements or sales
material, 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., CDA and Morningstar, Inc. In
addition, because the Fund invests 100% of its assets in the portfolio
which has identical investment objectives, the Fund may cite the
performance and ranking information of its Portfolio (which includes the
performance of predecessor mutual funds prior to their conversion to the
Portfolio) and may make certain performance, ranking and rating
comparisons. The Fund may also discuss the past performance, ranking and
rating of the Portfolio Adviser, and compare its performance to various
investment indexes. The Fund may use performance information as reported in
publications of general interest, national financial and industry
publications such as Forbes or Money Magazine and various investment
newsletters such as Donoghue's Money Letter. In addition, the Fund may
compare its total return, or the total return of indexes of U.S. markets,
world markets, individual countries undergoing privatization, or of world
indexes of countries undergoing privatization, to that of other mutual
funds, individual country indexes, or other recognized indexes.
From time to time, the Fund may provide information on certain markets
or countries and specific equity securities and quote published editorial
comments and/or information from newspapers, magazines, investment
newsletters and other publications such as The Wall Street Journal, Money
Magazine, Forbes, Barron's, USA Today and Mutual Fund Investors. The Fund
may also compare the historical returns on various investments, performance
indexes of those investments or economic indicators. In addition, the Fund
may reprint articles about the Fund and provide them to prospective
shareholders. The Distributor may also make available economic, financial
and investment reports to shareholders and prospective shareholders. In
order to describe these reports, the Fund may include descriptive
information on the reports in advertising literature sent to the public
prior to the mailing of a prospectus. Performance information may be quoted
numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and
comparisons may be made with funds which may have different investment
restrictions, objectives, policies or techniques than the Fund, and that
such other funds or market indicators may be comprised of securities that
differ significantly from the Fund's investments.
Performance information will vary from time to time and past results
are not necessarily representative of future results. You should remember
that the Fund's performance is a function of portfolio management in
selecting the type and quality of securities in which the Fund may invest,
and is affected by operating, distribution and marketing expenses.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE PORTFOLIO
The Fund
The Fund is a non-diversified series of Blanchard Funds (the
`Trust''), a Massachusetts business trust organized on January 24, 1986
which currently consists of eight series of shares. The other series of the
Trust's shares of beneficial interest, which are offered pursuant to
separate prospectuses, are Blanchard Growth & Income Fund, Blanchard Global
Growth Fund, Blanchard American Equity Fund, Blanchard Flexible Income
Fund, Blanchard Short-Term Flexible Income Fund, Blanchard Flexible Tax-
Free Bond Fund and Blanchard Worldwide Emerging Markets Fund.
The Fund is classified as a `non-diversified'' investment company
under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that may be invested in the securities
of a single issuer. The Fund intends, however, to comply with the
diversification requirements imposed by the U.S. Internal Revenue Code of
1986, as amended, for qualification as a regulated investment company. See
`Tax Matters'' in the Prospectus and in the Statement of Additional
Information.
Investor Meetings and Voting
Under Massachusetts law, the Trust and its series are generally not
required to hold annual or special shareholder meetings. However, special
meetings of shareholders may be held for such purposes as electing
trustees, changing fundamental policies, approving an investment
management/advisory agreement or approving a distribution and marketing
plan, if any, and, at the request of the shareholders, to replace trustees.
Shareholders holding 10% or more of the Trust's outstanding shares may call
a special meeting of shareholders. Trustees may be removed by the Trustees
or by shareholders at a special meeting called for this purpose.
Shareholders shall be given access to a list of the names and addresses of
all other shareholders, the number of shareholders and the cost of mailing
a request to them.
Whenever a vote is requested on matters pertaining to the Portfolio,
the Trust will hold a meeting of the Fund's shareholders and will cast its
vote as instructed by the Fund's shareholders. Shares of the Fund for which
no voting instructions have been received will be voted in the same
proportion as those shares for which voting instructions are received. As
with any mutual fund, other investors in the Portfolio could control the
results of voting at the Portfolio level.
The Fund's shares represent shares of beneficial interest. Each share
has equal rights with respect to voting matters of the Fund. In the event
of dissolution or liquidation of the Fund, holders of Fund shares will
receive pro rata, subject to the rights of creditors, the proceeds of the
sale of the Fund's assets less its liabilities. There are no preemptive or
conversion rights applicable to the shares of the Fund. Shares of the Fund,
when issued, will be fully paid, non-assessable and transferable. The
trustees may create additional series or classes of shares without
shareholder approval. Each series of the Trust is responsible only for its
own expenses and operating costs and incurs no liability with respect to
the expenses and costs of any other series, other than those which affect
the series as a group and are allocated among the series based upon their
relative average net assets during the year.
The Portfolio
The Portfolio is organized as a trust under the laws of the State of
New York. The Portfolio's Declaration of Trust provides that the Fund and
other entities investing in the Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) will be liable for all obligations of the Portfolio. However,
the risk of the Fund's incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the trustees believe that neither the Fund nor their
shareholders will be adversely affected by reason of the Fund's investing
in the Portfolio.
UNIQUE CHARACTERISTICS OF THE FUND AND PORTFOLIO STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund invests all of its investable assets in the
Portfolio, a separate registered investment company. Therefore, a
shareholder's interest in the Portfolio's securities is indirect. In
addition to selling a beneficial interest to the Fund, the Portfolio may
sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, other investors investing in the Portfolio are not required to
sell their shares at the same public offering price as the Fund and may
bear different levels of ongoing expenses than the Fund. Shareholders of
the Fund should be aware that these differences may result in differences
in returns experienced in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund
structures.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a
large fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the Portfolio may become less diverse, resulting in increased
portfolio risk. However, this possibility also exists for traditionally
structured funds which have large or institutional investors. Funds with a
greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Trust is
requested to vote on matters pertaining to the Portfolio, the Trust will
hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as do the Fund's shareholders. Shares of the Fund
for which no voting instructions have been received will be voted in the
same proportion as those shares for which voting instructions are received.
Certain changes in the Portfolio's objective, policies or restrictions may
require the Trust to withdraw the Fund's interest in the Portfolio. Any
withdrawal could result in a distribution in kind of portfolio securities
(as opposed to a cash distribution from the Portfolio). The Fund could
incur brokerage fees or other transaction costs in converting such
securities to cash. In addition, a distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity
of the Fund.
State securities regulations generally do not permit the same individuals
who are disinterested Trustees of the Trust to be Trustees of the Portfolio
absent the adoption of written procedures by a majority of the
disinterested Trustees of the Trust reasonably appropriate to deal with
potential conflicts of interest up to and including creating a separate
Board of Trustees. The Trustees of the Trust, including a majority of the
disinterested Trustees, have adopted procedures they believe are reasonably
appropriate to deal with any conflict of interest up to and including
creating a separate Board of Trustees.
Investors in the Fund may obtain information about whether an investment in
the Portfolio may be available through other funds by calling 1-800-829-
3863.
OTHER INFORMATION
This Prospectus omits certain information contained in the
registration statement of the Fund filed with the SEC. Copies of the
registration statement, including items omitted herein, may be obtained
from the SEC by paying the charges prescribed under its rules and
regulations. The Statement of Additional Information included in the
registration statement may be obtained without charge from the Fund.
For information about the Trustees and officers of the Fund and the
Portfolio see the Statement of Additional Information.
The Code of Ethics of the Portfolio Adviser and the Fund prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Fund's planned portfolio
transactions. The objective of the Code of Ethics of both the Fund and
Portfolio Adviser is that their operations be carried out for the exclusive
benefit of the Fund's shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statement of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by the Fund. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.
INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, 1177 Avenue of the
Americas, New York, New York10036, has been appointed the independent
accountants for the Fund.
THE BLANCHARD GROUP OF FUNDS
BLANCHARD GROWTH & INCOME FUND
Blanchard Growth & Income Fund (the `Fund'') seeks to provide long-
term capital appreciation and dividend income. The Fund, unlike many other
investment companies which directly acquire and manage their own portfolios
of securities, seeks its investment objective by investing all of its
investable assets in Growth and Income Portfolio (the `Portfolio''), an
open-end management investment company with investment objectives identical
to those of the Fund. Investors should carefully consider this investment
approach. For additional information regarding this investment structure,
see `Unique Characteristics of the Fund and Portfolio Structure''.
Blanchard Funds (the `Trust''), which currently consists of seven
investment portfolios, and Blanchard Precious Metals Fund, Inc., which
currently consists of one investment portfolio (each portfolio individually
referred to as a `Fund'' and collectively as the ``Funds'') are open-end
management investment companies, which offer separate investment
alternatives for different investor needs. Virtus Capital Management, Inc.
(`VCM'') is the Funds' overall investment manager. There is no guarantee
that the Fund will achieve its investment objectives.
Please read this Prospectus carefully and retain it for future
reference. The Fund's Statement of Additional Information, dated February
, 1997, has been filed with the Securities and Exchange Commission (the
- --
`SEC'') and is incorporated herein by reference. You may request a copy of
the Statement of Additional Information or a paper copy of this prospectus,
if you have received your prospectus electronically, by calling the Fund at
1-800-829-3863.
Investment in the Fund is subject to risk including possible loss of
principal and will fluctuate in value. Shares of the Fund are not bank
deposits or obligations of, or guaranteed or endorsed by, Signet Bank or
The Chase Manhattan Bank or any of their respective affiliates and are not
insured by, obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated February 1997
--
HIGHLIGHTS
The Fund's Objectives.
The Fund, which is an open-end management investment company, invests
in the Portfolio which, in turn, invests in securities in accordance with
investment objectives, policies and restrictions identical to those of the
Fund. The Portfolio seeks to provide long-term capital appreciation and
dividend income. See `Investment Objectives and Policies'' and
`Additional Information on Investment Policies, Techniques and Risk
Factors''(pages and ).
-- --
Fund Management.
VCM provides management services necessary for the Fund's operations.
As of , 1996, VCM had more than $ billion in assets under
--------- --
management. VCM receives monthly compensation from the Fund based on the
amount of assets under management. VCM evaluates the performance of the
Fund's Portfolio Adviser. The Portfolio Adviser is responsible for the
selection of the Portfolio's investments. See `Management of the Fund''
(page ).
--
The Chase Manhattan Bank (the `Portfolio Adviser'' or ``Chase''), a
wholly owned subsidiary of The Chase Manhattan Corporation, a registered
bank holding company, is a commercial bank offering a wide range of banking
and investment services to customers throughout the United States and
around the world. Its headquarters is at 270 Park Avenue, New York, New
York 10017. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience. See
`Portfolio Advisory Services- The Portfolio Adviser.
How to Invest and Redeem.
You may purchase shares of the Fund directly from Federated Securities
Corp. (the `Distributor'') which is the Fund's principal distributor. You
may also purchase shares from broker-dealers who have entered into a dealer
agreement with the Distributor.
The minimum amount required to open an account in the Fund is $3,000
($2,000 for qualified retirement plans, such as IRAs and Keoghs). The
minimum subsequent investment requirement is $200. The Fund has also
adopted a Distribution Plan which permits the reimbursement of distribution
expenses by the Fund in an amount not to exceed .50% of the average daily
net assets of the Fund on an annual basis. See `How to Invest'' and
`Distribution of Shares of the Fund'' (pages and ).
-- --
You may redeem your shares on any business day at the next determined
net asset value calculated after Federated Shareholder Services Company
(the `Transfer Agent'') has received the redemption request in proper
form. See `How to Redeem'' (page ).
--
The Fund reserves the right to cease offering shares to new
shareholders if the Portfolio Adviser believes that the Fund's size may
hamper its effectiveness in managing the Portfolio. In this event, no new
accounts will be accepted until further review. Shareholders who have
established accounts prior to the closure date will be allowed to add to
their investments.
Investor Services and Privileges.
The Fund offers certain investor services and privileges that may be
suited to your particular investment needs, including free Telephone
Exchange Privileges, Investment and Withdrawal Plans and various Retirement
Plans. See `Investor Services'' (page ).
--
Dividends.
The Fund intends to declare dividends, if any, at least semi-annually
from net investment income. Dividends, if any, are automatically reinvested
in additional Fund shares at net asset value on the payment date and are
reflected in the statements we send you, unless you elect to receive them
in cash, in which case we will send you a check. See `Tax Matters'' (page
).
- --
Additional Information on Investment Policies, Techniques and Risk Factors.
The Fund is a non-diversified fund and may be invested in a limited
number of issues; thus, there may be greater risk in an investment in the
Fund than in a diversified investment company. Moreover, there are
potential risks associated with certain of the Fund's investments and
additional risk considerations that may be associated with certain
techniques and strategies employed by the Fund, including those relating to
investments in foreign securities and futures and options transactions. See
`Additional Information on Investment Policies, Techniques and Risk
Factors''(page ).
--
SUMMARY OF FUND EXPENSES
[TO COME]
FINANCIAL HIGHLIGHTS
[TO COME]
FUND OBJECTIVE
The Blanchard Growth & Income Fund seeks to provide long-term capital
appreciation and dividend income. The Fund is not intended to be a
complete investment program, and there is no assurance it will achieve its
objectives.
INVESTMENT POLICIES
INVESTMENT APPROACH
The Fund seeks to achieve its objective by investing all of its investable
assets in the Portfolio. The Portfolio invests in common stocks of issuers
with a broad range of market capitalizations. Under normal market
conditions, the Portfolio will invest at least 80% of its total assets in
common stocks. In addition, the Portfolio may invest up to 20% of its
total assets in convertible securities.
The Portfolio's advisers intend to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for
positive change. The advisers believe that the market risk involved in
seeking capital appreciation will be moderated to an extent by the
anticipated dividend returns on the stocks in which the Portfolio invests.
The Portfolio is classified as a "non-diversified" fund under federal
securities law. The Portfolio's assets may be more concentrated in the
securities of any single issuer or group of issuers than if the Portfolio
were diversified.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest
without limitation in these instruments as well as investment grade debt
securities. At times when the Fund's advisers deem it advisable to limit
the Fund's exposure to the equity markets, the Fund may invest up to 20% of
its total assets in U. S. Government obligations (exclusive of any
investments in money market instruments).To the extent that the Portfolio
departs from its investment policies during temporary defensive periods,
the Fund's investment objective may not be achieved.
FUND STRUCTURE
The Portfolio has an objective identical to that of the Fund. The Fund may
withdraw its investment from the Portfolio at any time if the Trustees
determine that it is in the best interest of the Fund to do so. Upon any
such withdrawal, the Trustees would consider what action might be taken,
including investing all of the Fund's investable assets in another pooled
investment entity having substantially the same objective and policies as
the Fund or retaining an investment adviser to manage the Fund's assets
directly.
OTHER INVESTMENT PRACTICES
The Portfolio may also engage in the following investment practices, when
consistent with the Portfolio's overall objective and policies. These
practices, and certain associated risks, are more fully described in the
Statement of Additional Information.
FOREIGN SECURITIES. The Portfolio may invest up to 20% of its total assets
in foreign securities, including Depositary Receipts. Since foreign
securities are normally denominated and traded in foreign currencies, the
values of the Portfolio's foreign investments may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations.
There may be less information publicly available about foreign companies
than U.S. companies, and they are not generally subject to accounting,
auditing and financial reporting standards and practices comparable to
those in the U.S. Foreign securities may be less liquid and more volatile
than comparable U.S.securities. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment or delivery
of securities or in the recovery of the Portfolio's assets held abroad) and
expenses. It is possible that nationalization or expropriation of assets,
imposition of currency exchange controls, confiscatory taxation, political
or financial instability and diplomatic developments could affect the value
of the Portfolio's investments in certain foreign countries. Foreign laws
may restrict the ability to invest in certain countries or issuers and
special tax considerations will apply to foreign securities. The risks can
increase if the Portfolio invests in securities of issuers in emerging
markets.
The Portfolio may invest its assets in securities of foreign issuers in the
form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other similar securities representing securities of
foreign issuers (collectively, "Depositary Receipts"). The Portfolio
treats Depositary Receipts as interests in the underlying securities for
purposes of its investment policies. The Portfolio will limit its
investment in Depositary Receipts not sponsored by the issuer of the
underlying securities to no more than 5% of the value of its net assets (at
the time of investment).
SUPRANATIONAL AND ECU OBLIGATIONS. The Portfolio may invest in
securities issued by supranational organizations, which include
organizations such as The World Bank, the European Community, the European
Coal and Steel Community and the Asian Development Bank. The Portfolio
may also invest in securities denominated in the ECU, which is a "basket"
consisting of specified amounts of the currencies of certain member states
of the European Community. These securities are typically issued by
European governments and supranational organizations.
CONVERTIBLE SECURITIES. The Portfolio may invest up to 20% of its net
assets in convertible securities, which are securities generally offering
fixed interest or dividend yields which may be converted either at a stated
price or stated rate for common or preferred stock. Although to a lesser
extent than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase, and
increase as interest rates decline. Because of the conversion feature, the
market value of convertible securities also tends to vary with fluctuations
in the market value of the underlying common or preferred stock.
U. S. GOVERNMENT OBLIGATIONS. U. S. Government Obligations include
obligations issued or guaranteed by the U. S. Government, its agencies or
instrumentalities.
MONEY MARKET INSTRUMENTS. The Portfolio may invest in cash or high-
quality, short-term money market instruments. Such instruments may include
U.S. Government securities, commercial paper of domestic and foreign
issuers and obligations of domestic and foreign banks. Investments in
foreign money market instruments may involve certain risks associated with
foreign investment.
INVESTMENT GRADE DEBT SECURITIES. Investment grade debt securities are
securities rated in the category BBB or higher by Standard & Poor's
Corporation ("S&P"), Baa or higher by Moody's Investors Services, Inc.
("Moody's") or the equivalent by another national rating organization, or,
if unrated, determined by the advisers to be of comparable quality.
REPURCHASE AGREEMENTS , SECURITIES LOANS AND FORWARD COMMITMENTS. The
Portfolio may enter into agreements to purchase and resell securities at an
agreed-upon price and time. The Portfolio also has the ability to lend
portfolio securities in an amount equal to not more than 30% of its total
assets to generate additional income. These transactions must be fully
collateralized at all times. The Portfolio may purchase securities for
delivery at a future date, which may increase its overall investment
exposure and involves a risk of loss if the value of the securities
declines prior to the settlement date. These transactions involve some
risk to the Portfolio if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral or
completing the transaction.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may borrow
money from banks for temporary or short-term purposes, but will not borrow
for leveraging purposes. The Portfolio may also sell and simultaneously
commit to repurchase a portfolio security at an agreed-upon price and time,
to avoid selling securities during unfavorable market conditions in order
to meet redemptions. Whenever the Portfolio enters into a reverse
repurchase agreement, it will establish a segregated account in which it
will maintain liquid assets on a daily basis in an amount at least equal to
the repurchase price (including accrued interest). The Portfolio would be
required to pay interest on amounts obtained through reverse repurchase
agreements, which are considered borrowings under federal securities laws.
STAND-BY COMMITMENTS. The Portfolio may enter into put transactions,
including transactions sometimes referred to as stand-by commitments, with
respect to securities in its portfolio. In these transactions, the
Portfolio would acquire the right to sell a security at an agreed upon
price within a specified period prior to its maturity date. These
transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. Acquisition of
puts will have the effect of increasing the cost of the securities subject
to the put and thereby reducing the yields otherwise available from such
securities.
OTHER INVESTMENT COMPANIES. The Portfolio may invest up to 10% of its
total assets in shares of other investment companies when consistent with
its investment objective and policies, subject to applicable regulatory
limitations. Additional fees may be charged by other investment companies.
STRIPS. The Portfolio may invest up to 20% of its total assets in
stripped obligations (i.e., separately traded principal and interest
components of securities) where the underlying obligations are backed by
the full faith and credit of the U.S. Government, including instruments
known as "STRIPS". The value of these instruments tends to fluctuate more
in response to changes in interest rates than the value of ordinary
interest-paying debt securities with similar maturities. The risk is
greater when the period to maturity is longer.
DERIVATIVES AND RELATED INSTRUMENTS. The Portfolio may invest its assets
in derivative and related instruments to hedge various market risks or to
increase the Portfolio's income or gain. Some of these instruments will be
subject to asset segregation requirements to cover the Portfolio's
obligations. The Portfolio may (i) purchase, write and exercise call and
put options on securities and securities indexes (including using options
in combination with securities, other options or derivative instruments);
(ii) enter into swaps, futures contracts and options on futures contracts;
(iii) employ forward currency contracts; and (iv) purchase and sell
structured products, which are instruments designed to restructure or
reflect the characteristics of certain other investments.
There are a number of risks associated with the use of derivatives and
related instruments and no assurance can be given that any strategy will
succeed. The value of certain derivatives or related instruments in which
the Portfolio invests may be particularly sensitive to changes in
prevailing economic conditions and market value. The ability of the
Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Portfolio's advisers to forecast these factors
correctly. Inaccurate forecasts could expose the Portfolio to a risk of
loss. There can be no guarantee that there will be a correlation between
price movements in a hedging instrument and in the portfolio assets being
hedged. The Portfolio is not required to use any hedging strategies.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. Derivatives transactions not involving hedging may
have speculative characteristics, involve leverage and result in losses
that may exceed the original investment of the Fund. There can be no
assurance that a liquid market will exist at a time when the Portfolio
seeks to close out a derivatives position. Activities of large traders in
the futures and securities markets involving arbitrage, "program trading,"
and other investment strategies may cause price distortions in derivatives
markets. In certain instances, particularly those involving over-the-
counter transactions or forward contracts, there is a greater potential
that a counterparty or broker may default. In the event of a default, the
Portfolio may experience a loss. For additional information concerning
derivatives, related instruments and the associated risks, see the
Statement of Additional Information.
PORTFOLIO TURNOVER. The frequency of the Portfolio's portfolio
transactions will vary from year to year. The Portfolio's investment
policies may lead to frequent changes in investments, particularly in
periods of rapidly changing market conditions. High portfolio turnover
rates would generally result in higher transaction costs, including
brokerage commissions or dealer mark-ups, and would make it more difficult
for the Portfolio to qualify as a regulated investment company under
federal tax law.
LIMITING INVESTMENT RISKS. Specific investment restrictions help the
Portfolio limit investment risks for the Fund's shareholders. These
restrictions prohibit the Portfolio from: (a) investing more than 15% of
its net assets in illiquid securities (which include securities restricted
as to resale unless they are determined to be readily marketable in
accordance with procedures established by the Board of Trustees); or (b)
investing more than 25% of its total assets in any one industry. A
complete description of these and other investment policies is included in
the Statement of Additional Information. Except for restriction (c) above
and investment policies designated as fundamental in the Statement of
Additional Information, the investment objective and policies of the
Portfolio and the investment policies of the Fund are not fundamental.
Shareholder approval is not required to change any non-fundamental
investment policy. However, in the event of a change in the Fund's or
Portfolio's investment objective or policies, shareholders will be given at
least 30 days prior written notice.
RISK FACTORS. The net asset value of the shares of the Fund can be expected
to fluctuate based on the value of the securities held by the Portfolio.
The Fund does not constitute a balanced or complete investment program. The
Fund is subject to the general risks and considerations associated with
equity investing.
Because the Portfolio is "non-diversified," the value of the Fund's shares
is more susceptible to developments affecting issuers in which the
Portfolio invests.
For a discussion of certain other risks associated with the Portfolio's
additional investment activities, see "Other Investment Practices" above.
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 Fund
and for exercising all of the powers of the Fund except those reserved for
the shareholders. The Executive Committee of the Board of Trustees handles
the Board's responsibilities between meetings of the Board.
MANAGER. VCM is responsible for managing the Fund and overseeing the
investment of its assets, subject at all times to the supervision of the
Board members. In addition, VCM selects, monitors and evaluates the
Portfolio Adviser. VCM will review the Portfolio Adviser's performance
record periodically, and will make changes if necessary, subject to Board
member and shareholder approval.
MANAGEMENT FEES. Under the terms of the management contract, VCM
receives a monthly fee of .70% of the Fund's average daily net assets and
the Portfolio Adviser receives .40% per annum of the Fund's average daily
net assets directly from the Portfolio, as described below. The total fee
of 1.10% is higher than the fees paid by most investment companies.
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The management contract provides for the voluntary waiver of expenses
by VCM from time to time. VCM can terminate this voluntary waiver of
expenses at any time with respect to the Fund at its sole discretion. VCM
has also undertaken to reimburse the Fund for operating expenses in excess
of limitations established by certain states.
The Portfolio pays for all its expenses including legal and auditing
expenses; registration fees; taxes on the sales of portfolio securities;
brokerage commissions; Portfolio trustee fees; expenses connected with the
execution, recording and settlement of security transactions; fees and
expenses of the Portfolio's custodian for all services to the Portfolio;
expenses of preparing and mailing reports to investors and to government
agencies and commissions; expenses of meetings of investors and the
advisory fees of .40% of the Portfolio's average daily net assets payable
to the Portfolio Adviser under the Investment Advisory Agreement. In
addition, the Portfolio pays an administrative fee to The Chase Manhattan
Bank, N.A. at an annual rate of .05% of the Portfolio's average daily net
assets pursuant to an Administration Agreement wherein Chase provides
facilities and personnel necessary to operate the Portfolio.
VCM'S BACKGROUND. Virtus Capital Management, Inc., a Maryland
corporation formed in 1995, is a wholly owned subsidiary of Signet Banking
Corporation. Signet Banking Corporation is a multi-state, multi-bank
holding company which has provided investment management services since
1956. VCM, which is a registered investment adviser, manages, in addition
to the Funds, The Virtus Funds, three fixed income common trust funds with
$ million in assets. As part of their regular banking operations, Signet
---
Bank may make loans to public companies.
PORTFOLIO ADVISORY SERVICES
THE PORTFOLIO ADVISER
Chase acts as investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement and has overall responsibility for investment decisions
of the Portfolio, subject to the oversight of the Board of Trustees. Chase
is a wholly owned subsidiary of The Chase Manhattan Corporation, a bank
holding company. Chase and its predecessors have over 100 years of money
management experience. For its investment advisory services to the
Portfolio, Chase is entitled to receive an annual fee computed daily and
paid monthly based at an annual rate equal to 0.40% of the Portfolio's
average daily net assets. Chase is located at 270 Park Avenue, New York,
New York 10017.
Chase Asset Management, Inc. (`CAM''), a registered investment adviser, is
the sub-investment adviser to the Portfolio pursuant to a Sub-Investment
Advisory Agreement between CAM and Chase. CAM is a wholly-owned operating
subsidiary of Chase. CAM makes investment decisions for the Portfolio on a
day-to-day basis. For these services, CAM is entitled to receive a fee,
payable by Chase from its advisory fee, at an annual rate equal to 0.20% of
the Portfolio's average daily net assets. CAM was recently formed for the
purpose of providing discretionary investment advisory services to
institutional clients and to consolidate Chase's investment management
function. The same individuals who serve as portfolio managers for Chase
also serve as portfolio managers for CAM. CAM is located at 1211 Avenue of
the Americas, New York, New York 10036.
PORTFOLIO MANAGER. Dave Klassen, Director of Domestic Equity Portfolio
Management at Chase, and Greg Adams, Director of U.S. Equity Research at
Chase, have been responsible for the day-to-day management of the Portfolio
since March 1995. Mr. Klassen joined Chase in March 1992 and, in addition
to managing the Growth and Income Portfolio, is a manager of the Vista
Small Cap Equity Fund and the Capital Growth Portfolio. Prior to joining
Chase, Mr. Klassen was a Vice President and portfolio manager at Dean
Witter Reynolds, responsible for managing several mutual funds and other
accounts. Mr. Adams joined Chase in 1987 and is also a manager of the
Vista Balanced Fund and the Vista Large Cap Equity Fund. In addition, Mr.
Adams has been responsible for overseeing the proprietary computer model
program, which scans over 1600 equity securities in their quest for
attractive value, used in the U.S. equity selection process.
EFFECT OF BANKING LAWS
The Portfolio Adviser has received the opinion of its legal counsel
that it may provide services described in its Investment Advisory Agreement
and Custodian Agreement with the Portfolio, without violating the federal
banking law commonly known as the Glass-Steagall Act. Similarly, VCM
believes, based on advice of its counsel, that VCM may perform services
described in its management contract with the Fund, without violating the
Act. The Act generally bars banks from publicly underwriting or
distributing certain securities.
Decisions of the U.S. Supreme Court and banking regulators support the
position that a bank may act as investment adviser to a registered, open-
ended investment company. Based on the advice of its counsel, the Portfolio
Adviser and VCM each believe that it may serve as investment adviser to a
registered, open-end investment company.
Regarding the performance of custodial activities, the staff of the
Office of the Comptroller of the Currency, which supervises national banks,
has issued opinion letters stating that national banks may engage in
custodial activities. Therefore, the Portfolio Adviser believes, based on
advice of counsel, that it may serve as Custodian to the Portfolio as an
appropriate, incidental national banking function and as a proper adjunct
to its serving as Portfolio Adviser to the Portfolio.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent the
Portfolio Adviser from continuing to perform investment advisory or
custodial services for the Portfolio, and could prevent VCM from continuing
to perform management services for the Fund. If that occurred, the Fund's
trustees would then consider what action would be in the best interest of
the Fund's shareholders. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and
banks and financial institutions may be required to register as dealers
pursuant to state law.
HOW TO INVEST
You may purchase shares of the Fund from Federated Securities Corp.,
the Fund's principal Distributor. Federated Securities Corp. is a
subsidiary of Federated Investors. You may also purchase shares from
broker-dealers who have entered into a dealer agreement with the
Distributor at net asset value which is computed once daily as of the close
of the options exchanges (normally 4:15 P.M New York time). If your order
is received after the above time, your shares will be purchased at the net
asset value on the next business day. The Fund's net asset value per share
is determined by dividing the value of the Fund's net assets by the total
number of its shares outstanding. 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.
For your initial investment, there is a $3,000 minimum requirement.
The minimum initial investment requirement for qualified pension plans
(IRAs, Keoghs, etc.) is $2,000. The minimum investment requirement for
additional investments in the Fund is at least $200 per investment. (The
foregoing minimum investment requirements may be modified or waived at any
time at our discretion.) We charge no redemption fee when you redeem your
shares and there is no fee on reinvestment of any dividends or
distributions.
Purchases By Mail
To purchase shares of 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 Fund in payment for the shares.
If you need assistance in completing the application, call 1-800-829-3863
All purchases must be made in U.S. dollars and checks must be drawn on
a United States bank. Payment for shares may not be made by third party
checks; however, second party checks are acceptable when properly endorsed.
We reserve the right to limit the number of checks for one account
processed at one time. If your check does not clear, your purchase will be
cancelled and you could be liable for any losses or fees incurred. Payments
transmitted by check are accepted subject to collection at full face
amount.
Orders by mail are considered received after payment by check is
converted into Federal funds. This is generally the next business day
after the Transfer Agent receives the check.
PURCHASES BY WIRE. You may also purchase shares by bank wire. For
opening new accounts in this manner, please call 1-800-829-3863 (toll free)
before wiring your funds, and furnish the following information: the
account registration and address, and your taxpayer identification number
(for individuals, a Social Security number). When making additional
investments by wire to your existing accounts, please provide your account
numbers. You must include your name and telephone number, the amount being
wired and the name of the wiring bank with both new and existing account
purchases.
You should instruct your bank to wire Federal funds to: State Street
Bank and Trust Company, ABA number 011000028, Account number 0627-975-6,
Boston, Massachusetts 02266, indicating your account number and the account
registration. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to
your shareholder services representative at the telephone number listed on
your account statement.
AUTOMATIC INVESTMENT PLANS. Regular monthly purchases of shares may be
made by direct deposit of Social Security and certain other government
checks into your account. Fund shares may be purchased at regular intervals
selected by you by automatic transferral of funds from a bank checking
account that you may designate. All such purchases require a minimum of
$100 per transaction. Call 1-800-829-3863 for information and forms
required to establish these Plans.
BY TELEPHONE. This service allows you to purchase additional shares
quickly and conveniently through an electronic transfer of money. When you
make an additional purchase by telephone, Blanchard will automatically
debit your pre-designated 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 days after the form is received.
General Information
All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares
unless we receive written notice from you, at least 30 days prior to the
record date of such distribution, requesting that your dividends and
distributions be distributed to you in cash. See `Tax Matters''.
We reserve the right to suspend the offering of Fund shares for a period of
time. We also reserve the right to reject any purchase order.
No share certificates will be issued for shares unless requested in
writing. In order to facilitate redemptions and transfers, most
shareholders elect not to receive certificates. Shares are held in unissued
form by the Transfer Agent. Shares for which certificates have been issued
cannot be redeemed, unless the certificates are received together with the
redemption request in proper form. Share certificates are not issued for
fractional shares.
INVESTOR SERVICES
Automatic Withdrawal Plan
If you purchase $10,000 or more of Fund shares, you may establish an
Automatic Withdrawal Plan to authorize a specified dollar amount to be paid
periodically to a designated payee. Under this Plan, all income dividends
and capital gains distributions will be reinvested in shares in your
account at the applicable payment dates' closing net asset value.
Your specified withdrawal payments are made monthly or quarterly (on
or about the 10th day) in any amount you choose, but not less than $100 per
month or $300 quarterly. Please note that any redemptions of your shares,
which may result in a gain or loss for tax purposes, may involve the use of
principal, and may eventually use up all of the shares in your account.
Such payments do not provide a guaranteed annuity and may be terminated for
any shareholder if the value of the account drops below $10,000 due to
transfer or redemption of shares. In a such a case, the shareholder will be
notified that the withdrawal payments will be terminated.
The cost of administering the Automatic Withdrawal Plan for the
benefit of shareholders is a Fund expense.
Retirement Plans
We offer a Prototype Pension and Profit Sharing Plan, including Keogh
Plans, IRAs, SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan
support services are available by calling 1-800-829-3863.
Exchange Privileges
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 and
such exchanges may be made at net asset value without paying a redemption
fee or sales charge upon such exchange. Before making an exchange, you
should read the Prospectus concerning the participating fund into which
your exchange is being made. The other funds currently offered in the
Blanchard Group of Funds are Blanchard Capital Growth Fund, Blanchard
Global Growth Fund, Blanchard Precious Metals Fund, Inc., Blanchard
Flexible Income Fund, Blanchard Short-Term Flexible Income Fund, and
Blanchard Flexible Tax-Free Bond Fund. For information on The Virtus
Funds, please call 1-800-829-3863.
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 Fund's policy to mail to you at your address of record,
within five business days after any telephone call transaction, a written
confirmation statement of the transaction. In order to protect itself and
shareholders from liability for unauthorized or fraudulent telephone
transactions, the Fund will use reasonable procedures such as recording
calls in an attempt to verify the identity of a person making a telephone
redemption request. As a result of the Fund's policy, neither the 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. Since you may bear the risk of loss in the event of an
unauthorized telephone transaction, you should verify the accuracy of
telephone transactions immediately upon receipt of your confirmation
statement.
Exchanges can only be made between accounts with identical account
registration and in states where shares of the other fund are qualified for
sale. We do not place any limit on the number of exchanges that may be
made. 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 the Fund to
the disadvantage of other shareholders, we reserve the right to modify or
terminate this Exchange Privilege with respect to any shareholder.
A completed Purchase Application must be received by the Transfer
Agent before the Automatic Withdrawal Plan or Exchange Privilege may be
used.
HOW TO REDEEM
You may redeem your shares on any business day at the next determined
net asset value calculated after your redemption request has been accepted
by the Transfer Agent as described below.
BY TELEPHONE. You may redeem your shares by telephone by calling
1-800-829-3863, prior to 4:00 P.M., Eastern time. All calls will be
recorded. Redemption of Fund shares can be made in this manner only after
you have executed and filed with the Transfer Agent the telephone
redemption authorization form which may be obtained from the Fund or the
Transfer Agent. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative
at the telephone number listed on your account statement.
You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate.
Should you wish to revise these instructions, simply complete and file a
new telephone redemption authorization form. There is no charge for this
service. As long as the identification procedures described above are
followed, neither the 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
Privileges,''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
Fund does 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 the Transfer Agent for the wiring of funds.
Under extraordinary market conditions, it may be difficult for you to
redeem your shares by telephone. Under these circumstances, you should
consider redeeming your shares by mail, as described below.
BY MAIL. All other redemption requests should be made in writing to
the Blanchard Group of Funds, P.O. Box 8612, Boston, Massachusetts 02266-
8612, the Fund's Transfer Agent. Where share certificates have been issued,
the certificates must be endorsed and must accompany the redemption
request. Signatures on redemption requests for amounts in excess of $25,000
and endorsed share certificates submitted for redemption must be
accompanied by signature guarantees from any eligible guarantor institution
approved by the Transfer Agent in accordance with its Standards, Procedures
and Guidelines for the Acceptance of Signature Guarantees (`Signature
Guarantee Guidelines'). Eligible guarantor institutions generally include
banks, broker-dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. All eligible guarantor institutions must participate in the
Securities Transfer Agents Medallion Program (`STAMP'') in order to be
approved by the Transfer Agent pursuant to the Signature Guarantee
Guidelines. Copies of the Signature Guarantee Guidelines and information on
STAMP can be obtained from the Transfer Agent at (800) 462-9102. Signatures
on redemption requests for any amount must be guaranteed (as described
above) if the proceeds are not to be paid to the registered owner at the
registered address, or the registered address has changed within the
previous 60 days. The letter of instruction or a stock assignment must
specify the account number and the exact number of shares or dollar amount
to be redeemed. It must be signed by all registered shareholders in
precisely the same way as originally registered. The letter of instruction
must also include any other supporting legal documents, if required, in the
case of estates, trusts, guardianships, custodianships, corporations,
partnerships, pension or profit sharing plans, or other organizations.
General Information.
Your redemption request becomes effective when it is received in
proper form by the Transfer Agent prior to 4:00 P.M. Eastern time, or your
redemption will occur on the following business day. We will make payment
for redeemed shares within seven days after receipt by the Transfer Agent.
However, we may delay the forwarding of redemption proceeds on shares which
were recently purchased until the purchase check has cleared, which may
take up to 7 days or more. We may suspend the right of redemption when the
New York Stock Exchange is closed or when trading on the Exchange is
restricted, and under certain extraordinary circumstances in accordance
with the rules of the SEC. Due to the relatively high cost of handling
small investments, we reserve the right upon 60 days' written notice to
involuntarily redeem, at net asset value, the shares of any shareholder
whose account has a value of less than $1,000, other than as a result of a
decline in the net asset value per share. We do not presently contemplate
making such involuntary redemptions and will not redeem any shares held in
tax-sheltered retirement plans in this category. We also reserve the right
upon notice to shareholders to charge a fee for any services provided
herein that are currently free of charge.
DISTRIBUTION OF SHARES OF THE FUND
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.
DISTRIBUTION PLAN. According to the provisions of a distribution plan
adopted pursuant to Investment Company Act Rule 12b-1, the distributor may
select brokers and dealers to provide distribution and administrative
services as to shares of the Fund. The distributor may also select
administrators (including financial institutions, fiduciaries, custodians
for public funds and investment advisers) to provide administrative
services. Administrative services may include, but are not limited to, the
following functions: providing office space, equipment, telephone
facilities, and various personnel including clerical, supervisory, and
computer, as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries regarding shares; assisting clients in changing dividend
options, account designations, and addresses; and providing such other
services as the Fund reasonably requests for its shares.
Brokers, dealers, and administrators will receive fees based upon
shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the Board of Trustees, provided that for any period the total
amount of fees representing an expense to the Trust shall not exceed an
annual rate of .25% of the average daily net assets of shares of the Fund
held in the accounts during the period for which the brokers, dealers, and
administrators provide services. Any fees paid by the distributor with
respect to shares of the Fund pursuant to the distribution plan will be
reimbursed by the Trust from the assets of the shares 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 predicated upon the amount of shares of the Fund that
are sold by the dealer. Such payments, if made, will be in addition to
amounts paid under the distribution plan and will not be an expense of the
Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial
institutions a fee based upon the average net asset value of shares of
their customers invested in the Trust for providing administrative
services. This fee, if paid, will be reimbursed by VCM and not the Trust.
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 OF THE TRUST
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
The administrative fee received during any fiscal year for the Fund
shall be at least $75,000. Federated Administrative Services may
voluntarily waive a portion of its fee.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Shareholder
Services Company, P. O. Box 8600, Boston, Massachusetts, 02266-8600, is the
Fund's Transfer Agent and Dividend Disbursing Agent.
TAX MATTERS
The Fund intends to qualify each year and elect to be treated as a
separate `regulated investment company'' under Subchapter M of the
Internal Revenue Code of 1986, as amended (the `Code''). A regulated
investment company that distributes all of its taxable income to its
shareholders in accordance with the timing requirements imposed by the
Code, which the Fund intends to do, is not subject to Federal income tax on
the amounts so distributed. If for any taxable year the Fund does not
qualify for the treatment as a regulated investment company, all its
taxable income will be subject to tax at regular corporate rates without
any deduction for distributions to its shareholders, and such
distributions, in turn, will be taxable to the shareholders as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits. Because the Fund invests all of its assets in the Portfolio which
is classified as a partnership for Federal income tax purposes, the Fund
will be deemed to own a proportionate share of the income of the Portfolio
in which it invests, for purposes of determining whether it qualifies as a
regulated investment company.
The Trust is organized as a Massachusetts business trust and, under
current law, is not liable for any income or franchise tax in the
Commonwealth of Massachusetts as long as the Fund (and each other series of
the Trust) qualifies as a regulated investment company under the Code.
Distributions by the Fund of its ordinary income (net of expenses) and
the excess, if any, of its net short-term capital gain over its net long-
term capital loss are generally taxable to shareholders as ordinary income.
Such distributions are treated as dividends for Federal income tax
purposes. A portion of the ordinary income dividends paid by the Fund with
respect to a given year (essentially, the portion attributable to
qualifying dividends received by the underlying Portfolio from domestic
corporations during the year) may qualify for the 70% dividends-received
deductions for corporate shareholders. Distributions by the Fund of the
excess, if any, of its net long-term capital gain over its net short-term
capital loss are designated as capital gain dividends and are taxable to
shareholders as long-term capital gains, regardless of their holding
periods in their shares. Ordinary income and capital gain dividends from
the Fund may also be subject to state and local taxes.
Investors should carefully consider the tax implications of purchasing
shares just prior to a dividend record date. Investors purchasing shares
just prior to an ordinary income or capital gain dividend record date will
be taxed on the entire dividend received, even though their cost for shares
already reflected the amount of such dividend.
Distributions to shareholders will be treated in the same manner for
Federal income tax purposes whether received in cash or reinvested in
additional Fund shares. In general, distributions by the Fund are taken
into account by shareholders in the year in which they are made. However,
certain distributions made during January will be treated as having been
paid by the Fund and received by its shareholders on December 31 of the
preceding year. A statement setting forth the Federal income tax status of
all distributions made (or deemed made) during the year, including the
allocation to ordinary income dividends (and any portion thereof which
qualify for the dividends-received deduction for corporations) and capital
gain dividends, will be sent to the Fund's shareholders promptly after the
end of each year.
A shareholder will recognize gains or losses upon the sale or
redemption of shares of the Fund in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. Any loss realized upon a taxable
disposition of shares within six months from the date of their purchase
will be treated as a long-term capital loss to the extent of any capital
gain dividends received on such shares. All or a portion of any loss
realized upon a taxable disposition of shares of the Fund may be disallowed
if other shares of the Fund are purchased within 30 days before or after
such disposition.
Under the back-up withholding rules of the Code, a shareholder may be
subject to 31% withholding of Federal income tax on dividends and
redemption payments made by the Fund. To avoid this back-up withholding,
you must provide the Fund with a correct taxpayer identification number
(which for an individual is usually one's Social Security number) or
certify that you are a corporation or otherwise exempt from or not subject
to back-up withholding.
The foregoing discussion of Federal income tax consequences is based
on tax laws and regulations in effect on the date of this Prospectus and is
subject to change by legislative or administrative action. You should also
review the more detailed discussion of Federal income tax considerations in
the Statement of Additional Information for the Fund. In addition, you
should consult with your own tax advisor as to the tax consequences of
investing in the Fund, including the application of state and local taxes
to you, which may differ from the Federal income tax consequences described
above.
PERFORMANCE COMPUTATION INFORMATION
Advertisements and communications to investors regarding the Fund may
cite certain performance, ranking and rating information of the Fund and
the Portfolio and may make performance comparisons to other funds or to
relevant indices, as described below.
TOTAL RETURN. Cumulative total return data is computed by considering
all elements of return, including reinvestment of dividends and capital
gain distributions, over a stated period of time. Cumulative total return
figures are not annualized and represent the aggregate percentage or dollar
value change over the period in question.
Average annual return will be quoted for at least the one, five and
ten year periods ending on a recent calendar quarter (or if such periods
have not yet elapsed, at the end of a shorter period corresponding to the
life of the Fund for performance purposes). Average annual total return
figures are annualized and, therefore, represent the average annual
percentage change over the period in question.
COMPARATIVE RESULTS. From time to time in advertisements or sales
material, 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., CDA and Morningstar, Inc. In
addition, because the Fund invests 100% of its assets in the portfolio
which has identical investment objectives, the Fund may cite the
performance and ranking information of its Portfolio (which includes the
performance of predecessor mutual funds prior to their conversion to the
Portfolio) and may make certain performance, ranking and rating
comparisons. The Fund may also discuss the past performance, ranking and
rating of the Portfolio Adviser, and compare its performance to various
investment indexes. The Fund may use performance information as reported in
publications of general interest, national financial and industry
publications such as Forbes or Money Magazine and various investment
newsletters such as Donoghue's Money Letter. In addition, the Fund may
compare its total return, or the total return of indexes of U.S. markets,
world markets, individual countries undergoing privatization, or of world
indexes of countries undergoing privatization, to that of other mutual
funds, individual country indexes, or other recognized indexes.
From time to time, the Fund may provide information on certain markets
or countries and specific equity securities and quote published editorial
comments and/or information from newspapers, magazines, investment
newsletters and other publications such as The Wall Street Journal, Money
Magazine, Forbes, Barron's, USA Today and Mutual Fund Investors. The Fund
may also compare the historical returns on various investments, performance
indexes of those investments or economic indicators. In addition, the Fund
may reprint articles about the Fund and provide them to prospective
shareholders. The Distributor may also make available economic, financial
and investment reports to shareholders and prospective shareholders. In
order to describe these reports, the Fund may include descriptive
information on the reports in advertising literature sent to the public
prior to the mailing of a prospectus. Performance information may be quoted
numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and
comparisons may be made with funds which may have different investment
restrictions, objectives, policies or techniques than the Fund, and that
such other funds or market indicators may be comprised of securities that
differ significantly from the Fund's investments.
Performance information will vary from time to time and past results
are not necessarily representative of future results. You should remember
that the Fund's performance is a function of portfolio management in
selecting the type and quality of securities in which the Fund may invest,
and is affected by operating, distribution and marketing expenses.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE PORTFOLIO
The Fund
The Fund is a non-diversified series of Blanchard Funds (the
`Trust''), a Massachusetts business trust organized on January 24, 1986
which currently consists of six series of shares. The other series of the
Trust's shares of beneficial interest, which are offered pursuant to
separate prospectuses, are Blanchard Capital Growth Fund, Blanchard Global
Growth Fund, Blanchard Flexible Income Fund, Blanchard Short-Term Flexible
Income Fund and Blanchard Flexible Tax-Free Bond Fund.
The Fund is classified as a `non-diversified'' investment company
under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that may be invested in the securities
of a single issuer. The Fund intends, however, to comply with the
diversification requirements imposed by the U.S. Internal Revenue Code of
1986, as amended, for qualification as a regulated investment company. See
`Tax Matters'' in the Prospectus and in the Statement of Additional
Information.
Investor Meetings and Voting
Under Massachusetts law, the Trust and its series are generally not
required to hold annual or special shareholder meetings. However, special
meetings of shareholders may be held for such purposes as electing
trustees, changing fundamental policies, approving an investment
management/advisory agreement or approving a distribution and marketing
plan, if any, and, at the request of the shareholders, to replace trustees.
Shareholders holding 10% or more of the Trust's outstanding shares may call
a special meeting of shareholders. Trustees may be removed by the Trustees
or by shareholders at a special meeting called for this purpose.
Shareholders shall be given access to a list of the names and addresses of
all other shareholders, the number of shareholders and the cost of mailing
a request to them. As of February 12, 1996, Stephens, Inc., Little Rock,
Arkansas, acting in various capacities for numerous accounts, was the owner
of record of 328,740 shares (27.57%) of Blanchard Growth & Income Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
Whenever a vote is requested on matters pertaining to the Portfolio,
the Trust will hold a meeting of the Fund's shareholders and will cast its
vote as instructed by the Fund's shareholders. Shares of the Fund for which
no voting instructions have been received will be voted in the same
proportion as those shares for which voting instructions are received. As
with any mutual fund, other investors in the Portfolio could control the
results of voting at the Portfolio level.
The Fund's shares represent shares of beneficial interest. Each share
has equal rights with respect to voting matters of the Fund. In the event
of dissolution or liquidation of the Fund, holders of Fund shares will
receive pro rata, subject to the rights of creditors, the proceeds of the
sale of the Fund's assets less its liabilities. There are no preemptive or
conversion rights applicable to the shares of the Fund. Shares of the Fund,
when issued, will be fully paid, non-assessable and transferable. The
trustees may create additional series or classes of shares without
shareholder approval. Each series of the Trust is responsible only for its
own expenses and operating costs and incurs no liability with respect to
the expenses and costs of any other series, other than those which affect
the series as a group and are allocated among the series based upon their
relative average net assets during the year.
The Portfolio
The Portfolio is organized as a trust under the laws of the State of
New York. The Portfolio's Declaration of Trust provides that the Fund and
other entities investing in the Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) will be liable for all obligations of the Portfolio. However,
the risk of the Fund's incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the trustees believe that neither the Fund nor their
shareholders will be adversely affected by reason of the Fund's investing
in the Portfolio.
Unique Characteristics of the Fund and Portfolio Structure
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund invests all of its investable assets in the
Portfolio, a separate registered investment company. Therefore, a
shareholder's interest in the Portfolio's securities is indirect. In
addition to selling a beneficial interest to the Fund, the Portfolio may
sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, other investors investing in the Portfolio are not required to
sell their shares at the same public offering price as the Fund, and may
bear different levels of ongoing expenses than the Fund. Shareholders of
the Fund should be aware that these differences may result in differences
in returns experienced in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund
structures.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a
large fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the Portfolio may become less diverse, resulting in increased
portfolio risk. However, this possibility also exists for traditionally
structured funds which have large or institutional investors. Funds with a
greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Trust is
requested to vote on matters pertaining to the Portfolio, the Trust will
hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as do the Fund's shareholders. Shares of the Fund
for which no voting instructions have been received will be voted in the
same proportion as those shares for which voting instructions are received.
Certain changes in the Portfolio's objective, policies or restrictions may
require the Trust to withdraw the Fund's interest in the Portfolio. Any
withdrawal could result in a distribution in kind of portfolio securities
(as opposed to a cash distribution from the Portfolio). The Fund could
incur brokerage fees or other transaction costs in converting such
securities to cash. In addition, a distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity
of the Fund.
State securities regulations generally do not permit the same individuals
who are disinterested Trustees of the Trust to be Trustees of the Portfolio
absent the adoption of written procedures by a majority of the
disinterested Trustees of the Trust reasonably appropriate to deal with
potential conflicts of interest up to and including creating a separate
Board of Trustees. The Trustees of the Trust, including a majority of the
disinterested Trustees, have adopted procedures they believe are reasonably
appropriate to deal with any conflict of interest up to and including
creating a separate Board of Trustees.
Investors in the Fund may obtain information about whether an investment in
the Portfolio may be available through other funds by calling 1-800-829-
3863.
OTHER INFORMATION
This Prospectus omits certain information contained in the
registration statement of the Fund filed with the SEC. Copies of the
registration statement, including items omitted herein, may be obtained
from the SEC by paying the charges prescribed under its rules and
regulations. The Statement of Additional Information included in the
registration statement may be obtained without charge from the Fund.
For information about the Trustees and officers of the Fund and the
Portfolio see the Statement of Additional Information.
The Code of Ethics of the Portfolio Adviser and the Fund prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Fund's planned portfolio
transactions. The objective of the Code of Ethics of both the Fund and
Portfolio Adviser is that their operations be carried out for the exclusive
benefit of the Fund's shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statement of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by the Fund. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.
INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, 2500 One PPG Place,
Pittsburgh, Pennsylvania 15222-5401, has been appointed the independent
accountants for the Fund.
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD CAPITAL GROWTH FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a Prospectus but should be read in conjunction with
the current Prospectus dated February , 1997 (the "Prospectus"),
---
pursuant to which the Blanchard Capital Growth FUND (the "FUND") is
offered. Please retain this document for future reference.
To obtain a copy of the Prospectus or a paper copy of this Statement of
Additional Information, if you have received your Statement of Additional
Information electronically, please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 1
Investment Objective, Policies and Restrictions 1
Portfolio Transactions 13
Computation of Net Asset Value 15
Performance Information 16
Additional Purchase and Redemption Information 17
Tax Matters 17
The Management of the FUND 22
Management Services 32
Administrative Services 32
Distribution Plan 33
Description of the FUND 33
Shareholder Reports 34
Appendix A A-1
Appendix B A-3
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank
Distributor
Federated Securities Corp.
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Price Waterhouse LLP
Dated:February , 1997
--
FEDERATED SECURITIES CORP.
GENERAL INFORMATION AND HISTORY
As described in Blanchard Capital Growth's (the "FUND") Prospectus,
the FUND is a non-diversified series of Blanchard Funds, a Massachusetts
business trust that was organized under the name "Blanchard Strategic
Growth Fund" (the "Trust"). The trustees of the Trust approved the change
in the name of the Trust on December 4, 1990.
Effective March 31, 1996, the merger of The Chase Manhattan
Corporation with and into Chemical Banking Corporation was consummated and
Chemical Banking Corporation thereupon changed its name to The Chase
Manhattan Corporation. The Chase Manhattan Corporation is now the parent of
The Chase Manhattan Bank, the adviser to the Capital Growth Portfolio (the
`Portfolio'').
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The FUND seeks its investment objective by investing 100% of its assets in
the Capital Growth Portfolio (the "Portfolio"). The Portfolio has an
investment objective identical to the FUND and invests in accordance with
investment policies and restrictions identical to those of the FUND.
The investment objective of the FUND and the Portfolio may not be changed
except by a majority vote of shareholders.
The investment policies of the FUND and the Portfolio, as described below,
are not fundamental and may be changed without shareholder approval.
Investment Policies
The Prospectus sets forth the investment objective and various investment
policies of the Portfolio. This Statement of Additional Information
supplements and should be read in conjunction with the related sections of
the Prospectus. For descriptions of the securities ratings of Moody's
Investors Service, Inc. (`Moody's''), Standard & Poor's Ratings Group
(`Standard & Poor's'') Ratings Group (``Standard & Poor's'') and Fitch
Investors Service, Inc. (`Fitch''), see Appendix B.
U.S. GOVERNMENT SECURITIES - U.S. Government Securities include (1)
U.S. Treasury obligations, which generally differ only in their interest
rates, maturities and times of issuance, including: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to
ten years) and U.S. Treasury bonds (generally maturities of greater than
ten years); and (2) obligations issued or guaranteed by U.S. Government
agencies and instrumentalities which are supported by any of the following:
(a) the full faith and credit of the U.S. Treasury, (b) the right of the
issuer to borrow any amount listed to a specific line of credit from the
U.S. Treasury, (c) discretionary authority of the U.S. Government to
purchase certain obligations of the U.S. Government agency or
instrumentality or (d) the credit of the agency or instrumentality.
Agencies and instrumentalities of the U.S. Government include but are not
limited to: Federal Land Banks, Federal Financing Banks, Banks for
Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks, Federal
Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise
established or sponsored by the U.S. Government. Certain U.S. Government
Securities, including U.S. Treasury bills, notes and bonds, Government
National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of
the United States. Other U.S. Government Securities are issued or
guaranteed by federal agencies or government sponsored enterprises and are
not supported by the full faith and credit of the United States. These
securities include obligations that are supported by the right of the
issuer to borrow from the U.S. Treasury, such as obligations of the Federal
Home Loan Banks, and obligations that are supported by the creditworthiness
of the particular instrumentality, such as obligations of the Federal
National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities
issue specialized types of securities, such as guaranteed notes of the
Small Business Administration, Federal Aviation Administration, Department
of Defense, Bureau of Indian Affairs and Private Export Funding
Corporation, which often provide higher yields than are available from the
more common types of government-backed instruments. However, such
specialized instruments may only be available from a few sources, in
limited amounts, or only in very large denominations; they may also require
specialized capability in portfolio servicing and in legal matters related
to government guarantees. While they may frequently offer attractive
yields, the limited-activity markets of many of these securities means
that, if the Portfolio were required to liquidate any of them, it might not
be able to do so advantageously; accordingly, the Portfolio investing in
such securities normally to hold such securities to maturity or pursuant to
repurchase agreements, and would treat such securities (including
repurchase agreements maturing in more than seven days) as illiquid for
purposes of its limitation on investment in illiquid securities.
BANK OBLIGATIONS - Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at
the time of purchase in excess of $1 billion and the deposits of which are
insured by either the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation, and foreign
banks (including their U.S. branches) having total assets in excess of $10
billion (or the equivalent in other currencies), and such other U.S. and
foreign commercial banks which are judged by the advisers to meet
comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or
purchased on a discount basis. A bankers' acceptance is a short-term draft
drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its
face amount on the maturity date. Fixed time deposits are obligations of
branches of United States banks or foreign banks which are payable at a
stated maturity date and bear a fixed rate of interest. Although fixed
time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third
party. Fixed time deposits subject to withdrawal penalties and with
respect to which the Portfolio cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations
under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations. Bank
obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by
government regulation. Investors should also be aware that securities of
foreign banks and foreign branches of United States banks may involve
foreign investment risks in addition to those relating to domestic bank
obligations.
DEPOSITARY RECEIPTS - The Portfolio will limit its investment in Depositary
Receipts not sponsored by the issuer of the underlying security to no more
than 5% of the value of its net assets (at the time of investment). A
purchaser of an unsponsored Depositary Receipt may not have unlimited
voting rights and may not receive as much information about the issuer of
the underlying securities as with a sponsored Depositary Receipt.
CORPORATE REORGANIZATIONS - In general, securities that are the subject of
a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or
proposal. The increased market price of these securities may also discount
what the stated or appraised value of the security would be if the
contemplated action were approved or consummated. These investments may be
advantageous when the discount significantly overstates the risk of the
contingencies involved; significantly undervalues the securities, assets or
cash to be received by shareholders of the prospective portfolio company as
a result of the contemplated transaction; or fails adequately to recognize
the possibility that the offer or proposal may be replaced or superseded by
an offer or proposal of greater value. The evaluation of these
contingencies requires unusually broad knowledge and experience on the part
of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as
a result of the contemplated transaction, but also the financial resources
and business motivation of the offeror as well as the dynamics of the
business climate when the offer or proposal is in progress. Investments in
reorganization securities may tend to increase the turnover ratio of the
Portfolio and increase its brokerage and other transaction expenses.
WARRANTS AND RIGHTS - Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their
prices do not necessarily move parallel to the prices of the underlying
securities. Rights are similar to warrants but normally have a shorter
duration and are distributed directly by the issuer to shareholders.
Rights and warrants have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
COMMERCIAL PAPER - Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note
(which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
REPURCHASE AGREEMENTS - The Portfolio will enter into repurchase agreements
only with member banks of the Federal Reserve System and securities dealers
believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an underlying debt
instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase the instrument and the
Portfolio to resell the instrument at a fixed price and time, thereby
determining the yield during the Portfolio's holding period. This procedure
results in a fixed rate of return insulated from market fluctuations during
such period. A repurchase agreement is subject to the risk that the seller
may fail to repurchase the security. Repurchase agreements are considered
under the 1940 Act to be loans collateralized by the underlying securities.
All repurchase agreements entered into by the Portfolio will be fully
collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to the amount of
the loan, including the accrued interest thereon, and the Portfolio or its
custodian or sub-custodian will have possession of the collateral, which
the Board of Trustees believes will give it a valid, perfected security
interest in the collateral. Whether a repurchase agreement is the purchase
and sale of a security or a collateralized loan has not been conclusively
established. This might become an issue in the event of the bankruptcy of
the other party to the transaction. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Portfolio may suffer time delays and incur costs in
connection with the disposition of the collateral. The Board of Trustees
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by the Portfolio. Repurchase agreements maturing in more
than seven days are treated as illiquid for purposes of the Portfolio's
restrictions on purchases of illiquid securities. Repurchase agreements are
also subject to the risks described below with respect to stand-by
commitments.
FORWARD COMMITMENTS - In order to invest the Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased. When a commitment to purchase a
security on a forward commitment basis is made, procedures are established
consistent with the General Statement of Policy of the Securities and
Exchange Commission concerning such purchases. Since that policy currently
recommends that an amount of the Portfolio's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the
commitment, a separate account of the Portfolio consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the
Portfolio's commitments securities will be established at the Portfolio's
custodian bank. For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at
market value. If the market value of such securities declines, additional
cash, cash equivalents or highly liquid securities will be placed in the
account daily so that the value of the account will equal the amount of
such commitments by the Portfolio.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis
may involve more risk than other types of purchases. Securities purchased
on a forward commitment basis and the securities held in the Portfolio's
portfolio are subject to changes in value based upon the public's
perception of the issuer and changes, real or anticipated, in the level of
interest rates. Purchasing securities on a forward commitment basis can
involve the risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. On the settlement date of the forward commitment
transaction, the Portfolio will meet its obligations from then available
cash flow, sale of securities held in the separate account, sale of other
securities or, although it would not normally expect to do so, from sale of
the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations). The sale of
securities to meet such obligations may result in the realization of
capital gains or losses.
To the extent the Portfolio engages in forward commitment transactions, it
will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from
the trade date.
REVERSE REPURCHASE AGREEMENTS - Reverse Repurchase Agreements involve the
sale of securities held by the Portfolio with an agreement to repurchase
the securities at an agreed upon price and date. The repurchase price is
generally equal to the original sales price plus interest. Reverse
repurchase agreements are usually for seven days or less and cannot be
repaid prior to their expiration dates. Reverse repurchase agreements
involve the risk that the market value of the portfolio securities
transferred may decline below the price at which the Portfolio is obliged
to purchase the securities.
STRIPPED OBLIGATIONS - The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years
are eligible to be traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under
the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The
interest component of STRIPS may be more volatile than that of United
States Treasury bills with comparable maturities.
ILLIQUID SECURITIES - For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in
accordance with procedures established by the Board of Trustees, certain
investments in restricted securities for which there may be a secondary
market of qualified institutional buyers as contemplated by Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act") and
commercial obligations issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act ("Section 4(2) paper"). Rule 144A provides an exemption
from the registration requirements of the Securities Act for the resale of
certain restricted securities to qualified institutional buyers. Section
4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale of Section 4(2) paper
by the purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid
market for Rule 144A securities or Section 4(2) paper will develop or be
maintained. The Trustees have adopted policies and procedures for the
purpose of determining whether securities that are eligible for resale
under Rule 144A and Section 4(2) paper are liquid or illiquid for purposes
of the limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Trustees have delegated to the advisers the
determination as to whether a particular instrument is liquid or illiquid,
requiring that consideration be given to, among other things, the frequency
of trades and quotes for the security, the number of dealers willing to
sell the security and the number of potential purchasers, dealer
undertakings to make a market in the security, the nature of the security
and the time needed to dispose of the security. The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A
securities and Section 4(2) paper.
STAND-BY COMMITMENTS - In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date, and a stand-by commitment entitles the
Portfolio to same-day settlement and to receive an exercise price equal to
the amortized cost of the underlying security plus accrued interest, if
any, at the time of exercise. Stand-by commitments are subject to certain
risks, which include the inability of the issuer of the commitment to pay
for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by the Portfolio, and that the maturity of
the underlying security will generally be different from that of the
commitment.
SECURITIES LOANS - To the extent specified in the Prospectus, the Portfolio
is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans
of portfolio securities may not exceed 30% of the value of the Portfolio's
total assets. In connection with such loans, the Portfolio will receive
collateral consisting of cash, cash equivalents, U.S. Government securities
or irrevocable letters of credit issued by financial institutions. Such
collateral will be maintained at all times in an amount equal to at least
102% of the current market value plus accrued interest of the securities
loaned. The Portfolio can increase its income through the investment of
such collateral. The Portfolio continues to be entitled to the interest
payable or any dividend-equivalent payments received on a loaned security
and, in addition, to receive interest on the amount of the loan. However,
the receipt of any dividend-equivalent payments by the Portfolio on a
loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time
upon specified notice. The Portfolio might experience risk of loss if the
institutions with which it has engaged in portfolio loan transactions
breach their agreements with the Portfolio. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
experience financial difficulty. Loans will be made only to firms deemed
by the advisers to be of good standing and will not be made unless, in the
judgment of the advisers, the consideration to be earned from such loans
justifies the risk.
Additional Policies Regarding Derivatives and Related Transactions
Introduction
As explained more fully below, the Portfolio may employ derivative and
related instruments as tools in the management of portfolio assets. Put
briefly, a `derivative'' instrument may be considered a security or other
instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts,
structured notes and various over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or related instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is
quicker, easier and less expensive to invest in derivatives. Lastly, to
speculate or enhance portfolio performance. When used prudently,
derivatives can offer several benefits, including easier and more effective
hedging, lower transaction costs, quicker investment and more profitable
use of portfolio assets. However, derivatives also have the potential to
significantly magnify risks, thereby leading to potentially greater losses
for the Portfolio.
The Portfolio may invest its assets in derivative and related instruments
subject only to the Portfolio's investment objective and policies and the
requirement that the Portfolio maintain segregated accounts consisting of
liquid assets, such as cash, U.S. Government securities, or other high-
grade debt obligations (or, as permitted by applicable regulation, enter
into certain offsetting positions) to cover its obligations under such
instruments with respect to positions where there is no underlying
portfolio asset so as to avoid leveraging the Portfolio.
The value of some derivative or related instruments in which the Portfolio
may invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of the Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers
inaccurately forecast such factors and have taken positions in derivative
or similar instruments contrary to prevailing market trends, the Portfolio
could be exposed to the risk of a loss. The Portfolio might not employ any
or all of the strategies described herein, and no assurance can be given
that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies and
related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement
the Prospectus as well as provide useful information to prospective
investors.
Risk Factors
As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the
use of derivatives and related instruments:
There can be no guarantee that there will be a correlation between price
movements in a hedging vehicle and in the portfolio assets being hedged. As
incorrect correlation could result in a loss on both the hedged assets in
the Portfolio and the hedging vehicle so that the portfolio return might
have been greater had hedging not been attempted. This risk is particularly
acute in the case of `cross-hedges'' between currencies.
The advisers may incorrectly forecast interest rates, market values or
other economic factors in utilizing a derivatives strategy. In such a case,
the Portfolio may have been in a better position had it not entered into
such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains.
Strategies not involving hedging may increase the risk to the Portfolio.
Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Portfolio than hedging
strategies using the same instruments.
There can be no assurance that a liquid market will exist at a time when
the Portfolio seeks to close out an option, futures contract or other
derivative or related position. Many exchanges and boards of trade limit
the amount of fluctuation permitted in option or futures contract prices
during a single day; once the daily limit has been reached on particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain instruments are relatively new and without a significant
trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Finally, over-the-
counter instruments typically do not have a liquid market. Lack of a liquid
market for any reason may prevent the Portfolio from liquidating an
unfavorable position.
Activities of large traders in the futures and securities markets involving
arbitrage, `program trading,'' and other investment strategies may cause
price distortions in these markets.
In certain instances, particularly those involving over-the-counter
transactions or forward contracts, there is a greater potential that a
counterparty or broker may default or be unable to perform on its
commitments. In the event of such a default, the Portfolio may experience a
loss.
In transactions involving currencies, the value of the currency underlying
an instrument may fluctuate due to many factors, including economic
conditions, interest rates, governmental policies and market forces.
Specific Uses and Strategies
Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.
OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on:
securities;
securities indexes; and
debt instruments.
Although in most cases these options will be exchange-traded, the Portfolio
may also purchase, sell or exercise over-the-counter options. Over-the-
counter options differ from exchange-traded options in that they are two-
party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other
party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market
value. One purpose of purchasing call options is to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. The Portfolio may also use combinations of options to minimize
costs, gain exposure to markets or take advantage of price disparities or
market movements. For example, the Portfolio may sell put or call options
it has previously purchased or purchase put or call options it has
previously sold. These transactions may result in a net gain or loss
depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to
earn the related premium from such transactions. Prior to exercise or
expiration, an option may be closed out by an offsetting purchase or sale
of a related option. The Portfolio will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period,
the Portfolio writing a covered call (i.e., where the underlying securities
are held by the Portfolio) has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but has retained the risk of loss
should the price of the underlying securities decline. The writer of an
option has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order
to terminate its obligation under the option and must deliver the
underlying securities at the exercise price.
If a put or call option purchased by the Portfolio is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in
the case of a call, remains less than or equal to the exercise price, the
Portfolio will lose its entire investment in the option. Also, where a put
or call option on a particular security is purchased to hedge against price
movements in a related security, the price of the put or call option may
move more or less than the price of the related security. There can be no
assurance that a liquid market will exist when the Portfolio seeks to close
out an option position. Furthermore, if trading restrictions or suspensions
are imposed on the options markets, the Portfolio may be unable to close
out a position.
Futures Contracts and Options on Futures Contracts. The Portfolio may
purchase or sell:
interest-rate futures contracts;
futures contracts on specified instruments or indices; and
options on these futures contracts (`futures options'').
The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by
the U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For
example, the Portfolio may sell a futures contract -- or buy a futures
option -- to protect against a decline in value, or reduce the duration, of
portfolio holdings. Likewise, these instruments may be used where the
Portfolio intends to acquire an instrument or enter into a position. For
example, the Portfolio may purchase a futures contract -- or buy a futures
option -- to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired
in the future. Futures options may also be written to earn the related
premiums.
When writing or purchasing options, the Portfolio may simultaneously enter
into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of
price disparities or market movements. Such strategies may entail
additional risks in certain instances. The Portfolio may engage in cross-
hedging by purchasing or selling futures or options on a security or
currency different from the security or currency position being hedged to
take advantage of relationships between the two securities or currencies.
Investments in futures contracts and options thereon involve risks related
to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options or futures
contracts which are standardized and traded on a U.S. or foreign exchange
or board of trade, or similar entity, or quoted on an automated quotation
system.
FORWARD CONTRACTS. The Portfolio may use foreign currency and interest-rate
forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or perceived changes in interest
rates and other complex factors, as seen from an international perspective.
The Portfolio that may invest in securities denominated in foreign
currencies may, in addition to buying and selling foreign currency futures
contracts and options on foreign currencies and foreign currency futures,
enter into forward foreign currency exchange contracts to reduce the risks
or otherwise take a position in anticipation of changes in foreign exchange
rates. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be a
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
forward foreign currency contract, the Portfolio `locks in'' the exchange
rate between the currency it will deliver and the currency it will receive
for the duration of the contract. As a result, the Portfolio reduces its
exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will
exchange into. The effect on the value of the Portfolio is similar to
selling securities denominated in one currency and purchasing securities
denominated in another. Transactions that use two foreign currencies are
sometimes referred to as `cross-hedges.''
The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies.
The Portfolio may also enter into these contracts for purposes of
increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may also use forward contracts to hedge against changes in
interest-rates, increase exposure to a market or otherwise take advantage
of such changes. An interest-rate forward contract involves the obligation
to purchase or sell a specific debt instrument at a fixed price at a future
date.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolio may employ currency
and interest rate management techniques, including transactions in options
(including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and
currency and interest rate swaps. The aggregate amount of the Portfolio's
net currency exposure will not exceed the total net asset value of its
portfolio. However, to the extent that the Portfolio is fully invested
while also maintaining currency positions, it may be exposed to greater
combined risk.
The Portfolio will only enter into interest rate and currency swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency
swaps is limited to the net amount of interest or currency payments that
the Portfolio is contractually obligated to make. If the other party to an
interest rate or currency swap defaults, the Portfolio's risk of loss
consists of the net amount of interest or currency payments that the
Portfolio is contractually entitled to receive. Since interest rate and
currency swaps are individually negotiated, the Portfolio expects to
achieve an acceptable degree of correlation between their portfolio
investments and their interest rate or currency swap positions.
The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert
such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate.
The Portfolio may purchase or sell without limitation as to a percentage of
its assets forward foreign currency exchange contracts when the advisers
anticipate that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present
attractive investment opportunities and are not held by the Portfolio. In
addition, the Portfolio may enter into forward foreign currency exchange
contracts in order to protect against adverse changes in future foreign
currency exchange rates. The Portfolio may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in
the value of securities denominated in a different currency if its advisers
believe that there is a pattern of correlation between the two currencies.
Forward contracts may reduce the potential gain from a positive change in
the relationship between the U.S. Dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. dollar equivalent value of
the prices of or rates of return on the Portfolio's foreign currency
denominated portfolio securities and the use of such techniques will
subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices, and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to the Portfolio's use of cross-hedges, there
can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. The Portfolio will typically
use interest rate swaps to shorten the effective duration of its portfolio.
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, such as
an exchange of fixed rate payments for floating rate payments. Currency
swaps involve the exchange of their respective rights to make or receive
payments in specified currencies.
STRUCTURED PRODUCTS. The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of certain other investments. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, or specified instruments (such as commercial bank
loans) and the issuance by that entity of one or more classes of securities
(`structured products'') backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured products to create securities
with different investment characteristics such as varying maturities,
payment priorities and interest rate provisions and the extent of the
payments made with respect to structured products is dependent on the
extent of the cash flow on the underlying instruments. The Portfolio may
invest in structured products which represent derived investment positions
based on relationships among different markets of asset classes.
The Portfolio may also invest in other types of structured products,
including among others, inverse floaters, spread trades and notes linked by
a formula to the price of an underlying instrument. Inverse floaters have
coupon rates that vary inversely at a multiple of a designated floating
rate (which typically is determined by reference to an index rate, but may
also be determined through a dutch auction or a remarketing agent or by
reference to another security) (the `reference rate''). As an example,
inverse floaters may constitute a class of CMOs with a coupon rate that
moves inversely to a designated index, such as LIBOR (London Interbank
Offered Rate) or the Cost of Funds Index. Any rise in the reference rate
of an inverse floater (as a consequence of an increase in interest rates)
causes a drop in the coupon rate while any drop in the reference rate of an
inverse floater causes an increase in the coupon rate. A spread trade is
an investment position relating to a difference in the prices or interest
rates of two securities where the value of the investment position is
determined by movements in the difference between the prices or interest
rates, as the case may be, of the respective securities. When the Portfolio
invests in notes linked to the price of an underlying instrument, the price
of the underlying security is determined by a multiple (based on a formula)
of the price of such underlying security. A structured product may be
considered to be leveraged to the extent its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to
greater volatility than an investment directly in the underlying market or
security. Total return on the structured product is derived by linking
return to one or more characteristics of the underlying instrument.
Because certain structured products of the type in which the Portfolio may
invest may involve no credit enhancement, the credit risk of those
structured products generally would be equivalent to that of the underlying
instruments. The Portfolio may invest in a class of structured products
that is either subordinated or unsubordinated to the right of payment of
another class. Subordinated structured products typically have higher
yields and present greater risks than unsubordinated structured products.
Although the Portfolio's purchase of subordinated structured products would
have similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of
the Portfolio's fundamental investment limitation related to borrowing and
leverage.
Certain issuers of structured products may be deemed to be, "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in
private placement transactions and there currently is no action trading
market for structured products. As a result, certain structured products
in which the Portfolio invests may be deemed illiquid and subject to its
limitation on illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or
security. In addition, because structured products are typically sold in
private placement transactions, there currently is no active trading market
for structured products.
Additional Restrictions on the Use of Futures and Option Contracts
The Portfolio is not a "commodity pool" (i.e., a pooled investment vehicle
which trades in commodity futures contracts and options thereon and the
operator of which is registered with the CFTC and futures contracts and
futures options will be purchased, sold or entered into only for bona fide
hedging purposes, provided that the Portfolio may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on
open contracts and options would not exceed 5% of the liquidation value of
the Portfolio's portfolio, provided, further, that, in the case of an
option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation.
When the Portfolio purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the
account of its broker, will at all times equal the value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the transactions described herein may
be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition
of stock or securities held for less than three months.
Investment Restrictions
The Portfolio has adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares"
of the Portfolio which, as used in this Statement of Additional
Information, means the vote of the lesser of (i) 67% or more of the total
beneficial interests of a Portfolio present at a meeting, if the holders of
more than 50% of the outstanding total beneficial interests of a Portfolio
are present or represented by proxy, or (ii) more than 50% of the
outstanding total beneficial interests of a Portfolio.
The Portfolio may not:
(1) borrow money, except that the Portfolio may borrow money for temporary
or emergency purposes, or by engaging in reverse repurchase transactions,
in an amount not exceeding 33-1/3% of the value of its total assets at the
time when the loan is made and may pledge, mortgage or hypothecate no more
than 1/3 of its net assets to secure such borrowings. Any borrowing
representing more than 5% of the Portfolio's total assets must be repaid
before the Portfolio may make additional investments;
(2) make loans, except that the Portfolio may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, with respect to the
Portfolio's permissible futures and options transactions in U.S. government
securities, positions in such options and futures shall not be subject to
this restriction;
(4) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments but this shall not prevent the
Portfolio from (i) purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchase or sales of foreign
currencies or securities;
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by the Portfolio in securities backed by mortgages on real
estate or in marketable securities of companies engaged in such activities
are not hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except that
(a) the Portfolio may engage in transactions that may result in the
issuance of senior securities to the extent permitted under applicable
regulations and interpretation of the 1940 Act or an exemptive order; (b)
the Portfolio may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; and (c) subject
to the restrictions set forth above, the Portfolio may borrow money as
authorized by the 1940 Act. For purposes of this restriction, collateral
arrangements with respect to permissible options and futures transactions,
including deposits of initial and variation margin, are not considered to
be the issuance of a senior security; or
(7) underwrite securities backed by other persons except insofar as the
Portfolio may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships. For purposes of investment restriction
(3) above, industrial development bonds, where the payment of principal and
interest is the ultimate responsibility of companies within the same
industry, are grouped together as an "industry." Supranational
organizations are collectively considered to be members of a single
`industry'' for purposes of restriction (3) above.
In addition, the Portfolio is subject to the following non-fundamental
restrictions which may be changed without shareholder approval:
(1) The Portfolio may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of an issuer.
(2) The Portfolio may not make short sales of securities, other than short
sales `against the box,'' or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transaction,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of the Portfolio.
(3) The Portfolio may not purchase or sell interests in oil, gas or
mineral leases.
(4) The Portfolio may not invest more than 15% of its net assets in
illiquid securities.
(5) The Portfolio may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities; (ii) the writing,
purchasing or selling of puts, calls or combinations thereof with respect
to portfolio securities or (iii) with respect to the Portfolio's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
(6) The Portfolio may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies.
It is the Portfolio's position that proprietary strips, such as CATS
and TIGRS, are United States Government securities. However, the Portfolio
has been advised that the staff of the Securities and Exchange Commission's
Division of Investment Management does not consider these to be United
States Government securities, as defined under the Investment Company Act
of 1940, as amended.
For purposes of the Portfolio's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private)
ultimately responsible for the payment of the principal of and interest on
the security.
In order to permit the sale of its beneficial interests in certain states,
the Portfolio may make commitments more restrictive than the investment
policies and limitations described above and in the Prospectus. Should the
Portfolio determine that any such commitment is no longer in its best
interests, it will revoke the commitment by terminating sales of its
beneficial interests in the state involved. In order to comply with
certain federal and state statutes and regulatory policies, as a matter of
operating policy, the Portfolio will not: (i) invest more than 5% of its
assets in companies which, including predecessors, have a record of less
than three years' continuous operation, (ii) invest in warrants valued at
the lower of cost or market, in excess of 5% of the value of its net
assets, and no more than 2% of such value may be warrants which are not
listed on the New York or American Stock Exchanges, or (iii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or trustee
of the Trust or Portfolio, or is an officer or director of the Adviser, if
after the purchase of the securities of such issuer by the Portfolio one or
more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all
taken at market value.
If a percentage or rating restriction on investment or use of assets set
forth herein or in the Prospectus is adhered to at the time a transaction
is effected later changes in percentage resulting from any cause other than
actions by the Portfolio will not be considered a violation. If the value
of the Portfolio's holdings of illiquid securities at any time exceeds the
percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees
will consider what actions, if any, are appropriate to maintain adequate
liquidity.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Portfolio Adviser and
who is appointed and supervised by senior officers of the Portfolio
Adviser. Changes in the Portfolio's investments are reviewed by the Board
of Trustees. The Portfolio's portfolio manager may serve other clients of
the Portfolio Adviser in a similar capacity.
The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market
conditions. Because a high turnover rate may increase transaction costs and
the possibility of taxable short-term gains, the Portfolio Adviser will
weigh the added costs of short-term investment against anticipated gains.
The Portfolio Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, high portfolio turnover may
result in high transaction costs to the Portfolio. For the fiscal year
ended October 31, 1995, the portfolio turnover rate for the Portfolio was
86%.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of the
Portfolio and other clients of the Portfolio Adviser on the basis of their
professional capability, the value and quality of their brokerage services,
and the level of their brokerage commissions. Debt securities are traded
principally in the over-the-counter market through dealers acting on their
own account and not as brokers. In the case of securities traded in the
over-the-counter market (where no stated commissions are paid but the
prices include a dealer's markup or markdown), the Portfolio Adviser
normally seeks to deal directly with the primary market makers unless, in
its opinion, best execution is available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time
to time, soliciting dealer fees are available to the Portfolio Adviser on
the tender of the Portfolio's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for
the Portfolios by the Portfolio Adviser. At present, no other recapture
arrangements are in effect.
Under Section 28(e) of the Securities Exchange Act of 1934, the Portfolio
Adviser may cause the Portfolio to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for the Portfolio in excess of the
amount other broker-dealers would have charged for the transaction if the
Portfolio Adviser determines in good faith that the greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of either a
particular transaction or the Portfolio Adviser's overall responsibilities
to the Portfolio or to its clients. Not all of such services are useful or
of value in advising the Portfolio.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers
of securities, furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Portfolio and the Portfolio Adviser's other
clients as part of providing advice as to the availability of securities or
of purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance
and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Portfolio Adviser for
no consideration other than brokerage or underwriting commissions.
Securities may be bought or sold through such broker-dealers, but at
present, unless otherwise directed by the Portfolio, a commission higher
than one charged elsewhere will not be paid to such a firm solely because
it provided Research to the Portfolio Adviser.
The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this
effort are sometimes used by the Portfolio Adviser as a consideration in
the selection of brokers to execute portfolio transactions. However, the
Portfolio Adviser would be unable to quantify the amount of commissions
which are paid as a result of such Research because a substantial number of
transactions are effected through brokers which provide Research but which
are selected principally because of their execution capabilities.
The advisory fees that the FUND pays to the Portfolio Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and,
conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Portfolio Adviser in carrying out
its obligations to the Portfolio. While such services are not expected to
reduce the expenses of the Portfolio Adviser, the Portfolio Adviser would,
through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its
own staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's
other clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for
more than one client or that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or
more clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When the Portfolio or the Portfolio Adviser's other clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Portfolio is concerned. However, it is believed that the ability of the
Portfolio to participate in volume transactions will generally produce
better executions for the Portfolio.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 P.M. New York Time,
on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will
be closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. Occasionally, events which
affect the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New
York Stock Exchange and will therefore not be reflected in the computation
of the FUND's net asset value. If events materially affecting the value of
such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees of the Portfolio.
Portfolio securities which are traded both on an exchange and in the over-
the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. Dollar values at the
mean between the bid and offered quotations of the currencies against U.S.
Dollars as last quoted by any recognized dealer. When portfolio securities
are traded, the valuation will be the last reported sale price on the day
of valuation. (For securities traded on the New York Stock Exchange, the
valuation will be the last reported sales price as of the close of the
Exchange's regular trading session, currently 4:15 P.M. New York Time.) If
there is no such reported sale or the valuation is based on the Over-the-
Counter market, the securities will be valued at the last available bid
price or at the mean between the bid and asked prices, as determined by the
Trustees. As of the date of this Statement of Additional Information, such
securities will be valued by the latter method. Securities for which
reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith
by, or under procedures established by, the Trustees of the Portfolio.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Portfolio will be valued on an amortized cost basis by
the Portfolio, excluding unrealized gains or losses thereon from the
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If
the Portfolio acquires a money market instrument with more than sixty days
remaining to its maturity, it will be valued at current market value until
the 60th day prior to maturity, and will then be valued on an amortized
cost basis based upon the value on such date unless the Trustees of the
Portfolio determine during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the
FUND outstanding at the time of the valuation and the result (adjusted to
the nearest cent) is the net asset value per share.
Orders to purchase or redeem shares of the FUND received by dealers prior
to 4:00 P.M. (Eastern Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options
exchanges (normally 4:15 P.M. New York Time), provided the order is
received by the FUND's Transfer Agent prior to 4:00 P.M. on that day. It is
the responsibility of the dealer to insure that all orders are transmitted
timely to the FUND. Orders received by dealers after 4:00 P.M. will be
confirmed at the next computed offering or redemption price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to that
of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated
both in terms of total return and in terms of yield. The total return basis
combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assumes reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the Commission, funds advertising performance must
include total return quotes calculated according to the following formula:
P(1 + T)n = ERV
Where P =a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV =ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the FUND's registration statement. In calculating the
ending redeemable value, the pro rata share of the account opening fee is
deducted from the initial $1,000 investment and all dividends and
distributions by the FUND are assumed to have been reinvested at net asset
value as described in the Prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding
the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
The FUND's cumulative total return for the fiscal year ended October 31,
1996 was % and the
-----
Portfolio's cumulative total return from inception through October 31, 1996
was %.
-----
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth
above in order to compare more accurately the FUND's performance with other
measures of investment return. For example, in comparing the FUND's total
return with data published by Lipper Analytical Services, Inc. or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on
the reinvestment date. Percentage increases are determined by subtracting
the initial net asset value of the investment from the ending net asset
value and by dividing the remainder by the beginning net asset value. The
FUND does not, for these purposes, deduct the pro rata share of the account
opening fee from the initial value invested. THE FUND WILL, HOWEVER,
DISCLOSE THE PRO RATA SHARE OF THE ACCOUNT OPENING FEE, WHICH WAS IN EFFECT
UNTIL DECEMBER 1994, AND WILL DISCLOSE THAT THE PERFORMANCE DATA DOES NOT
REFLECT SUCH NON-RECURRING CHARGE AND THAT INCLUSION OF SUCH CHARGE WOULD
REDUCE THE PERFORMANCE QUOTED. Such alternative total return information
will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a
result of a decline in the net asset value per share. Shareholders are
notified at least 60 days prior to any proposed redemption and are invited
to add to their account if they wish to continue as shareholders of the
FUND, however, the FUND does not presently contemplate making such
redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act, under
which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or
$250,000 during any 90-day period. Should any shareholder's redemption
exceed this limitation, the FUND can, at its sole option, redeem the excess
in cash or in portfolio securities. Such securities would be selected
solely by the FUND and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the
value used in computing net asset value for the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the FUND and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the FUND or its shareholders, and the discussions here and
in the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the FUND is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes
to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for
the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by
the FUND made during the taxable year or, under specified circumstances,
within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement. Because the FUND invests
all of its assets in the Portfolio, which is classified as a partnership
for federal income tax purposes, the FUND will be deemed to own a
proportionate share of the assets and income of the Portfolio for purposes
of determining whether the FUND satisfies the requirements (described more
fully below) necessary to qualify as a regulated investment company.
In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the company's principal
business of investing in stock or securities) and other income (including
gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies (the
"Income Requirement"); and (2) derive less than 30% of its gross income
(exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the
sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three
months (the "Short-Short Gain Test"). Because of the Short-Short Gain Test,
the FUND may have to limit the sale of appreciated securities that it held
for less than three months. However, foreign currency gains that are
directly related to the company's investment in stock or securities are not
treated as short-short gains. Similarly, the Short-Short Gain Test will not
prevent the FUND from disposing of investments at a loss, since losses are
disregarded for this purpose. Interest (including original issue discount)
received by the FUND at maturity or upon the disposition of a security held
for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-
Short Gain Test. However, income attributable to realized market
appreciation will be so treated for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition of
an asset (and allocated to the FUND) will be a capital gain or loss.
However, gain recognized on the disposition of a debt obligation purchased
at a market discount will be treated as ordinary income to the extent of
the portion of the discount that accrued while the Portfolio held the
obligation. In addition, under the rules of Code Section 988, a portion of
gain or loss recognized on the disposition of a debt obligation denominated
in a foreign currency or an option with respect thereto, and (with certain
exceptions) gain or loss recognized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as
ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an
asset is long-term or short-term, the holding period of the asset may be
affected if (1) the asset is used to close a "short sale" (which may
include the acquisition of a put option) or is substantially identical to
another asset so used, (2) the asset is otherwise held by the Portfolio as
part of a "straddle" (as defined) or (3) the asset is stock and the
Portfolio grants an in-the-money qualified covered call option with respect
thereto. In addition, the FUND may be required to defer the recognition of
a loss on a disposition of an asset held as part of a straddle to the
extent of any unrecognized gain on the offsetting position.
Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option
written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of such
an option will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the
Portfolio may be limited in its ability to write options which expire
within three months and to enter into closing transactions at a gain within
three months of the writing of options.
Regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts are subject to special tax
treatment as "Section 1256 contracts." Such contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated as of such date. Gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any gain or loss
recognized upon the actual termination of such contracts during the year.
The combined capital gain or loss for the year with respect to Section 1256
contracts is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. (The Portfolio may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of
a "mixed straddle" with other investments that are not Section 1256
contracts.) The IRS has held in private rulings that constructive gains
arising from deemed year-end dispositions of Section 1256 contracts will
not be taken into account for purposes of the Short-Short Gain Test.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency
loss incurred after October 31 as if it were incurred in the succeeding
year.
In addition to the requirements described above, the FUND must satisfy an
asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable
year, at least 50% of the value of its assets must consist of cash and cash
items, U.S. Government securities, securities of other RICs, and securities
of other issuers (as to which the RIC has not invested more than 5% of the
value of its total assets in securities of such issuer and as to which it
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other RICs), or in two or more issuers which
the RIC controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security
is treated as issued by the issuer of the security and not the issuer of
the option.
If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to
shareholders, and such distributions will be taxable to the shareholders as
ordinary dividends to the extent of the FUND's current and accumulated
earnings and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to 98% of its ordinary taxable income
for the calendar year and 98% of its capital gain net income for the one-
year period ended on October 31 of the year. The balance of such income
must be distributed during the next calendar year.
The FUND intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end
of each calendar year to avoid liability for the excise tax. The FUND may
in certain circumstances have to liquidate portfolio investments in order
to effect such distributions.
FUND Distributions
The FUND intends to distribute substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net capital
gain for each taxable year. The FUND currently intends to distribute such
gains annually. Net capital gain distributed and designated as a capital
gain dividend is taxable to shareholders as long-term capital gain,
regardless of the shareholder's holding period in his shares and the time
when such gain was recognized by the Portfolio.
If the FUND elects to retain its net capital gain, it will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if
each received a distribution of his pro rata share of the gain, with the
result that each would be required to report his pro rata share of such
gain on his tax return as a long-term capital gain, would receive a
refundable tax credit for his pro rata share of the tax paid by the FUND on
the gain, and would increase the tax basis for his shares by an amount
equal to the deemed distribution less the credit.
Ordinary income dividends distributed by the FUND will qualify for the 70%
dividends-received deduction generally available to corporations (other
than corporations, such as S corporations, which are not eligible for the
deduction) to the extent of the portion of the distribution attributed to
"qualifying dividends" received by the Portfolio during the taxable year
from domestic corporations. A dividend received by the Portfolio will not
be treated as a qualifying dividend (1) if it was received with respect to
stock that the Portfolio held for less than 46 days (91 days in the case of
certain preferred stock), subject to the limitations of Code Sections
246(c)(3) and (4) and 246A. Moreover, the dividends-received deduction for
a corporate shareholder will also be disallowed if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
FUND shares or the FUND fails to satisfy them with respect to its interest
in the Portfolio.
Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries,
which entitle the Portfolio to reduced rates of, or exemptions from, taxes
on such income. It is impossible to determine the effective rate of foreign
tax in advance since the future mix of the Portfolio's investments in
various countries is not known.
Distributions by the FUND that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the
extent of (and in reduction of) the shareholders' tax basis in their
shares; any excess will be treated as gain from a sale of the shares, as
discussed more fully below.
Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the
FUND (or of another fund). In addition, if a shareholder's cost for his
shares already reflects undistributed (realized or unrealized) income or
gain, a subsequent distribution of such amounts will be taxable to the
shareholder in the manner described above, although economically it
constitutes a return of capital.
Ordinarily, shareholders are required to take distributions into account in
the year in which they are made. However, dividends declared by the FUND in
October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed
to have been received by the shareholders (and made by the FUND) on
December 31 of such year if such dividends are actually paid in January of
the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made)
during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of dividends and the proceeds of redemption paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all to the FUND, (2) who is subject to backup
withholding pursuant to a notice from the IRS for failure to report
interest or dividend income properly, or (3) who has not otherwise
certified to the FUND that it is not subject to backup withholding.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of his
shares in an amount equal to the difference between the amount realized on
the shares and his adjusted tax basis in them. All or a portion of any loss
so recognized may be disallowed if the shareholder purchases other shares
of the FUND within 30 days before or after the disposition. In general,
gain or loss arising from a sale or redemption of FUND shares will
constitute capital gain or loss, and will be long-term capital gain or loss
if the shares were held longer than one year. However, a capital loss
arising from a disposition of shares held for six months or less will be
treated as a long-term capital loss to the extent of any amount of capital
gain dividends received on the shares. For this purpose, the special
holding period rules of Code Section 246(c)(3) and (4) (alluded to above in
connection with the dividends-received deduction for corporations) will
generally apply. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of noncorporate taxpayers, $3,000
of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income received
from the FUND is "effectively connected" with a U.S. trade or business
carried on by the shareholder.
If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to
U.S. withholding tax at the rate of 30% (or a lower treaty rate, if one
applies) of the gross amount of the dividend. Such a shareholder would
generally be exempt from U.S. federal income tax on gains realized on a
sale of FUND shares and capital gain dividends.
If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and gain realized upon the sale of FUND
shares will be subject to U.S. federal income tax at the rates applicable
to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that
are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless they furnish the FUND with proper notification of their exempt
status.
The tax consequences to foreign shareholders entitled to claim the benefits
of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the FUND,
including the applicability of any foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations as in effect on the date of
this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly alter the
conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to
the consequences of their investing in the FUND in light of their
particular circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their birthdates, addresses,
principal occupations, and present positions, including any affiliation
with Virtus Capital Management, Inc., Signet Trust Company, Federated
Investors, Federated Securities Corp., Federated Shareholder Services
Company, and Federated Administrative Services or the Funds (as defined
below).
John F. Donahue(1)(2)
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: JULY 28, 1924 CHAIRMAN AND TRUSTEE OF THE FUND; 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 Fund.
Thomas G. Bigley
28th Floor
One Oxford Centre
Pittsburgh, PA
BIRTHDATE: FEBRUARY 3, 1934 TRUSTEE OF THE FUND; 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.(3)
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
BIRTHDATE: JUNE 23, 1937 TRUSTEE OF THE FUND; 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(3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA
BIRTHDATE: JULY 4, 1918 TRUSTEE OF THE FUND; 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(3)
571 Hayward Mill Road
Concord, MA
BIRTHDATE: MAY 18, 1922 TRUSTEE OF THE FUND; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; Director, Trustee, or Managing General
Partner of the Funds.
Lawrence D. Ellis, M.D.(1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
BIRTHDATE: OCTOBER 11, 1932 TRUSTEE OF THE FUND; 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.(3)
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
BIRTHDATE: JUNE 18, 1924 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Miller , Ament, Henny & Kochuba; 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(1)
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: OCTOBER 22, 1930 PRESIDENT, TRUSTEE AND TREASURER OF THE FUND;
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; 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 OF THE FUND; 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
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
BIRTHDATE: OCTOBER 6, 1926 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Miller, Ament, Henny & Kochuba; 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 OF THE FUND; President, Law
Professor, Duquesne University; Consulting Partner, Mollica, Murray and
Hogue; Director, Trustee or Managing Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
BIRTHDATE: SEPTEMBER 14, 1925 TRUSTEE OF THE FUND; 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 OF THE FUND; 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 OF THE FUND;
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
Shareholder Services Company, and Federated Shareholder Services; Director,
Federated Services Company; President or Executive 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 and Trustee of the
Fund.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: OCTOBER 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY OF THE
FUND; Executive Vice President, Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: MAY 17, 1923 VICE PRESIDENT OF THE FUND; 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.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: MAY 22, 1962 VICE PRESIDENT AND ASSISTANT TREASURER OF THE
FUND; Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
(1) This Trustee is deemed to be an `interested person'' of the Trust as
defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations related
to the financial reporting process.
As referred to in the list of Trustees and Officers, `Funds'' includes the
following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; Blanchard Group of Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated 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; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Targeted Duration Trust; Tax-Free Instruments Trust; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.
FUND Ownership
As of October 1, 1996, Officers and Trustees owned less than 1% of the
outstanding shares of the FUND.
To the best knowledge of the FUND, as of October 1, 1996, one shareholder
owned 5% or more of the outstanding shares of the FUND: [To Come]
The Trustees and officers of the Portfolio and their age and principal
occupations for at least the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those
Trustees who are "interested persons" (as defined in the 1940 Act) of the
Portfolio. Unless otherwise indicated below, the address of each officer is
6 St. James Avenue, Suite 900, Boston, Massachusetts 02116.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Fergus Reid, III 64 Chairman and Chief 1984
971 West Road Executive Officer,
New Canaan, CT 06840 Lumelite Corporation,
since September 1985;
Trustee, Morgan
Stanley Portfolios.
Richard E. Ten Haken 62 Former District 1984
4 Barnfield Road Superintendent of
Pittsford, NY 14534 Schools, Monroe No. 2
and Orleans Counties,
New York; Chairman of
the Finance and the
Audit and Accounting
Committees, Member of
the Executive
Committee; Chairman of
the Board and
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
President, New York
State Teachers'
Retirement System.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
William J. Armstrong 54 Vice President and 1987
49 Aspen Way Treasurer, Ingersoll-
Upper Saddle River, NJ Rand Company.
07458
John R.H. Blum 67 Attorney in Private 1984
322 Main Street Practice; formerly a
Lakeville, CT 06039 Partner in the law
firm of Richards,
O'Neil & Allegaert;
Commissioner of
Agriculture - State of
Connecticut, 1992-
1995.
*Joseph J. Harkins 65 Retired; Commercial 1990
257 Plantation Circle Sector Executive and
South Executive Vice
Ponte Vedra Beach, FL President of The Chase
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
32082 Manhattan Bank, N.A.
from 1985 through
1989. He has been
employed by Chase in
numerous capacities
and offices since
1954. Director of
Blessings Corporation,
Jefferson Insurance
Company of New York,
Monticello Insurance
Company and National.
*H. Richard 60 Consultant, Republic 1992
Vartabedian Bank of New York;
P.O. Box 296 formerly, Senior
Beach Road Investment Officer,
Hendrick's Head Division Executive of
Southport, ME 04576 the Investment
Management Division of
The Chase Manhattan
Bank, N.A., 1980
through 1991.
Stuart W. Cragin, Jr. 63 Retired; formerly 1992
108 Valley Road President, Fairfield
Cos Cob, CT 06807 Testing Laboratory,
Inc. He has previously
served in a variety of
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
marketing,
manufacturing and
general management
positions with Union
Camp Corp., Trinity
Paper & Plastics
Corp., and Conover
Industries.
Irving L. Thode 65 Retired; Vice 1992
80 Perkins Road President of Quotron
Greenwich, CT 06830 Systems. He has
previously served in a
number of executive
positions with Control
Data Corp., including
President of its Latin
American Operations,
and General Manager of
its Data Services
business.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
W. Perry Neff 69 Independent Financial 1989
Trustee Consultant; Director
RR 1 Box 102 of North America Life
Weston, VT 05181 Assurance Co.,
Petroleum & Resources
Corp. and The Adams
Express Co.; Formerly
Director and Chairman
of The Hanover Funds,
Inc.; Formerly
Director, Chairman and
President of The
Hanvover Investment
Funds Inc.
Roland R. Eppley, Jr. 64 Retired; formerly 1988
Trustee President and Chief
105 Coventry Place Exective Officer,
Palm Beach Gardens, FL Eastern States
33418 Bankcard Assocation
Inc. (1971-1988);
Director, Janel
Hydraulics, Inc.;
Formerly, Director of
The Hanover Funds,
Inc.
W.D. MacCallan 69 Director of The Adams 1989
Trustee Express Co. and
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
624 East 45th Street Petroleum & Resources
Savannah, GA 31405 Corp.; formerly
Chairman of the Board
and Chief Executive
Officer of The Adams
Express Co. and
Petroleum & Resources
Corp.; formerly
Director of The
Hanover Fund, Inc. and
The Hanover Investment
Funds, Inc.
*Asterisks indicate those Trustees that are ``nterested persons'' (as
defined in the 1940 Act). Mr. Reid is not an interested person of the
Trust's investment advisers or principal underwriter but may be deemed an
interested person of the Trust solely by reason of being an officer of the
Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Blum,
Cragin, Thode, Armstrong, Harkins, Reid and Vartabedian. The function of
the Audit Committee is to recommend independent auditors and monitor
accounting and financial matters.
The Board of Trustees of the Trust has established an Investment Committee.
The members of the Investment Committee are Messrs. Vartabedian (Chairman)
and Reid, as well as Leonard M. Spalding. President of Vista Capital
Management. The function of the Investment Committee is to review the
investment management process of the Trust.
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not
an affiliate of the Portfolio Adviser is compensated for his or her
services according to a fee schedule which recognizes the fact that each
Trustee also serves as a Trustee of other investment companies advised by
the Portfolio Adviser. Each Trustee receives a fee, allocated among all
investment companies for which the Trustee serves, which consists of an
annual retainer component and a meeting fee component. Effective August 21,
1995, each Trustee receives a quarterly retainer of $12,000 and an
additional per meeting fee of $1,500. Prior to August 21, 1995, the
quarterly retainer was $9,000 and the per-meeting fee was $1,000. The
Chairman of the Trustees and the Chairman of the Investment Committee each
receive a 50% increment over regular Trustee total compensation for serving
in such capacities for all the investment companies advised by the
Portfolio Adviser.
Officers and Trustees of the FUNDS Compensation
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUNDS COMPENSATION FROM PAID TO TRUSTEES
THE FUNDS(1) FROM THE FUNDS AND
FUND COMPLEX*
John F. Donahue, $ $ for the Fund
Chairman and Trustee Complex
Thomas G. Bigley, $ $ for the Fund
Trustee Complex
John T. Conroy, Jr., $ $ for the Fund
Trustee Complex
William J. Copeland, $ $ for the Fund
Trustee Complex
James E. Dowd, $ $ for the Fund
Trustee Complex
Lawrence D. Ellis, $ $ for the Fund
M.D., Trustee Complex
Edward L. Flaherty, $ $ for the Fund
Jr., Trustee Complex
Edward C. Gonzales, $ $ for the Fund
President, Trustee Complex
and Treasurer
Peter E. Madden, $ $ for the Fund
Trustee Complex
Gregory F. Meyer, $ $ for the Fund
Trustee Complex
John E. Murray, Jr., $ $ for the Fund
J.D., S.J.D., Complex
Trustee
Wesley W. Posvar, $ $ for the Fund
Trustee Complex
Marjorie P. Smuts, $ $ for the Fund
Trustee Complex
(1) The aggregate compensation is provided for the Funds which was
comprised of eleven portfolios on
December 31, 1996.
*The total compensation is provided for the Fund Complex, which consists of
Blanchard Precious Metals Fund, Inc., The Virtus Funds and the Trust for
the calendar year ended December 31, 1996.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1996 for each Trustee of the
Portfolio:
Capital Pension or Total
Growth Retirement Compensat
Portfolio Benefits ion
(1) Accrued from
as Fund "Fund
Expenses Complex"(
2)
Fergus Reid, $ $
III, Trustee
Richard E. Ten
Haken, Trustee
William J.
Armstrong,
Trustee
John R.H.
Blum, Trustee
Joseph J.
Harkins,
Trustee
H. Richard
Vartabedian,
Trustee
Stuart W.
Cragin, Jr.,
Trustee
Irving L.
Thode, Trustee
W. Perry Neff
Trustee
Roland R.
Eppley, Jr.
Trustee
W. D.
MacCallan
Trustee
(1) Prior to January 1, 1996, the Portfolio did not pay the Trustees
expenses directly. Rather, the Trustees payments accrued against the
underlying Fund, the Vista Growth and Income Fund. Data reflects Trustee
compensation as if the Portfolio had paid such expenses directly. As of
January 1, 1996, Trustee compensation will be paid by the Portfolio
directly. Mr. Vartabedian received a 50% increment over regular Trustee
compensation for serving as Chairman of the Portfolio. This incremental
amount was paid by the Portfolio directly.
(2) Data reflects total compensation earned during the period January 1,
1996 to December 31, 1996 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Portfolio Adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is
not an employee of any of the Portfolios, the Portfolio Adviser,
Administrator or distributor or any of their affiliates) may be entitled to
certain benefits upon retirement from the Board of Trustees. Pursuant to
the Plan, the normal retirement date is the date on which the eligible
Trustee has attained age 65 and has completed at least five years of
continuous service with one or more of the investment companies advised by
the Portfolio Adviser (collectively, the "Covered Portfolios"). Each
Eligible Trustee is entitled to receive from the Covered Portfolios an
annual benefit commencing on the first day of the calendar quarter
coincident with or following his date of retirement equal to 10% of the
highest annual compensation received from the Covered Portfolios multiplied
by the number of such Trustee's years of service (not in excess of 10
years) completed with respect to any of the Covered Portfolios. Such
benefit is payable to each eligible Trustee in monthly installments for the
life of the Trustee.
Set forth in the table below are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years
of service classifications. The estimated credited years of service for
Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian, Cragin,
Thode, Neff, Epply and MacCallan, are 11, 11, 8, 11, 3, 3, 3, 6, 7 and 6,
respectively.
Years of
Service Highest Annual Compensation Paid by All Vista
Funds
40,000 45,000 50,000 55,000
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Deferred Compensation Plan
Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to
which each Trustee (who is not an employee of any of the Funds, the
Portfolio Adviser, Administrator or Distributor or any of their affiliates)
may enter into agreements with the Funds whereby payment of the Trustees'
fees are deferred until the payment date elected by the Trustee (or the
Trustee's termination of service). The deferred amounts are deemed invested
in shares of the Fund on whose Board the Trustee sits. The deferred amounts
are paid out in a lump sum or over a period of several years as elected by
the Trustee at the time of deferral. If a deferring Trustee dies prior to
the distribution of amounts held in the deferral account, the balance of
the deferral account will be distributed to the Trustee's designated
beneficiary in a single lump sum payment as soon as practicable after such
deferring Trustee's death. The following Eligible Trustees have executed a
deferred compensation agreement for the 1996 calendar year: Messrs. Ten
Haken, Thode and Vartabedian.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which is a
division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet
Banking Corporation to restrict the flow of non-public information, FUND
investments are typically made without any knowledge of Signet Banking
Corporation or its affiliates' lending relationships with an issuer.
The manager shall not be liable to the Trust, the FUND, or any shareholder
of the FUND for any losses that may be sustained in the purchase, holding,
or sale of any security or for anything done or omitted by it, except acts
or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
Management Fees
For its services, VCM receives an annual management fee as described in the
Prospectus. For the period October 31, 1995, to October 31, 1996, the
amount paid or accrued by the FUND to VCM was $ , of which was
-------- ----
waived. For the period July 12, 1995, to October 31, 1995, the amount paid
or accrued by the FUND to VCM was $2,415, all of which was waived. For the
period November 1, 1994, to July 11, 1995, the amount paid or accrued by
the FUND to Sheffield Management Corporation was $5,526, all of which was
waived.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the FUND for
the fees set forth in the Prospectus. For the period November 1, 1995 to
October 31, 1996, the amount paid or accrued by the FUND to Federated
Administrative Services was $ .
--------
Transfer Agent & Dividend Disbursing Agent
Federated Shareholder Services Company serves as transfer agent and
dividend disbursing agent for the FUND. The fee paid to the transfer agent
is based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Shareholder Services Company also maintains FUND accounting
records. The fee paid for this service is based upon the level of the
FUND's average net assets for the period plus out-of-pocket expenses.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the FUND pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to
the Investment Company Act of 1940. The Plan provides that the FUND's
Distributor shall act as the Distributor of shares, and it permits the
payment of fees to brokers and dealers for distribution and administrative
services and to administrators for administrative services. The Plan is
designed to (i) stimulate brokers and dealers to provide distribution and
administrative support services to the FUND and its shareholders and (ii)
stimulate administrators to render administrative support services to the
FUND and its shareholders. These services are to be provided by a
representative who has knowledge of the shareholders' particular
circumstances and goals, and include, but are not limited to: providing
office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial
to establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries regarding the
FUND; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Trust reasonably
requests.
Other benefits which the FUND hopes to achieve through the Plan include,
but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders
by having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the FUND in seeking to achieve its
investment objectives. By identifying potential investors in shares whose
needs are served by the FUND's objectives, and properly servicing these
accounts, the FUND may be able to curb sharp fluctuations in rates of
redemptions and sales.
For the fiscal year ended October 31, 1996, the FUND paid $ in
--------
distribution services fees.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of the
type commonly known as a "Massachusetts business trust". Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
The FUND's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations for the FUND and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the FUND or the Trustees. The
Declaration of Trust provides for indemnification out of the FUND property
of any shareholder held personally liable for the obligations of the FUND.
The Declaration of Trust also provides that the FUND shall, upon request,
assume the defense of any claim made against any shareholders for any act
or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the FUND itself would be
unable to meet its obligations. VCM believes that, in view of the above,
the risk of personal liability to shareholders is remote. The Declaration
of Trust further provides that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend
rights and the right of redemption are described in the Prospectus. Shares
are fully paid and nonassessable, except as set forth under "Shareholder
and Trustee Liability" above. The shareholders have certain rights, as set
forth in the Declaration of Trust, to call a meeting for any purpose,
including the purpose of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another open-end
management company if approved by the vote of the holders of a majority of
the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The
assets of the FUND received for the issue or sale of the shares of the FUND
and all income earnings and the proceeds thereof, subject only to the
rights of creditors, are specially allocated to the FUND, and constitute
the underlying assets of the FUND.
SHAREHOLDER REPORTS
Shareholders received an Annual Report containing financial statements
audited by the FUND's independent accountants for the fiscal year ended
October 31, 1996. The Financial Statements for the fiscal year ended
October 31, 1996 are incorporated herein by reference to the Annual Report
of the FUND filed with the U.S. Securities and Exchange Commission (File
Nos. 33-3165 and 811-4579). A copy of the Annual Report may be obtained
without charge by contacting the FUND at 1-800-829-3863.
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration, an independent agency of the U.S.
Government. These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by
the U.S. Government.
FNMA BONDS -- are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA INSURED NOTES -- are bonds issued by the Farmers Home
Administration, the U.S. Government and are guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders
such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is either insured by
the Federal Housing Administration or guaranteed by the Veterans
Administration and therefore guaranteed by the U.S. Government. As a
consequence of the fees Paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest
paid on the VA-guaranteed or FHA-insured mortgages underlying the
Certificates. The average life of a GNMA Certificate is likely to be
substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures may result in the return of the greater part of
principal invested far in advance of the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will
vary widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on
GNMA Certificates may vary from their coupon rates for the following
reasons: (i) Certificates may be issued at a premium or discount, rather
than at par; (ii) Certificates may trade in the secondary market at a
premium or discount after issuance; (iii) interest is earned and compounded
monthly which has the effect of raising the effective yield earned on the
Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although
possibly at a lower rate. In addition, prepayment of mortgages included in
the mortgage pool underlying a GNMA Certificate purchased at a premium
could result in a loss to the Portfolio. Due to the large amount of GNMA
Certificates outstanding and active participation in the secondary market
by securities dealers and investors, GNMA Certificates are highly liquid
instruments. Prices of GNMA Certificates are readily available from
securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the
pool of mortgages backing each Certificate. If agency securities are
purchased at a premium above principal, the premium is not guaranteed by
the issuing agency and a decline in the market value to par may result in a
loss of the premium, which may be particularly likely in the event of a
prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC, and FNMA CERTIFICATES -- are mortgage-backed bonds issued by
the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S.
Government.
GSA PARTICIPATION CERTIFICATES -- are participation certificates
issued by the General Services Administration of the U.S. Government and
are guaranteed by the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development
Act of 1970, the payment of which is guaranteed by the U.S. Government.
PUBLIC HOUSING BONDS -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department
of Housing and Urban Development of the U.S. Government, the payment of
which is secured by the U.S. Government.
PENN CENTRAL TRANSPORTATION CERTIFICATES -- are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds
issued by the Washington Metropolitan Area Transit Authority some of the
bonds issued prior to 1993 are guaranteed by the U.S. Government.
FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home
Loan Mortgage Corporation. These bonds are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued
by the Federal Home Loan Bank System and are not guaranteed by the U.S.
Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS --
are notes and bonds issued by the Student Loan Marketing Association and
are not guaranteed by the U.S. Government.
D.C. ARMORY BOARD BONDS -- are bonds issued by the District of
Columbia Armory Board and are guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial
interest and participation certificates issued and guaranteed by the
Export-Import Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of
the U.S. Government, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment, and may not
be able to assert a claim against the U.S. Government itself in the event
the agency or instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with
respect to bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. 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
qualities and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during 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 a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time
may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca--Bonds which are rated "Ca" represent obligations which are
speculative in high degree.
Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2", and "3" to certain of
its rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the
issue ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal
and pay interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from
"AAA" issues only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay
principal and pay interest for bonds in this category than for higher rated
categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being
paid.
D--Bonds rated "D" are in default. The "D" category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired unless S&P believes that
such payments will be made during such grace period. The "D" rating is
also used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1--Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt
obligations. "Prime-1" repayment ability will often be evidenced by many
of the following characteristics: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and
ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt 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
alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3"
have an acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Not Prime--Issuers rated "Not Prime" do not fall within any of the
Prime rating categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days. Ratings are graded in several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The four categories are
as follows:
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".
A-3--Issues carrying this designation have adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the bigger
designations.
B--Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
Fitch Bond Ratings
AAA--Bonds rated AAA by Fitch are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issues is generally rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings.
BBB--Bonds rated BBB by Fitch are 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 consequences 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.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs,
however, are not used in the AAA category.
Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, although near-term
adverse changes could cause these securities to be rated below investment
grade.
LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest.
However, such bonds may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade bonds.
After purchase by the Portfolio, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the
Portfolio. However, the Portfolio's investment manager will consider such
event in its determination of whether the Portfolio should continue to hold
the security. To the extent the ratings given by Moody's, S&P or Fitch may
change as a result of changes in such organizations or their rating
systems, the Portfolio will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained the
Prospectus and statement of additional information.
G01386-08 (10/96)
093265403
STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GROWTH & INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction with
the current prospectus dated February , 1997 (the `Prospectus''),
--
pursuant to which the Blanchard Growth & Income Fund (the `FUND'') is
offered. Please retain this document for future reference.
To obtain a copy of the Prospectus or a paper copy of this Statement of
Additional Information, if you have received your Statement of Additional
Information electronically, please call the FUND at 1-800-829-3863.
TABLE OF CONTENTS Page
General Information and History 1
Investment Objectives, Policies and Restrictions 1
Portfolio Transactions 13
Computation of Net Asset Value 15
Performance Information 16
Additional Purchase and Redemption Information 17
Tax Matters 17
The Management of the FUND 22
Management Services 32
Administrative Services 33
Distribution Plan 33
Description of the FUND 34
Shareholder Reports 34
Appendix A A-1
Appendix B A-3
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank
Distributor
Federated Securities Corp.
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Price Waterhouse LLP Dated: February , 1997
---
FEDERATED SECURITIES CORP.
GENERAL INFORMATION AND HISTORY
As described in the Blanchard Growth & Income Fund's (the `FUND'')
Prospectus, the FUND is a non-diversified series of Blanchard Funds, a
Massachusetts business trust that was organized under the name `Blanchard
Strategic Growth Fund''(the ``Trust''). The trustees of the Trust approved
the change in the name of the Trust on December 4, 1990.
Effective March 31, 1996, the merger of The Chase Manhattan
Corporation with and into Chemical Banking Corporation was consummated and
Chemical Banking Corporation thereupon changed its name to The Chase
Manhattan Corporation. The Chase Manhattan Corporation is now the parent of
The Chase Manhattan Bank, the adviser to the Growth & Income Portfolio (the
`Portfolio'').
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The FUND seeks its investment objectives by investing 100% of its net
assets in the Growth & Income Portfolio (the `Portfolio''). The Portfolio
has investment objectives identical to the FUND and invests in accordance
with investment policies and restrictions identical to those of the FUND.
The investment objectives of the FUND and the Portfolio may not be changed
except by a majority vote of shareholders.
The investment policies of the FUND and the Portfolio, as described below,
are not fundamental and may be changed without shareholder approval.
Investment Policies
The Prospectus sets forth the investment objective and various investment
policies of the Portfolio. This Statement of Additional Information
supplements and should be read in conjunction with the related sections of
the Prospectus. For descriptions of the securities ratings of Moody's
Investors Service, Inc. (`Moody's''), Standard & Poor's Ratings Group
(`Standard & Poor's'') and Fitch Investors Service, Inc. (``Fitch''), see
Appendix B.
U.S. GOVERNMENT SECURITIES - U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to
ten years) and U.S. Treasury bonds (generally maturities of greater than
ten years); and (2) obligations issued or guaranteed by U.S. Government
agencies and instrumentalities which are supported by any of the following:
(a) the full faith and credit of the U.S. Treasury, (b) the right of the
issuer to borrow any amount listed to a specific line of credit from the
U.S. Treasury, (c) discretionary authority of the U.S. Government to
purchase certain obligations of the U.S. Government agency or
instrumentality or (d) the credit of the agency or instrumentality.
Agencies and instrumentalities of the U.S. Government include but are not
limited to: Federal Land Banks, Federal Financing Banks, Banks for
Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks, Federal
Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise
established or sponsored by the U.S. Government. Certain U.S. Government
Securities, including U.S. Treasury bills, notes and bonds, Government
National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of
the United States. Other U.S. Government Securities are issued or
guaranteed by federal agencies or government sponsored enterprises and are
not supported by the full faith and credit of the United States. These
securities include obligations that are supported by the right of the
issuer to borrow from the U.S. Treasury, such as obligations of the Federal
Home Loan Banks, and obligations that are supported by the creditworthiness
of the particular instrumentality, such as obligations of the Federal
National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small
Business Administration, Federal Aviation Administration, Department of
Defense, Bureau of Indian Affairs and Private Export Funding Corporation,
which often provide higher yields than are available from the more common
types of government-backed instruments. However, such specialized
instruments may only be available from a few sources, in limited amounts,
or only in very large denominations; they may also require specialized
capability in portfolio servicing and in legal matters related to
government guarantees. While they may frequently offer attractive yields,
the limited-activity markets of many of these securities means that, if the
Portfolio were required to liquidate any of them, it might not be able to
do so advantageously; accordingly, the Portfolio investing in such
securities normally to hold such securities to maturity or pursuant to
repurchase agreements, and would treat such securities (including
repurchase agreements maturing in more than seven days) as illiquid for
purposes of its limitation on investment in illiquid securities.
BANK OBLIGATIONS - Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at
the time of purchase in excess of $1 billion and the deposits of which are
insured by either the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation, and foreign
banks (including their U.S. branches) having total assets in excess of $10
billion (or the equivalent in other currencies), and such other U.S. and
foreign commercial banks which are judged by the advisers to meet
comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or
purchased on a discount basis. A bankers' acceptance is a short-term draft
drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its
face amount on the maturity date. Fixed time deposits are obligations of
branches of United States banks or foreign banks which are payable at a
stated maturity date and bear a fixed rate of interest. Although fixed
time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third
party. Fixed time deposits subject to withdrawal penalties and with
respect to which the Portfolio cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations
under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations. Bank
obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by
government regulation. Investors should also be aware that securities of
foreign banks and foreign branches of United States banks may involve
foreign investment risks in addition to those relating to domestic bank
obligations.
DEPOSITARY RECEIPTS - The Portfolio will limit its investment in Depositary
Receipts not sponsored by the issuer of the underlying security to no more
than 5% of the value of its net assets (at the time of investment). A
purchaser of an unsponsored Depositary Receipt may not have unlimited
voting rights and may not receive as much information about the issuer of
the underlying securities as with a sponsored Depositary Receipt.
ECU OBLIGATIONS - The specific amounts of currencies comprising the ECU may
be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies. The
Trustees do not believe that such adjustments will adversely affect holders
of ECU-denominated securities or the marketability of such securities.
SUPRANATIONAL OBLIGATIONS - Supranational organizations, include
organizations such as The World Bank, which was chartered to finance
development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative
economic activities; the European Coal and Steel Community, which is an
economic union of various European nations steel and coal industries; and
the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical
assistance to member nations of the Asian and Pacific regions.
CORPORATE REORGANIZATIONS - In general, securities that are the subject of
a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or
proposal. The increased market price of these securities may also discount
what the stated or appraised value of the security would be if the
contemplated action were approved or consummated. These investments may be
advantageous when the discount significantly overstates the risk of the
contingencies involved; significantly undervalues the securities, assets or
cash to be received by shareholders of the prospective portfolio company as
a result of the contemplated transaction; or fails adequately to recognize
the possibility that the offer or proposal may be replaced or superseded by
an offer or proposal of greater value. The evaluation of these
contingencies requires unusually broad knowledge and experience on the part
of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as
a result of the contemplated transaction, but also the financial resources
and business motivation of the offeror as well as the dynamics of the
business climate when the offer or proposal is in progress. Investments in
reorganization securities may tend to increase the turnover ratio of the
Portfolio and increase its brokerage and other transaction expenses.
WARRANTS AND RIGHTS - Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their
prices do not necessarily move parallel to the prices of the underlying
securities. Rights are similar to warrants but normally have a shorter
duration and are distributed directly by the issuer to shareholders.
Rights and warrants have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
COMMERCIAL PAPER - Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note
(which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
REPURCHASE AGREEMENTS - The Portfolio will enter into repurchase agreements
only with member banks of the Federal Reserve System and securities dealers
believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an underlying debt
instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase the instrument and the
Portfolio to resell the instrument at a fixed price and time, thereby
determining the yield during the Portfolio's holding period. This procedure
results in a fixed rate of return insulated from market fluctuations during
such period. A repurchase agreement is subject to the risk that the seller
may fail to repurchase the security. Repurchase agreements are considered
under the 1940 Act to be loans collateralized by the underlying securities.
All repurchase agreements entered into by the Portfolio will be fully
collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to the amount of
the loan, including the accrued interest thereon, and the Portfolio or its
custodian or sub-custodian will have possession of the collateral, which
the Board of Trustees believes will give it a valid, perfected security
interest in the collateral. Whether a repurchase agreement is the purchase
and sale of a security or a collateralized loan has not been conclusively
established. This might become an issue in the event of the bankruptcy of
the other party to the transaction. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Portfolio may suffer time delays and incur costs in
connection with the disposition of the collateral. The Board of Trustees
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by the Portfolio. Repurchase agreements maturing in more
than seven days are treated as illiquid for purposes of the Portfolio's
restrictions on purchases of illiquid securities. Repurchase agreements are
also subject to the risks described below with respect to stand-by
commitments.
FORWARD COMMITMENTS - In order to invest the Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased. When a commitment to purchase a
security on a forward commitment basis is made, procedures are established
consistent with the General Statement of Policy of the Securities and
Exchange Commission concerning such purchases. Since that policy currently
recommends that an amount of the Portfolio's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the
commitment, a separate account of the Portfolio consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the
Portfolio's commitments securities will be established at the Portfolio's
custodian bank. For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at
market value. If the market value of such securities declines, additional
cash, cash equivalents or highly liquid securities will be placed in the
account daily so that the value of the account will equal the amount of
such commitments by the Portfolio.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis
may involve more risk than other types of purchases. Securities purchased
on a forward commitment basis and the securities held in the Portfolio's
portfolio are subject to changes in value based upon the public's
perception of the issuer and changes, real or anticipated, in the level of
interest rates. Purchasing securities on a forward commitment basis can
involve the risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. On the settlement date of the forward commitment
transaction, the Portfolio will meet its obligations from then available
cash flow, sale of securities held in the separate account, sale of other
securities or, although it would not normally expect to do so, from sale of
the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations). The sale of
securities to meet such obligations may result in the realization of
capital gains or losses.
To the extent the Portfolio engages in forward commitment transactions, it
will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from
the trade date.
REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve the
sale of securities held by the Portfolio with an agreement to repurchase
the securities at an agreed upon price and date. The repurchase price is
generally equal to the original sales price plus interest. Reverse
repurchase agreements are usually for seven days or less and cannot be
repaid prior to their expiration dates. Reverse repurchase agreements
involve the risk that the market value of the portfolio securities
transferred may decline below the price at which the Portfolio is obliged
to purchase the securities.
STRIPPED OBLIGATIONS - The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years
are eligible to be traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under
the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The
interest component of STRIPS may be more volatile than that of United
States Treasury bills with comparable maturities.
ILLIQUID SECURITIES - For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in
accordance with procedures established by the Board of Trustees, certain
investments in restricted securities for which there may be a secondary
market of qualified institutional buyers as contemplated by Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act") and
commercial obligations issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act ("Section 4(2) paper"). Rule 144A provides an exemption
from the registration requirements of the Securities Act for the resale of
certain restricted securities to qualified institutional buyers. Section
4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale of Section 4(2) paper
by the purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid
market for Rule 144A securities or Section 4(2) paper will develop or be
maintained. The Trustees have adopted policies and procedures for the
purpose of determining whether securities that are eligible for resale
under Rule 144A and Section 4(2) paper are liquid or illiquid for purposes
of the limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Trustees have delegated to the advisers the
determination as to whether a particular instrument is liquid or illiquid,
requiring that consideration be given to, among other things, the frequency
of trades and quotes for the security, the number of dealers willing to
sell the security and the number of potential purchasers, dealer
undertakings to make a market in the security, the nature of the security
and the time needed to dispose of the security. The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A
securities and Section 4(2) paper.
STAND-BY COMMITMENTS - In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date, and a stand-by commitment entitles the
Portfolio to same-day settlement and to receive an exercise price equal to
the amortized cost of the underlying security plus accrued interest, if
any, at the time of exercise. Stand-by commitments are subject to certain
risks, which include the inability of the issuer of the commitment to pay
for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by the Portfolio, and that the maturity of
the underlying security will generally be different from that of the
commitment.
SECURITIES LOANS - To the extent specified in the prospectus, the Portfolio
is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans
of portfolio securities may not exceed 30% of the value of the Portfolio's
total assets. In connection with such loans, the Portfolio will receive
collateral consisting of cash, cash equivalents, U.S. Government securities
or irrevocable letters of credit issued by financial institutions. Such
collateral will be maintained at all times in an amount equal to at least
102% of the current market value plus accrued interest of the securities
loaned. The Portfolio can increase its income through the investment of
such collateral. The Portfolio continues to be entitled to the interest
payable or any dividend-equivalent payments received on a loaned security
and, in addition, to receive interest on the amount of the loan. However,
the receipt of any dividend-equivalent payments by the Portfolio on a
loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time
upon specified notice. The Portfolio might experience risk of loss if the
institutions with which it has engaged in portfolio loan transactions
breach their agreements with the Portfolio. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
experience financial difficulty. Loans will be made only to firms deemed
by the advisers to be of good standing and will not be made unless, in the
judgment of the advisers, the consideration to be earned from such loans
justifies the risk.
Additional Policies Regarding Derivatives and Related Transactions
Introduction
As explained more fully below, the Portfolio may employ derivative and
related instruments as tools in the management of portfolio assets. Put
briefly, a `derivative'' instrument may be considered a security or other
instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts,
structured notes and various over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or related instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is
quicker, easier and less expensive to invest in derivatives. Lastly, to
speculate or enhance portfolio performance. When used prudently,
derivatives can offer several benefits, including easier and more effective
hedging, lower transaction costs, quicker investment and more profitable
use of portfolio assets. However, derivatives also have the potential to
significantly magnify risks, thereby leading to potentially greater losses
for the Portfolio.
The Portfolio may invest its assets in derivative and related instruments
subject only to the Portfolio's investment objective and policies and the
requirement that the Portfolio maintain segregated accounts consisting of
liquid assets, such as cash, U.S. Government securities, or other high-
grade debt obligations (or, as permitted by applicable regulation, enter
into certain offsetting positions) to cover its obligations under such
instruments with respect to positions where there is no underlying
portfolio asset so as to avoid leveraging the Portfolio.
The value of some derivative or related instruments in which the Portfolio
may invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of a Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers
inaccurately forecast such factors and have taken positions in derivative
or similar instruments contrary to prevailing market trends, the Portfolio
could be exposed to the risk of a loss. The Portfolio might not employ any
or all of the strategies described herein, and no assurance can be given
that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies and
related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement
the Portfolio's current prospectuses as well as provide useful information
to prospective investors.
Risk Factors
As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the
use of derivatives and related instruments:
There can be no guarantee that there will be a correlation between price
movements in a hedging vehicle and in the portfolio assets being hedged. As
incorrect correlation could result in a loss on both the hedged assets in
the Portfolio and the hedging vehicle so that the portfolio return might
have been greater had hedging not been attempted. This risk is particularly
acute in the case of `cross-hedges'' between currencies.
The advisers may incorrectly forecast interest rates, market values or
other economic factors in utilizing a derivatives strategy. In such a case,
the Portfolio may have been in a better position had it not entered into
such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains.
Strategies not involving hedging may increase the risk to the Portfolio.
Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Portfolio than hedging
strategies using the same instruments.
There can be no assurance that a liquid market will exist at a time when
the Portfolio seeks to close out an option, futures contract or other
derivative or related position. Many exchanges and boards of trade limit
the amount of fluctuation permitted in option or futures contract prices
during a single day; once the daily limit has been reached on particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain instruments are relatively new and without a significant
trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Finally, over-the-
counter instruments typically do not have a liquid market. Lack of a liquid
market for any reason may prevent the Portfolio from liquidating an
unfavorable position.
Activities of large traders in the futures and securities markets involving
arbitrage, `program trading,'' and other investment strategies may cause
price distortions in these markets.
In certain instances, particularly those involving over-the-counter
transactions or forward contracts, there is a greater potential that a
counterparty or broker may default or be unable to perform on its
commitments. In the event of such a default, the Portfolio may experience a
loss.
In transactions involving currencies, the value of the currency underlying
an instrument may fluctuate due to many factors, including economic
conditions, interest rates, governmental policies and market forces.
Specific Uses and Strategies
Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.
OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on:
securities;
securities indexes; and
debt instruments.
Although in most cases these options will be exchange-traded, the Portfolio
may also purchase, sell or exercise over-the-counter options. Over-the-
counter options differ from exchange-traded options in that they are two-
party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other
party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market
value. One purpose of purchasing call options is to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. The Portfolio may also use combinations of options to minimize
costs, gain exposure to markets or take advantage of price disparities or
market movements. For example, the Portfolio may sell put or call options
it has previously purchased or purchase put or call options it has
previously sold. These transactions may result in a net gain or loss
depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to
earn the related premium from such transactions. Prior to exercise or
expiration, an option may be closed out by an offsetting purchase or sale
of a related option. The Portfolio will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period,
the Portfolio writing a covered call (i.e., where the underlying securities
are held by the Portfolio) has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but has retained the risk of loss
should the price of the underlying securities decline. The writer of an
option has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order
to terminate its obligation under the option and must deliver the
underlying securities at the exercise price.
If a put or call option purchased by the Portfolio is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in
the case of a call, remains less than or equal to the exercise price, the
Portfolio will lose its entire investment in the option. Also, where a put
or call option on a particular security is purchased to hedge against price
movements in a related security, the price of the put or call option may
move more or less than the price of the related security. There can be no
assurance that a liquid market will exist when the Portfolio seeks to close
out an option position. Furthermore, if trading restrictions or suspensions
are imposed on the options markets, the Portfolio may be unable to close
out a position.
Futures Contracts and Options on Futures Contracts. The Portfolio may
purchase or sell:
interest-rate futures contracts;
futures contracts on specified instruments or indices; and
options on these futures contracts (`futures options'').
The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by
the U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For
example, the Portfolio may sell a futures contract -- or buy a futures
option -- to protect against a decline in value, or reduce the duration, of
portfolio holdings. Likewise, these instruments may be used where the
Portfolio intends to acquire an instrument or enter into a position. For
example, the Portfolio may purchase a futures contract -- or buy a futures
option -- to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired
in the future. Futures options may also be written to earn the related
premiums.
When writing or purchasing options, the Portfolio may simultaneously enter
into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of
price disparities or market movements. Such strategies may entail
additional risks in certain instances. The Portfolio may engage in cross-
hedging by purchasing or selling futures or options on a security or
currency different from the security or currency position being hedged to
take advantage of relationships between the two securities or currencies.
Investments in futures contracts and options thereon involve risks related
to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options or futures
contracts which are traded on a U.S. or foreign exchange or board of trade,
or similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. The Portfolio may use foreign currency and interest-rate
forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or perceived changes in interest
rates and other complex factors, as seen from an international perspective.
The Portfolio that may invest in securities denominated in foreign
currencies may, in addition to buying and selling foreign currency futures
contracts and options on foreign currencies and foreign currency futures,
enter into forward foreign currency exchange contracts to reduce the risks
or otherwise take a position in anticipation of changes in foreign exchange
rates. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be a
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
forward foreign currency contract, the Portfolio `locks in'' the exchange
rate between the currency it will deliver and the currency it will receive
for the duration of the contract. As a result, the Portfolio reduces its
exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will
exchange into. The effect on the value of the Portfolio is similar to
selling securities denominated in one currency and purchasing securities
denominated in another. Transactions that use two foreign currencies are
sometimes referred to as `cross-hedges.''
The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies.
The Portfolio may also enter into these contracts for purposes of
increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may also use forward contracts to hedge against changes in
interest-rates, increase exposure to a market or otherwise take advantage
of such changes. An interest-rate forward contract involves the obligation
to purchase or sell a specific debt instrument at a fixed price at a future
date.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolio may employ currency
and interest rate management techniques, including transactions in options
(including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and
currency and interest rate swaps. The aggregate amount of the Portfolio's
net currency exposure will not exceed the total net asset value of its
portfolio. However, to the extent that the Portfolio is fully invested
while also maintaining currency positions, it may be exposed to greater
combined risk.
The Portfolio will only enter into interest rate and currency swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency
swaps is limited to the net amount of interest or currency payments that
the Portfolio is contractually obligated to make. If the other party to an
interest rate or currency swap defaults, the Portfolio's risk of loss
consists of the net amount of interest or currency payments that the
Portfolio is contractually entitled to receive. Since interest rate and
currency swaps are individually negotiated, the Portfolio expects to
achieve an acceptable degree of correlation between their portfolio
investments and their interest rate or currency swap positions.
The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert
such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate.
The Portfolio may purchase or sell without limitation as to a percentage of
its assets forward foreign currency exchange contracts when the advisers
anticipate that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present
attractive investment opportunities and are not held by the Portfolio. In
addition, the Portfolio may enter into forward foreign currency exchange
contracts in order to protect against adverse changes in future foreign
currency exchange rates. The Portfolio may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in
the value of securities denominated in a different currency if its advisers
believe that there is a pattern of correlation between the two currencies.
Forward contracts may reduce the potential gain from a positive change in
the relationship between the U.S. Dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. dollar equivalent value of
the prices of or rates of return on the Portfolio's foreign currency
denominated portfolio securities and the use of such techniques will
subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices, and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to the Portfolio's use of cross-hedges, there
can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. The Portfolio will typically
use interest rate swaps to shorten the effective duration of its portfolio.
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, such as
an exchange of fixed rate payments for floating rate payments. Currency
swaps involve the exchange of their respective rights to make or receive
payments in specified currencies.
STRUCTURED PRODUCTS. The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of certain other investments. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, or specified instruments (such as commercial bank
loans) and the issuance by that entity of one or more classes of securities
(`structured products'') backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured products to create securities
with different investment characteristics such as varying maturities,
payment priorities and interest rate provisions, and the extent of the
payments made with respect to structured products is dependent on the
extent of the cash flow on the underlying instruments. The Portfolio may
invest in structured products which represent derived investment positions
based on relationships among different markets or asset classes.
The Portfolio may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked
by a formula to the price of an underlying instrument. Inverse floaters
have coupon rates that vary inversely at a multiple of a designated
floating rate (which typically is determined by reference to an index rate,
but may also be determined through a dutch auction or a remarketing agent
or by reference to another security) (the "reference rate"). As an
example, inverse floaters may constitute a class of CMOs with a coupon rate
that moves inversely to a designated index, such as LIBOR (London Interbank
Offered Rate) or the Cost of Funds Index. Any rise in the reference rate
of an inverse floater (as a consequence of an increase in interest rates)
causes a drop in the coupon rate while any drop in the reference rate of an
inverse floater causes an increase in the coupon rate. A spread trade is
an investment position relating to a difference in the prices or interest
rates of two securities where the value of the investment position is
determined by movements in the difference between the prices or interest
rates, as the case may be, of the respective securities. When the Portfolio
invests in notes linked to the price of an underlying instrument, the price
of the underlying security is determined by a multiple (based on a formula)
of the price of such underlying security. A structured product may be
considered to be leveraged to the extent its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to
greater volatility than an investment directly in the underlying market or
security. Total return on the structured product is derived by linking
return to one or more characteristics of the underlying instrument.
Because certain structured products of the type in which the Portfolio may
invest may involve no credit enhancement, the credit risk of those
structured products generally would be equivalent to that of the underlying
instruments. The Portfolio may invest in a class of structured products
that is either subordinated or unsubordinated to the right of payment of
another class. Subordinated structured products typically have higher
yields and present greater risks than unsubordinated structured products.
Although the Portfolio's purchase of subordinated structured products would
have similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of
the Portfolio's fundamental investment limitation related to borrowing and
leverage.
Certain issuers of structured products may be deemed to be, "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in
private placement transactions and there currently is no action trading
market for structured products. As a result, certain structured products
in which the Portfolio invests may be deemed illiquid and subject to its
limitation on illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or
security. In addition, because structured products are typically sold in
private placement transactions, there currently is no active trading market
for structured products.
Additional Restrictions on the Use of Futures and Option Contracts
The Portfolio is not a "commodity pool" (i.e., a pooled investment vehicle
which trades in commodity futures contracts and options thereon and the
operator of which is registered with the CFTC and futures contracts and
futures options will be purchased, sold or entered into only for bona fide
hedging purposes, provided that the Portfolio may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on
open contracts and options would not exceed 5% of the liquidation value of
the Portfolio's portfolio, provided, further, that, in the case of an
option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation.
When the Portfolio purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian or sub-custodian so that
the amount so segregated, plus the initial deposit and variation margin
held in the account of its broker, will at all times equal the value of the
futures contract, thereby insuring that the use of such futures is
unleveraged.
The Portfolio's ability to engage in the transactions described herein may
be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition
of stock or securities held for less than three months.
Investment Restrictions
The Portfolio has adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares"
of the Portfolio which, as used in this Statement of Additional
Information, means the vote of the lesser of (i) 67% or more of the total
beneficial interests of a Portfolio present at a meeting, if the holders of
more than 50% of the outstanding total beneficial interests of a Portfolio
are present or represented by proxy, or (ii) more than 50% of the
outstanding total beneficial interests of a Portfolio.
The Portfolio may not:
(1) borrow money, except that the Portfolio may borrow money for temporary
or emergency purposes, or by engaging in reverse repurchase transactions,
in an amount not exceeding 33-1/3% of the value of its total assets at the
time when the loan is made and may pledge, mortgage or hypothecate no more
than 1/3 of its net assets to secure such borrowings. Any borrowings
representing more than 5% of the Portfolio's total assets must be repaid
before the Portfolio may make additional investments;
(2) make loans, except that the Portfolio may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, with respect to the
Portfolio's permissible futures and options transactions in U.S. government
securities, positions in such options and futures shall not be subject to
this restriction;
(4) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments but this shall not prevent the
Portfolio from (i) purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchase or sales of foreign
currencies or securities;
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by the Portfolio in securities backed by mortgages on real
estate or in marketable securities of companies engaged in such activities
are not hereby precluded;
(6) issue any senior security (as defined in the 1940 Act), except that
(a) the Portfolio may engage in transactions that may result in the
issuance of senior securities to the extent permitted under applicable
regulations and interpretations of the 1940 Act or an exemptive order; (b)
the Portfolio may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; and (c) subject
to the restrictions set forth above, the Portfolio may borrow money as
authorized by the 1940 Act. For purposes of this restriction, collateral
arrangements with respect to permissible options and futures transactions,
including deposits of initial and variation margin, are not considered to
be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes Real
Estate Limited Partnerships. For purposes of investment restriction (3)
above, industrial development bonds, where the payment of principal and
interest is the ultimate responsibility of companies within the same
industry, are grouped together as an `industry.'' Supranational
organizations are collectively considered to be members of a single
`industry'' for purposes of restriction (3) above.
In addition, the Portfolio is subject to the following non-fundamental
restrictions which may be changed without shareholder approval:
(1) The Portfolio may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of an issuer.
(2) The Portfolio may not make short sales of securities, other than short
sales `against the box,'' or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of the Portfolio.
(3) The Portfolio may not purchase or sell interests in oil, gas or
mineral leases.
(4) The Portfolio may not invest more than 15% of its net assets in
illiquid securities.
(5) The Portfolio may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities, (ii) the writing,
purchasing or selling of puts, calls or combinations thereof with respect
to portfolio securities or (iii) with respect to the Portfolio's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
(6) The Portfolio may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies.
It is the Portfolio's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Portfolio has
been advised that the staff of the Securities and Exchange Commission's
Division of Investment Management does not consider these to be United
States Government securities, as defined under the Investment Company Act
of 1940, as amended.
For purposes of the Portfolio's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private)
ultimately responsible for the payment of the principal of and interest on
the security.
In order to permit the sale of its beneficial interests in certain states,
the Portfolio may make commitments more restrictive than the investment
policies and limitations described above and in the prospectus. Should the
Portfolio determine that any such commitment is no longer in its best
interests, it will revoke the commitment by terminating sales of its
beneficial interests in the state involved. In order to comply with certain
federal and state statutes and regulatory policies, as a matter of
operating policy, the Portfolio will not: (i) invest more than 5% of its
assets in companies which, including predecessors, have a record of less
than three years' continuous operation, (ii) invest in warrants valued at
the lower of cost or market, in excess of 5% of the value of its net
assets, and no more than 2% of such value may be warrants which are not
listed on the New York or American Stock Exchanges, or (iii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or trustee
of the Trust or Portfolio, or is an officer or director of the Adviser, if
after the purchase of the securities of such issuer by the Portfolio one or
more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all
taken at market value.
If a percentage or rating restriction on investment or use of assets set
forth herein or in the Prospectus is adhered to at the time a transaction
is effected, later changes in percentage resulting from any cause other
than actions by the Portfolio will not be considered a violation. If the
value of the Portfolio's holdings of illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees
will consider what actions, if any, are appropriate to maintain adequate
liquidity.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Portfolio Adviser and
who is appointed and supervised by senior officers of the Portfolio
Adviser. Changes in the Portfolio's investments are reviewed by the Board
of Trustees. The Portfolio's portfolio manager may serve other clients of
the Portfolio Adviser in a similar capacity.
The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market
conditions. Because a high turnover rate may increase transaction costs and
the possibility of taxable short-term gains, the Portfolio Adviser will
weigh the added costs of short-term investment against anticipated gains.
The Portfolio Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, high portfolio turnover may
result in high transaction costs to the Portfolio. For the fiscal year
ended October 31, 1996, the portfolio turnover rate for the Portfolio was
%.
- ----
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by
selecting broker-dealers to execute portfolio transactions on behalf of the
Portfolio and other clients of the Portfolio Adviser on the basis of their
professional capability, the value and quality of their brokerage services,
and the level of their brokerage commissions. Debt securities are traded
principally in the over-the-counter market through dealers acting on their
own account and not as brokers. In the case of securities traded in the
over-the-counter market (where no stated commissions are paid but the
prices include a dealer's markup or markdown), the Portfolio Adviser
normally seeks to deal directly with the primary market makers unless, in
its opinion, best execution is available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time
to time, soliciting dealer fees are available to the Portfolio Adviser on
the tender of the Portfolio's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for
the Portfolios by the Portfolio Adviser. At present, no other recapture
arrangements are in effect.
Under Section 28(e) of the Securities Exchange Act of 1934, the Portfolio
Adviser may cause the Portfolio to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for the Portfolio in excess of the
amount other broker-dealers would have charged for the transaction if the
Portfolio Adviser determines in good faith that the greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of either a
particular transaction or the Portfolio Adviser's overall responsibilities
to the Portfolio or to its clients. Not all of such services are useful or
of value in advising the Portfolio.
The term `brokerage and research services'' includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities, furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Portfolio and the Portfolio Adviser's other
clients as part of providing advice as to the availability of securities or
of purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance
and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services (`Research'') to the Portfolio Adviser for
no consideration other than brokerage or underwriting commissions.
Securities may be bought or sold through such broker-dealers, but at
present, unless otherwise directed by the Portfolio, a commission higher
than one charged elsewhere will not be paid to such a firm solely because
it provided Research to the Portfolio Adviser.
The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this
effort are sometimes used by the Portfolio Adviser as a consideration in
the selection of brokers to execute portfolio transactions. However, the
Portfolio Adviser would be unable to quantify the amount of commissions
which are paid as a result of such Research because a substantial number of
transactions are effected through brokers which provide Research but which
are selected principally because of their execution capabilities.
The management fees that the Funds pay to the Portfolio Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and,
conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Portfolio Adviser in carrying out
its obligations to the Portfolio. While such services are not expected to
reduce the expenses of the Portfolio Adviser, the Portfolio Adviser would,
through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its
own staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's
other clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for
more than one client or that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or
more clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When the Portfolio or the Portfolio Adviser's other clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Portfolio is concerned. However, it is believed that the ability of the
Portfolio to participate in volume transactions will generally produce
better executions for the Portfolio.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:15 P.M. New York Time,
on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will
be closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. Occasionally, events which
affect the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New
York Stock Exchange and will therefore not be reflected in the computation
of the FUND's net asset value. If events materially affecting the value of
such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees of the Portfolio.
Portfolio securities which are traded both on an exchange and in the over-
the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. Dollar values at the
mean between the bid and offered quotations of the currencies against U.S.
Dollars as last quoted by any recognized dealer. When portfolio securities
are traded, the valuation will be the last reported sale price on the day
of valuation. (For securities traded on the New York Stock Exchange, the
valuation will be the last reported sales price as of the close of the
Exchange's regular trading session, currently 4:15 P.M. New York Time.) If
there is no such reported sale or the valuation is based on the Over-the-
Counter market, the securities will be valued at the last available bid
price or at the mean between the bid and asked prices, as determined by the
Trustees. As of the date of this Statement of Additional Information, such
securities will be valued by the latter method. Securities for which
reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith
by, or under procedures established by, the Trustees of the Portfolio.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Portfolio will be valued on an amortized cost basis by
the Portfolio, excluding unrealized gains or losses thereon from the
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If
the Portfolio acquires a money market instrument with more than sixty days
remaining to its maturity, it will be valued at current market value until
the 60th day prior to maturity, and will then be valued on an amortized
cost basis based upon the value on such date unless the Trustees of the
Portfolio determine during such 60-day period that this amortized cost
value does not represent fair market value.
All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the
FUND outstanding at the time of the valuation and the result (adjusted to
the nearest cent) is the net asset value per share.
Orders to purchase or redeem Shares of the FUND received by dealers prior
to 4:00 P.M. (Eastern Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options
exchanges (normally 4:15 P.M New York Time), provided the order is received
by the FUND's Transfer Agent prior to 4:00 P.M. on that day. It is the
responsibility of the dealer to insure that all orders are transmitted
timely to the FUND. Orders received by dealers after 4:00 P.M. will be
confirmed at the next computed offering or redemption price.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to that
of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated
both in terms of total return and in terms of yield. The total return basis
combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assumes reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the Commission, funds advertising performance must
include total return quotes calculated according to the following formula:
P(1 + T)n = ERV
Where P =a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV =ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the FUND's registration statement. In calculating the
ending redeemable value, the pro rata share of the account opening fee is
deducted from the initial $1,000 investment and all dividends and
distributions by the FUND are assumed to have been reinvested at net asset
value as described in the prospectus on the reinvestment dates during the
period. Total return, or `T'' in the formula above, is computed by finding
the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
The FUND's cumulative total return, for the fiscal year ended October 31,
1996 was % and the Portfolio's cumulative total return from inception
-----
through October 31, 1996 was %.
------
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth
above in order to compare more accurately the FUND's performance with other
measures of investment return. For example, in comparing the FUND's total
return with data published by Lipper Analytical Services, Inc. or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on
the reinvestment date. Percentage increases are determined by subtracting
the initial net asset value of the investment from the ending net asset
value and by dividing the remainder by the beginning net asset value. The
FUND does not, for these purposes, deduct the pro rata share of the account
opening fee, which was in effect until December, 1994, from the initial
value invested. THE FUND WILL, HOWEVER, DISCLOSE THE PRO RATA SHARE OF THE
ACCOUNT OPENING FEE AND WILL DISCLOSE THAT THE PERFORMANCE DATA DOES NOT
REFLECT SUCH NON-RECURRING CHARGE AND THAT INCLUSION OF SUCH CHARGE WOULD
REDUCE THE PERFORMANCE QUOTED. Such alternative total return information
will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a
result of a decline in the net asset value per share. Shareholders are
notified at least 60 days prior to any proposed redemption and are invited
to add to their account if they wish to continue as shareholders of the
FUND, however, the FUND does not presently contemplate making such
redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act, under
which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or
$250,000 during any 90-day period. Should any shareholder's redemption
exceed this limitation, the FUND can, at its sole option, redeem the excess
in cash or in portfolio securities. Such securities would be selected
solely by the FUND and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the
value used in computing net asset value for the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the FUND and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the FUND or its shareholders, and the discussions here and
in the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The FUND has elected to be taxed as a regulated investment company
(`RIC'') under Subchapter M of the Internal Revenue Code of 1986, as
amended (the `Code''). As a RIC, the FUND is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital
gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least
90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital
loss) for the taxable year (the `Distribution Requirement''), and
satisfies certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year,
will be considered distributions of income and gains of the taxable year
and can therefore satisfy the Distribution Requirement. Because the FUND
invests all of its assets in the Portfolio, which is classified as a
partnership for federal income tax purposes, the FUND will be deemed to own
a proportionate share of the assets and income of the Portfolio for
purposes of determining whether the FUND satisfies the requirements
(described more fully below) necessary to qualify as a regulated investment
company.
In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the company's principal
business of investing in stock or securities) and other income (including
gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies (the
`Income Requirement''); and (2) derive less than 30% of its gross income
(exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the
sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three
months (the `Short-Short Gain Test''). Because of the Short-Short Gain
Test, the FUND may have to limit the sale of appreciated securities that it
held for less than three months. However, foreign currency gains that are
directly related to the company's investment in stock or securities are not
treated as short-short gains. Similarly, the Short-Short Gain Test will not
prevent the FUND from disposing of investments at a loss, since losses are
disregarded for this purpose. Interest (including original issue discount)
received by the FUND at maturity or upon the disposition of a security held
for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-
Short Gain Test. However, income attributable to realized market
appreciation will be so treated for this purpose.
In general, gain or loss recognized by the Portfolio on the disposition of
an asset (and allocated to the FUND) will be a capital gain or loss.
However, gain recognized on the disposition of a debt obligation purchased
at a market discount will be treated as ordinary income to the extent of
the portion of the discount that accrued while the Portfolio held the
obligation. In addition, under the rules of Code Section 988, a portion of
gain or loss recognized on the disposition of a debt obligation denominated
in a foreign currency or an option with respect thereto, and (with certain
exceptions) gain or loss recognized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as
ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an
asset is long-term or short-term, the holding period of the asset may be
affected if (1) the asset is used to close a `short sale'' (which may
include the acquisition of a put option) or is substantially identical to
another asset so used, (2) the asset is otherwise held by the Portfolio as
part of a `straddle'' (as defined) or (3) the asset is stock and the
Portfolio grants an in-the-money qualified covered call option with respect
thereto. In addition, the FUND may be required to defer the recognition of
a loss on a disposition of an asset held as part of a straddle to the
extent of any unrecognized gain on the offsetting position.
Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option
written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of such
an option will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the
Portfolio may be limited in its ability to write options which expire
within three months and to enter into closing transactions at a gain within
three months of the writing of options.
Regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts are subject to special tax
treatment as `Section 1256 contracts.'' Such contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated as of such date. Gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any gain or loss
recognized upon the actual termination of such contracts during the year.
The combined capital gain or loss for the year with respect to Section 1256
contracts is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. (The Portfolio may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of
a `mixed straddle'' with other investments that are not Section 1256
contracts.) The IRS has held in private rulings that constructive gains
arising from deemed year-end dispositions of Section 1256 contracts will
not be taken into account for purposes of the Short-Short Gain Test.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency
loss incurred after October 31 as if it were incurred in the succeeding
year.
In addition to the requirements described above, the FUND must satisfy an
asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable
year, at least 50% of the value of its assets must consist of cash and cash
items, U.S. Government securities, securities of other RICs, and securities
of other issuers (as to which the RIC has not invested more than 5% of the
value of its total assets in securities of such issuer and as to which it
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other RICs), or in two or more issuers which
the RIC controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security
is treated as issued by the issuer of the security and not the issuer of
the option.
If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to
shareholders, and such distributions will be taxable to the shareholders as
ordinary dividends to the extent of the FUND's current and accumulated
earnings and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to 98% of its ordinary taxable income
for the calendar year and 98% of its capital gain net income for the one-
year period ended on October 31 of the year. The balance of such income
must be distributed during the next calendar year.
The FUND intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end
of each calendar year to avoid liability for the excise tax. The FUND may
in certain circumstances have to liquidate portfolio investments in order
to effect such distributions.
FUND Distributions
The FUND intends to distribute substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net capital
gain for each taxable year. The FUND currently intends to distribute such
gains annually. Net capital gain distributed and designated as a capital
gain dividend is taxable to shareholders as long-term capital gain,
regardless of the shareholder's holding period in his shares and the time
when such gain was recognized by the Portfolio.
If the FUND elects to retain its net capital gain, it will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if
each received a distribution of his pro rata share of the gain, with the
result that each would be required to report his pro rata share of such
gain on his tax return as a long-term capital gain, would receive a
refundable tax credit for his pro rata share of the tax paid by the FUND on
the gain, and would increase the tax basis for his shares by an amount
equal to the deemed distribution less the credit.
Ordinary income dividends distributed by the FUND will qualify for the 70%
dividends-received deduction generally available to corporations (other
than corporations, such as S corporations, which are not eligible for the
deduction) to the extent of the portion of the distribution attributed to
`qualifying dividends'' received by the Portfolio during the taxable year
from domestic corporations. A dividend received by the Portfolio will not
be treated as a qualifying dividend (1) if it was received with respect to
stock that the Portfolio held for less than 46 days (91 days in the case of
certain preferred stock), subject to the limitations of Code Sections
246(c)(3) and (4) and 246A. Moreover, the dividends-received deduction for
a corporate shareholder will also be disallowed if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
FUND shares or the FUND fails to satisfy them with respect to its interest
in the Portfolio.
Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries,
which entitle the Portfolio to reduced rates of, or exemptions from, taxes
on such income. It is impossible to determine the effective rate of foreign
tax in advance since the future mix of the Portfolio's investments in
various countries is not known.
Distributions by the FUND that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the
extent of (and in reduction of) the shareholders' tax basis in their
shares; any excess will be treated as gain from a sale of the shares, as
discussed more fully below.
Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the
FUND (or of another fund). In addition, if a shareholder's cost for his
shares already reflects undistributed (realized or unrealized) income or
gain, a subsequent distribution of such amounts will be taxable to the
shareholder in the manner described above, although economically it
constitutes a return of capital.
Ordinarily, shareholders are required to take distributions into account in
the year in which they are made. However, dividends declared by the FUND in
October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed
to have been received by the shareholders (and made by the FUND) on
December 31 of such year if such dividends are actually paid in January of
the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made)
during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of dividends and the proceeds of redemption paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all to the FUND, (2) who is subject to backup
withholding pursuant to a notice from the IRS for failure to report
interest or dividend income properly, or (3) who has not otherwise
certified to the FUND that it is not subject to backup withholding.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of his
shares in an amount equal to the difference between the amount realized on
the shares and his adjusted tax basis in them. All or a portion of any loss
so recognized may be disallowed if the shareholder purchases other shares
of the FUND within 30 days before or after the disposition. In general,
gain or loss arising from a sale or redemption of FUND shares will
constitute capital gain or loss, and will be long-term capital gain or loss
if the shares were held longer than one year. However, a capital loss
arising from a disposition of shares held for six months or less will be
treated as a long-term capital loss to the extent of any amount of capital
gain dividends received on the shares. For this purpose, the special
holding period rules of Code Section 246(c)(3) and (4) (alluded to above in
connection with the dividends-received deduction for corporations) will
generally apply. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of noncorporate taxpayers, $3,000
of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership (`foreign shareholder''), depends on whether the income
received from the FUND is `effectively connected'' with a U.S. trade or
business carried on by the shareholder.
If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to
U.S. withholding tax at the rate of 30% (or a lower treaty rate, if one
applies) of the gross amount of the dividend. Such a shareholder would
generally be exempt from U.S. federal income tax on gains realized on a
sale of FUND shares and capital gain dividends.
If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and gain realized upon the sale of FUND
shares will be subject to U.S. federal income tax at the rates applicable
to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that
are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless they furnish the FUND with proper notification of their exempt
status.
The tax consequences to foreign shareholders entitled to claim the benefits
of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the FUND,
including the applicability of any foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations as in effect on the date of
this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly alter the
conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to
the consequences of their investing in the FUND in light of their
particular circumstances.
THE MANAGEMENT OF THE FUND
Officers and Trustees are listed with their birthdates, addresses,
principal occupations, and present positions, including any affiliation
with Virtus Capital Management, Inc., Signet Trust Company, Federated
Investors, Federated Securities Corp., Federated Shareholder Services
Company, and Federated Administrative Services or the Funds (as defined
below).
John F. Donahue(1)(2)
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: JULY 28, 1924 CHAIRMAN AND TRUSTEE OF THE FUND; 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 Fund.
Thomas G. Bigley
28th Floor
One Oxford Centre
Pittsburgh, PA
BIRTHDATE: FEBRUARY 3, 1934 TRUSTEE OF THE FUND; 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.(3)
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
BIRTHDATE: JUNE 23, 1937 TRUSTEE OF THE FUND; 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(3)
One PNC Plaza - 23rd Floor
Pittsburgh, PA
BIRTHDATE: JULY 4, 1918 TRUSTEE OF THE FUND; 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(3)
571 Hayward Mill Road
Concord, MA
BIRTHDATE: MAY 18, 1922 TRUSTEE OF THE FUND; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; Director, Trustee, or Managing General
Partner of the Funds.
Lawrence D. Ellis, M.D.(1)
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
BIRTHDATE: OCTOBER 11, 1932 TRUSTEE OF THE FUND; 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.(3)
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
BIRTHDATE: JUNE 18, 1924 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Miller, Ament, Henny & Kochuba; 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(1)
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: OCTOBER 22, 1930 PRESIDENT, TRUSTEE AND TREASURER OF THE FUND;
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; 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 OF THE FUND; 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
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
BIRTHDATE: OCTOBER 6, 1926 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Miller, Ament, Henny & Kochuba; 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 OF THE FUND; President, Law
Professor, Duquesne University; Consulting Partner, Mollica, Murray and
Hogue; Director, Trustee or Managing Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
BIRTHDATE: SEPTEMBER 14, 1925 TRUSTEE OF THE FUND; 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 OF THE FUND; 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 OF THE FUND;
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
Shareholder Services Company, and Federated Shareholder Services; Director,
Federated Services Company; President or Executive 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 and Trustee of the
Fund.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: OCTOBER 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY OF THE
FUND; Executive Vice President, Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: MAY 17, 1923 VICE PRESIDENT OF THE FUND; 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.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
BIRTHDATE: MAY 22, 1962 VICE PRESIDENT AND ASSISTANT TREASURER OF THE
FUND; Vice President, Federated Administrative Services; Vice President and
Assistant Treasurer of some of the Funds.
(1) This Trustee is deemed to be an `interested person'' of the Trust as
defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
(3) Member of the Audit Committee. The Audit Committee is responsible for
reviewing compliance with all internal controls and all regulations related
to the financial reporting process.
As referred to in the list of Trustees and Officers, `Funds'' includes the
following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; Blanchard Group of Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated 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; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Targeted Duration Trust; Tax-Free Instruments Trust; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.
As of February , 1997, Officers and Trustees owned less than 1% of the
--
outstanding shares of the FUND.
To the best knowledge of the FUND, as of February , 1997, one
---
shareholder owned 5% or more of the outstanding shares of the FUND. [TO
COME]
The Trustees and officers of the Portfolio and their age and principal
occupations for at least the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those
Trustees who are ``nterested persons'' (as defined in the 1940 Act) of the
Portfolio. Unless otherwise indicated below, the address of each officer is
6 St. James Avenue, Suite 900, Boston, Massachusetts 02116.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Fergus Reid, III 64 Chairman and Chief 1984
971 West Road Executive Officer,
New Canaan, CT 06840 Lumelite Corporation,
since September 1985;
Trustee, Morgan
Stanley Portfolios.
Richard E. Ten Haken 62 Former District 1984
4 Barnfield Road Superintendent of
Pittsford, NY 14534 Schools, Monroe No. 2
and Orleans Counties,
New York; Chairman of
the Finance and the
Audit and Accounting
Committees, Member of
the Executive
Committee; Chairman of
the Board and
President, New York
State Teachers'
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Retirement System.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
William J. Armstrong 54 Vice President and 1987
49 Aspen Way Treasurer, Ingersoll-
Upper Saddle River, NJ Rand Company.
07458
John R.H. Blum 67 Attorney in Private 1984
322 Main Street Practice; formerly a
Lakeville, CT 06039 Partner in the law
firm of Richards,
O'Neil & Allegaert;
Commissioner of
Agriculture - State of
Connecticut, 1992-
1995.
*Joseph J. Harkins 65 Retired; Commercial 1990
257 Plantation Circle Sector Executive and
South Executive Vice
Ponte Vedra Beach, FL President of The Chase
32082 Manhattan Bank, N.A.
from 1985 through
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
1989. He has been
employed by Chase in
numerous capacities
and offices since
1954. Director of
Blessings Corporation,
Jefferson Insurance
Company of New York,
Monticello Insurance
Company and National.
*H. Richard 60 Consultant, Republic 1992
Vartabedian Bank of New York;
P.O. Box 296 formerly, Senior
Beach Road Investment Officer,
Hendrick's Head Division Executive of
Southport, ME 04576 the Investment
Management Division of
The Chase Manhattan
Bank, N.A., 1980
through 1991.
Stuart W. Cragin, Jr. 63 Retired; formerly 1992
108 Valley Road President, Fairfield
Cos Cob, CT 06807 Testing Laboratory,
Inc. He has previously
served in a variety of
marketing,
manufacturing and
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
general management
positions with Union
Camp Corp., Trinity
Paper & Plastics
Corp., and Conover
Industries.
Irving L. Thode 65 Retired; Vice 1992
80 Perkins Road President of Quotron
Greenwich, CT 06830 Systems. He has
previously served in a
number of executive
positions with Control
Data Corp., including
President of its Latin
American Operations,
and General Manager of
its Data Services
business.
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
W. Perry Neff 69 Independent Financial 1989
Trustee Consultant; Director
RR 1 Box 102 of North America Life
Weston, VT 05181 Assurance Co.,
Petroleum & Resources
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Corp. and The Adams
Express Co.; Formerly
Director and Chairman
of The Hanover Funds,
Inc.; Formerly
Director, Chairman and
President of The
Hanvover Investment
Funds Inc.
Roland R. Eppley, Jr. 64 Retired; formerly 1988
Trustee President and Chief
105 Coventry Place Exective Officer,
Palm Beach Gardens, FL Eastern States
33418 Bankcard Assocation
Inc. (1971-1988);
Director, Janel
Hydraulics, Inc.;
Formerly, Director of
The Hanover Funds,
Inc.
W.D. MacCallan 69 Director of The Adams 1989
Trustee Express Co. and
624 East 45th Street Petroleum & Resources
Savannah, GA 31405 Corp.; formerly
Chairman of the Board
and Chief Executive
Officer of The Adams
Trustee Age Principal Occupations Year First
For the Last Five Became a
Years Trustee
Express Co. and
Petroleum & Resources
Corp.; formerly
Director of The
Hanover Fund, Inc. and
The Hanover Investment
Funds, Inc.
*Asterisks indicate those Trustees that are ``nterested persons'' (as
defined in the 1940 Act). Mr. Reid is not an interested person of the
Trust's investment advisers or principal underwriter but may be deemed an
interested person of the Trust solely by reason of being an officer of the
Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Blum,
Cragin, Thode, Armstrong, Harkins, Reid and Vartabedian. The function of
the Audit Committee is to recommend independent auditors and monitor
accounting and financial matters.
The Board of Trustees of the Trust has established an Investment Committee.
The members of the Investment Committee are Messrs. Vartabedian (Chairman)
and Reid, as well as Leonard M. Spalding. President of Vista Capital
Management. The function of the Investment Committee is to review the
investment management process of the Trust.
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not
an affiliate of the Portfolio Adviser is compensated for his or her
services according to a fee schedule which recognizes the fact that each
Trustee also serves as a Trustee of other investment companies advised by
the Portfolio Adviser. Each Trustee receives a fee, allocated among all
investment companies for which the Trustee serves, which consists of an
annual retainer component and a meeting fee component. Effective August 21,
1995, each Trustee receives a quarterly retainer of $12,000 and an
additional per meeting fee of $1,500. Prior to August 21, 1995, the
quarterly retainer was $9,000 and the per-meeting fee was $1,000. The
Chairman of the Trustees and the Chairman of the Investment Committee each
receive a 50% increment over regular Trustee total compensation for serving
in such capacities for all the investment companies advised by the
Portfolio Adviser.
Officers and Trustees of the FUNDS Compensation
NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE FUNDS COMPENSATION FROM PAID TO TRUSTEES
THE FUNDS(1) FROM THE FUNDS AND
FUND COMPLEX*
John F. Donahue, $-0- $-0- for the Fund
Chairman and Trustee Complex
Thomas G. Bigley, $0 $0 for the Fund
Trustee Complex
John T. Conroy, Jr., $0 $0 for the Fund
Trustee Complex
William J. Copeland, $0 $0 for the Fund
Trustee Complex
James E. Dowd, $0 $0 for the Fund
Trustee Complex
Lawrence D. Ellis, $0 $0 for the Fund
M.D., Trustee Complex
Edward L. Flaherty, $0 $0 for the Fund
Jr., Trustee Complex
Edward C. Gonzales, $0 $0- for the Fund
President, Trustee Complex
and Treasurer
Peter E. Madden, $0 $0 for the Fund
Trustee Complex
Gregory F. Meyer, $0 $0 for the Fund
Trustee Complex
John E. Murray, Jr., $0 $0 for the Fund
J.D., S.J.D., Complex
Trustee
Wesley W. Posvar, $0 $0 for the Fund
Trustee Complex
Marjorie P. Smuts, $0 $0 for the Fund
Trustee Complex
(1) The aggregate compensation is provided for the Funds which was
comprised of eleven portfolios on
December 31, 1996. Information is furnished for the period from May ,
---
1996, date of election of Trustees, to December 31, 1996.
*The total compensation is provided for the Fund Complex, which consists of
Blanchard Precious Metals Fund, Inc., The Virtus Funds and the Trust for
the calendar year ended December 31, 1996.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1996 for each Trustee of the
Trust:
Growth Pension or Total
and Retirement Compensat
Income Benefits ion
Portfolio Accrued from
(1) as Fund "Fund
Expenses Complex"(
2)
Fergus Reid, $
III, Trustee
Richard E. Ten
Haken, Trustee
William J.
Armstrong,
Trustee
John R.H.
Blum, Trustee
Joseph J.
Harkins,
Trustee
H. Richard
Vartabedian,
Trustee
Stuart W.
Cragin, Jr.,
Trustee
Irving L.
Thode, Trustee
W. Perry Neff
Trustee
Roland R.
Eppley, Jr.
Trustee
W. D.
MacCallan
Trustee
(1) Prior to January 1, 1996, the Portfolio did not pay the Trustees
expenses directly. Rather, the Trustees payments accrued against the
underlying Fund, the Vista Growth and Income Fund. Data reflects Trustee
compensation as if the Portfolio had paid such expenses directly. As of
January 1, 1996, Trustee compensation will be paid by the Portfolio
directly. Mr. Vartabedian received a 50% increment over regular Trustee
compensation for serving as Chairman of the Portfolio. This incremental
amount was paid by the Portfolio directly.
(2) Data reflects total compensation earned during the period January 1,
1996 to December 31, 1996 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Portfolio Adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is
not an employee of any of the Portfolios, the Portfolio Adviser,
Administrator or distributor or any of their affiliates) may be entitled to
certain benefits upon retirement from the Board of Trustees. Pursuant to
the Plan, the normal retirement date is the date on which the eligible
Trustee has attained age 65 and has completed at least five years of
continuous service with one or more of the investment companies advised by
the Portfolio Adviser (collectively, the "Covered Portfolios"). Each
Eligible Trustee is entitled to receive from the Covered Portfolios an
annual benefit commencing on the first day of the calendar quarter
coincident with or following his date of retirement equal to 10% of the
highest annual compensation received from the Covered Portfolios multiplied
by the number of such Trustee's years of service (not in excess of 10
years) completed with respect to any of the Covered Portfolios. Such
benefit is payable to each eligible Trustee in monthly installments for the
life of the Trustee.
Set forth below in the table below are the estimated annual benefits
payable to an eligible Trustee upon retirement assuming various
compensation and years of service classifications. The estimated credited
years of service for Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins,
Vartabedian, Cragin, Thode, Neff, Epply and MacCallan are 11, 11, 8, 11, 3,
3, 3, 6, 7 and 6, respectively.
Years of
Service Highest Annual Compensation Paid by All Vista
Funds
40,000 45,000 50,000 55,000
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Deferred Compensation Plan
Effective August 21, 1995, the Trustees instituted a Deferred
Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan")
pursuant to which each Trustee (who is not an employee of any of the Funds,
the Portfolio Adviser, Administrator or Distributor or any of their
affiliates) may enter into agreements with the Funds whereby payment of the
Trustees' fees are deferred until the payment date elected by the Trustee
(or the Trustee's termination of service). The deferred amounts are deemed
invested in shares of the Fund on whose Board the Trustee sits. The
deferred amounts are paid out in a lump sum or over a period of several
years as elected by the Trustee at the time of deferral. If a deferring
Trustee dies prior to the distribution of amounts held in the deferral
account, the balance of the deferral account will be distributed to the
Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
Trustees have executed a deferred compensation agreement for the 1996
calendar year: Messrs. Ten Haken, Thode and Vartabedian.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. (`VCM''), which is
a division of Signet Trust Company, a wholly-owned subsidiary of Signet
Banking Corporation. Because of the internal controls maintained by Signet
Banking Corporation to restrict the flow of non-public information, Fund
investments are typically made without any knowledge of Signet Banking
Corporation or its affiliates' lending relationships with an issuer.
The manager shall not be liable to the Trust, the FUND, or any shareholder
of the FUND for any losses that may be sustained in the purchase, holding,
or sale of any security or for anything done or omitted by it, except acts
or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
Management Fees
For its services, VCM receives an annual management fee as described in the
prospectus. For the period November 1, 1995, to October 31, 1996, the
amount paid or accrued by the FUND to VCM was $ , all of which was
------
waived. For the period July 12, 1995, to October 31, 1995, the amount paid
or accrued by the FUND to VCM was $6,416, all of which was waived. For the
period November 1, 1994, to July 11, 1995, the amount paid or accrued by
the FUND to Sheffield Management Corporation was $14,683, all of which was
waived.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for
the fees set forth in the prospectus. For the period November 1, 1995 to
October 31, 1996, the amount paid or accrued by the FUND to Federated
Administrative Services was $23,014.
Transfer Agent & Dividend Disbursing Agent
Federated Shareholder Services Company serves as transfer agent and
dividend disbursing agent for the FUND. The fee paid to the transfer agent
is based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Shareholder Services Company also maintains FUND accounting
records. The fee paid for this service is based upon the level of the
FUND's average net assets for the period plus out-of-pocket expenses.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the FUND pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to
the Investment Company Act of 1940. The Plan provides that the FUND's
Distributor shall act as the Distributor of shares, and it permits the
payment of fees to brokers and dealers for distribution and administrative
services and to administrators for administrative services. The Plan is
designed to (i) stimulate brokers and dealers to provide distribution and
administrative support services to the FUND and its shareholders and (ii)
stimulate administrators to render administrative support services to the
FUND and its shareholders. These services are to be provided by a
representative who has knowledge of the shareholders' particular
circumstances and goals, and include, but are not limited to: providing
office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial
to establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries regarding the
FUND; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Trust reasonably
requests.
Other benefits which the FUND hopes to achieve through the Plan include,
but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders
by having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the FUND in seeking to achieve its
investment objectives. By identifying potential investors in shares whose
needs are served by the FUND's objectives, and properly servicing these
accounts, the FUND may be able to curb sharp fluctuations in rates of
redemptions and sales.
For the fiscal year ended October 31, 1996, the FUND paid $ in
------
distribution services fees.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of the
type commonly known as a `Massachusetts business trust''. Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
The FUND's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations for the FUND and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the FUND or the Trustees. The
Declaration of Trust provides for indemnification out of the FUND property
of any shareholder held personally liable for the obligations of the FUND.
The Declaration of Trust also provides that the FUND shall, upon request,
assume the defense of any claim made against any shareholders for any act
or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the FUND itself would be
unable to meet its obligations. VCM believes that, in view of the above,
the risk of personal liability to shareholders is remote. The Declaration
of Trust further provides that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend
rights and the right of redemption are described in the Prospectus. Shares
are fully paid and nonassessable, except as set forth under `Shareholder
and Trustee Liability''above. The shareholders have certain rights, as set
forth in the Declaration of Trust, to call a meeting for any purpose,
including the purpose of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another open-end
management company if approved by the vote of the holders of a majority of
the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder
vote of the FUND. Shareholders of the FUND shall be entitled to receive
distributions as a class of the assets belonging to the FUND. The assets of
the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the
underlying assets of the FUND.
SHAREHOLDER REPORTS
Shareholders received an Annual Report containing financial statements
audited by the FUND's independent accountants for the fiscal year ended
October 31, 1996. The Financial Statements for the fiscal year ended
October 31, 1996 are incorporated herein by reference to the Annual Report
of the FUND filed with the U.S. Securities and Exchange Commission (File
Nos. 33-3165 and 811-4579). A copy of the Annual Report may be obtained
without charge by contacting the FUND at 1-800-829-3863.
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration, an independent agency of the U.S.
Government. These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by
the U.S. Government.
FNMA BONDS -- are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA INSURED NOTES -- are bonds issued by the Farmers Home
Administration, the U.S. Government and are guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders
such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is either insured by
the Federal Housing Administration or guaranteed by the Veterans
Administration and therefore guaranteed by the U.S. Government. As a
consequence of the fees Paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest
paid on the VA-guaranteed or FHA-insured mortgages underlying the
Certificates. The average life of a GNMA Certificate is likely to be
substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures may result in the return of the greater part of
principal invested far in advance of the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will
vary widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on
GNMA Certificates may vary from their coupon rates for the following
reasons: (i) Certificates may be issued at a premium or discount, rather
than at par; (ii) Certificates may trade in the secondary market at a
premium or discount after issuance; (iii) interest is earned and compounded
monthly which has the effect of raising the effective yield earned on the
Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although
possibly at a lower rate. In addition, prepayment of mortgages included in
the mortgage pool underlying a GNMA Certificate purchased at a premium
could result in a loss to the Portfolio. Due to the large amount of GNMA
Certificates outstanding and active participation in the secondary market
by securities dealers and investors, GNMA Certificates are highly liquid
instruments. Prices of GNMA Certificates are readily available from
securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the
pool of mortgages backing each Certificate. If agency securities are
purchased at a premium above principal, the premium is not guaranteed by
the issuing agency and a decline in the market value to par may result in a
loss of the premium, which may be particularly likely in the event of a
prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC, and FNMA CERTIFICATES -- are mortgage-backed bonds issued by
the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S.
Government.
GSA PARTICIPATION CERTIFICATES -- are participation certificates
issued by the General Services Administration of the U.S. Government and
are guaranteed by the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development
Act of 1970, the payment of which is guaranteed by the U.S. Government.
PUBLIC HOUSING BONDS -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department
of Housing and Urban Development of the U.S. Government, the payment of
which is secured by the U.S. Government.
PENN CENTRAL TRANSPORTATION CERTIFICATES -- are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds
issued by the Washington Metropolitan Area Transit Authority some of the
bonds issued prior to 1993 are guaranteed by the U.S. Government.
FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home
Loan Mortgage Corporation. These bonds are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued
by the Federal Home Loan Bank System and are not guaranteed by the U.S.
Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS --
are notes and bonds issued by the Student Loan Marketing Association and
are not guaranteed by the U.S. Government.
D.C. ARMORY BOARD BONDS -- are bonds issued by the District of
Columbia Armory Board and are guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial
interest and participation certificates issued and guaranteed by the
Export-Import Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of
the U.S. Government, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment, and may not
be able to assert a claim against the U.S. Government itself in the event
the agency or instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with
respect to bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. 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
qualities and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during 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 a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time
may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca--Bonds which are rated "Ca" represent obligations which are
speculative in high degree.
Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2", and "3" to certain of
its rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the
issue ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to repay
principal and pay interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from
"AAA" issues only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay
principal and pay interest for bonds in this category than for higher rated
categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being
paid.
D--Bonds rated "D" are in default. The "D" category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired unless S&P believes that
such payments will be made during such grace period. The "D" rating is
also used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1--Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt
obligations. "Prime-1" repayment ability will often be evidenced by many
of the following characteristics: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and
ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt 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
alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3"
have an acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Not Prime--Issuers rated "Not Prime" do not fall within any of the
Prime rating categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days. Ratings are graded in several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The four categories are
as follows:
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".
A-3--Issues carrying this designation have adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the bigger
designations.
B--Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
Fitch Bond Ratings
AAA--Bonds rated AAA by Fitch are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issues is generally rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings.
BBB--Bonds rated BBB by Fitch are 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 consequences 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.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs,
however, are not used in the AAA category.
Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, although near-term
adverse changes could cause these securities to be rated below investment
grade.
LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest.
However, such bonds may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade bonds.
After purchase by the Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the
Portfolio. However, the Portfolio's investment manager will consider such
event in its determination of whether the Portfolio should continue to hold
the security. To the extent the ratings given by Moody's, S&P or Fitch may
change as a result of changes in such organizations or their rating
systems, the Portfolio will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained the
Prospectus and statement of additional information.
G01386-07 (2/97)
093265304
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. (2,6) Audited Financial
Statements to be filed by amendment.
(b) Exhibits
1. (a) Declaration of Trust of Registrant.(22)
(b) Amendment of Declaration of Trust. (22)
2. By-laws of Registrant. (22)
3. Not Applicable
4. Specimen Certificates for Shares of
Beneficial Interest of Registrant for
Blanchard Short-Term Flexible Income Fund,
Blanchard Growth & Income Fund, Blanchard
Flexible Tax-Free Bond Fund, Blanchard
Capital Growth Fund. (22)
5. (i) Conformed copy of Management Contract
through and including Exhibit C between
Registrant, on behalf of each of the
series, and Virtus Capital Management,
Inc. (21)
(ii) Conformed copy of Sub-Advisory Agreements
for Short-Term Global Income Fund,
Flexible Income Fund, Short-Term Bond
Fund, Flexible Tax-Free Bond Fund, and
Global Growth Fund between Virtus Capital
Management, Inc., and Shufro, Rose &
Ehrman; Investment Advisors, Inc.;
Fiduciary International, Inc.; OFFITBANK;
Lombard Odier International Portfolio
Management Limited; Provident Investment
Counsel, Inc.; U.S. Trust Company of New
York; Mellon Capital Management
Corporation; Martin Currie Inc.; and
Martin Currie Inc. from Item 5(b)(x)(a)-
xviii) of the Blanchard Funds Registration
Statement filed with the Commission on
August 7, 1995. (File Number 33-3165 and
811-4579). (21)
(iii) The Registrant incorporates the Form of
Global Asset Allocation Agreement between
Virtus Capital Management, Inc. and
Fiduciary International, Inc. for Global
(formerly Strategic) Growth Fund from Item
5(b)(x)(b) of the Blanchard Funds
Registration Statement filed with the
Commission on August 7, 1995. (File Number
33-3165 and 811-4579).
+ All Exhibits Have been filed electronically.
21 Previously filed on August 27, 1996 in Post-Effective Amendment No. 37
to the Registrant's Registration Statement.
22 Previously filed on November 27, 1996 in Post-Effective Amendment No.
39 to the Registrant's Registration Statement.
6. (i) Conformed copy of Distributor's Contract
including Exhibit C between Registrant and
Federated Securities Corp. (21)
7. Not Applicable.
8. (i) Form of Custodian Contract between
Registrant, on behalf of each series and
Signet Trust Company.(17)
(ii) Form of Agreement for Fund Accounting,
Shareholder Recordkeeping and Custody
Services Procurement between Registrant,
and Federated Services Company.(17)
9. (i) Conformed copy of Administrative Services
Agreement between Registrant and Federated
Administrative Services.(19)
(ii) Form of Transfer Agency and Fund
Accounting and Pricing Services Agreements
for Growth & Income Fund.(18)
10. None.
11. Conformed copy of consent of Deloitte &
Touche LLP, independent accountants for
the Fund. +
12. Not applicable.
13. Agreement re: initial $100,000 capital.(3)
14. Copies of model tax-sheltered retirement
plans.(3)
15. (i) Conformed copy of Distribution Plan
including Exhibit B. (21)
(ii) Copy of 12b-1 Agreement.(19)
+ All Exhibits Have been filed electronically.
3 Previously filed on April 23, 1986 in Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement.
17 To be filed by amendment.
18 Previously filed on August 7, 1995 in Post-Effective Amendment No. 29
to the Registrant's Registration Statement.
19 Previously filed on October 17, 1995 in Post-Effective Amendment No.
31 to the Registrant's Registration Statement.
21 Previously filed on August 27, 1996 in Post-Effective Amendment No. 37
to the Registrant's Registration Statement.
16.(i) Schedule of Performance Quotations for
Global (formerly Strategic) Growth Fund
series.(5)
(ii) Schedule of Performance Quotations for
Flexible Income Fund series.(10)
(iii) Schedule of Performance Quotations for
Flexible Tax-Free Bond Fund series.(12)
(iv) Schedule of Performance Quotations for
Emerging Markets Fund (formerly Blanchard
Asset Manager or Blanchard Asset
Allocation Fund) series.(12)
(v) Forms of computation of performance
quotations for Growth & Income and Capital
Growth series.(18)
17. Copy of Financial Data Schedules. +
18. Not applicable.
19. Conformed Copy of Power of Attorney.(19)
+ All Exhibits Have been filed electronically.
5 Previously filed on July 3, 1990 in Post-Effective Amendment No. 6 to
the Registrant's Registration Statement.
10 Previously filed on September 3, 1992 in Post-Effective Amendment No.
15 to the Registrant's Registration Statement.
12 Previously filed on May 25, 1993 in Post-Effective Amendment No. 17 to
the Registrant's Registration Statement.
18 Previously filed on August 7, 1995 in Post-Effective Amendment No. 29
to the Registrant's Registration Statement.
19 Previously filed on October 17, 1995 in Post-Effective Amendment No.
31 to the Registrant's Registration Statement.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
See "The Manager and Management Agreement" in the Prospectus and
Statement of Additional Information.
ITEM 26. Number of Holders or Securities
Number of Record Holders
Title of Class as of November 1, 1996
BAAF 15
BGGF 7,751
BPMF 8,647
BFIF 15,754
BSTFIF 14,800
BFTFBF 1,132
BGIF 2,279
BCGF 228
ITEM 27. Indemnification (20)
ITEM 28. Business and Other Connections or Investment Adviser
For a description of the other business of Virtus Capital
Management, Inc. see "Management of the Funds" in Part A. The officers of
Virtus Capital Management, Inc. are:
Gary M. Allen President, Chief Chief Investment Officer,
Investment Officer VCM, since March 1995; Senior
and Director Vice President and Chief
Investment Officer, STC (March
1994 to March 1995); Managing
Director of U.S. Equities
(November 1990 to March 1994)
and Director, Internal Asset
Management (June 1985 to
November 1990) of the Virginia
Retirement System.
E. Christian Goetz Senior Vice President,Chief Operating Officer, VCM,
Chief Operating Officer since February, 1996; Director
and Director of Fixed Income, VCM, since
March, 1995; Portfolio Manager
STC (November, 1990 to March,
1995).
Tanya Orr Bird Vice President and Equity Portfolio Manager, VCM,
and Director since September, 1995; Director
of Client Services, VCM,
(October, 1994 to September,
1995); Consultant, William M.
Mercer Asset Planning Inc.,
(1989 to October 1994).
John S. Hall Vice President Fixed Income Portfolio Manager,
VCM, since May, 1995; Senior
Fixed Income Portfolio Manager
(1992 to May, 1995) Hibernia
National Bank
Robert J. King Vice President and Director of Client Services and
Director of Client Marketing, VCM, since
Services and MarketingSeptember, 1995; Client
Services/Marketing Director
(1990 to September, 1995); Chase
Investment Counsel Corp.
C. Gregory Weirich Vice President and Sales Sales and Client Service for
and Client Service for Fixed Income, VCM, since June,
Fixed Income 1994; Vice President and Sales
Manager, Signet Employee
Benefits (February, 1993 to
June, 1994); Vice President and
Sales, Signet Employee Benefits
(April, 1989 to February, 1993).
ITEM 29. Principal Underwriters
(a) Federated Securities Corp., the Distributor for shares of
the Registrant, also acts as principal underwriter for the following
open-end investment companies: 111 Corcoran Funds; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; BayFunds; Blanchard
Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash
Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated
Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income
Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series; Federated Master Trust;
Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash
Trust; Independence One Mutual Funds; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument
Funds; SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; The Biltmore Funds; The Biltmore Municipal Funds;
The Monitor Funds; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Tower Mutual Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision Group of
Funds, Inc.; andWorld Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive VicePresident and
Federated Investors Tower President, Federated, Treasurer
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President and
Pittsburgh, PA 15222-3779 Secretary
John B. Fisher President- Vice President
Federated Investors Tower Institutional Sales,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) not applicable
ITEM 30. Location of Accounts and Records
The accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and Rules 31a-1 through 31a-3
promulgated thereunder are maintained at one of the following locations:
Blanchard Funds Federated Investors Tower
Pittsburgh, PA
Federated Shareholder Services P.O. Box 8600
Company (Transfer Agent,Dividend Boston, MA
Disbursing Agent and
Portfolio Recordkeeper)
Federated Administrative Federated Investors Tower
Services (Administrator) Pittsburgh, PA
Virtus Capital Management, Inc. 707 East Main Street
(Adviser) Suite 1300
Richmond, VA
Signet Trust Company 7 North Eighth Street
(Custodian) Richmond, VA
ITEM 31. Management Services
Not applicable.
ITEM 32. Undertakings
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of Trustees and
the calling of special shareholder meetings by shareholders.
Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of the latest annual report to shareholders, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, BLANCHARD FUNDS, has duly
caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, certifies that it meets
all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and all in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the 23rd day of
December, 1996.
BLANCHARD FUNDS
BY: /s/C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue
December 23, 1996
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By:/s/C. Grant Anderson
C. Grant Anderson Attorney In Fact December 23, 1996
ASSISTANT SECRETARY For the Persons
Listed Below
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Edward C. Gonzales* President, Treasurer
(Principal Financial and
Accounting Officer) and Trustee
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
SIGNATURES
Capital Growth Portfolio has duly caused this Post-Effective Amendment
to the Registration Statement on Form N-1A of the Blanchard Funds to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York and the State of New York on the 23rd day of December,
1996.
CAPITAL GROWTH PORTFOLIO
BY: /s/H. Richard Vartabedian
H. Richard Vartabedian
Chairman and President
December 23, 1996
This amendment to the Registration Statement on Form N-1A of The Blanchard
Funds has been signed below by the following persons in the capacities and
on the dates indicated.
NAME TITLE DATE
By:/s/ H. Richard Vartabedian
H. Richard Vartabedian Chairman, President December 23, 1996
and Trustee
William J. Armstrong Trustee
John R.H. Blum Trustee
Joseph J. Harkins Trustee
Richard E. Ten Haken Trustee
Stuart W. Cragin, Jr. Trustee
Irving L. Thode Trustee
Fergus Reid, III Trustee
W. Perry Neff Trustee
Roland R. Eppley, Jr. Trustee
W.D. MacCallan Trustee
/s/ H. Richard Vartabedian
Attorney in Fact
H. Richard Vartabedian
Exhibit 8 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
CUSTODIAN CONTRACT
Between
BLANCHARD FUNDS
and
SIGNET TRUST COMPANY
on behalf of:
Blanchard Asset Allocation Fund
Blanchard Global Growth Fund
Blanchard 100% Treasury Money Market Fund
Blanchard Short-Term Global Income Fund
Blanchard American Equity Fund
Blanchard Flexible Income Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Worldwide Emerging Markets Fund
(collectively, the ``Funds')
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It
2. Duties of the Custodian With Respect to Property
of the Funds Held by the Custodian
2.1 Holding Securities
2.2 Delivery of Securities
2.3 Registration of Securities
2.4 Bank Accounts
2.5 Payments for Shares
2.6 Availability of Federal Funds
2.7 Collection of Income
2.8 Payment of Fund Moneys
2.9 Liability for Payment in Advance of Receipt
of Securities Purchased
2.10 Payments for Repurchases or Redemptions
of Shares of a Fund
2.11 Appointment of Agents
2.12 Deposit of Fund Assets in Securities System
2.13 Segregated Account
2.14 Joint Repurchase Agreements
2.15 Ownership Certificates for Tax Purposes
2.16 Proxies
2.17 Communications Relating to Fund Portfolio Securities
2.18 Proper Instructions
2.19 Actions Permitted Without Express Authority
2.20 Evidence of Authority
3. Duties of Custodian with Respect to the books of Account and
Regulatory Reporting
4. Records
5. Opinion of funds' Auditors
6. Reports to Trust by Auditors
7. Compensation of Custodian
8. Responsibility of Custodian
9. Effective Period, Termination and Amendment
10. Successor Custodian
11. Interpretive and Additional Provisions
12. Massachusetts Law to Apply
13. Notices
14. Counterparts
15. Limitations of Liability
CUSTODIAN CONTRACT
This Contract between BLANCHARD FUNDS, (the `Trust''), a
Massachusetts business trust, on behalf of the portfolios (hereinafter
collectively called the `Funds'' and individually referred to as a
`Fund'') of the Trust, organized and existing under the laws of the
Commonwealth of Massachusetts, having its principal place of business at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3770, and SIGNET
TRUST COMPANY, a wholly-owned subsidiary of Signet Banking Corporation,
having its principal place of business at 7 North 8th Street, Richmond,
Virginia 23219, hereinafter called the `Custodian'',
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It.
The Trust hereby employs the Custodian as the custodian of the assets
of each of the Funds of the Trust. Except as otherwise expressly provided
herein, the securities and other assets of each of the Funds shall be
segregated from the assets of each of the other Funds and from all other
persons and entities. The Trust will deliver to the Custodian all
securities and cash owned by the Funds and all payments of income, payments
of principal or capital distributions received by them with respect to all
securities owned by the Funds from time to time, and the cash consideration
received by them for shares (`Shares'') of beneficial interest of the
Funds as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of the Funds held or received by the Funds
and not delivered to the Custodian.
Upon receipt of `Proper Instructions'' (within the meaning of Section
2.18), the Custodian shall from time to time employ one or more sub-
custodians upon the terms specified in the Proper Instructions, provided
that the Custodian shall have no more or less responsibility or liability
to the Trust or any of the Funds on account of any actions or omissions of
any sub-custodian so employed than any such sub-custodian has to the
Custodian.
2. Duties of the Custodian With Respect to Property of the Funds Held by
the Custodian.
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of each Fund all non-cash property,
including all securities owned by each Fund, other than securities
which are maintained pursuant to Section 2.12 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively
referred to herein as `Securities System'', or securities which are
subject to a joint repurchase agreement with affiliated funds pursuant
to Section 2.14. The Custodian shall maintain records of all
receipts, deliveries and locations of such securities, together with a
current inventory thereof, and shall conduct periodic physical
inspections of certificates representing stocks, bonds and other
securities held by it under this Contract in such manner as the
Custodian shall determine from time to time to be advisable in order
to verify the accuracy of such inventory. With respect to securities
held by any agent appointed pursuant to Section 2.11 hereof, and with
respect to securities held by any sub-custodian appointed pursuant to
Section 1 hereof, the Custodian may rely upon certificates from such
agent as to the holdings of such agent and from such sub-custodian as
to the holdings of such sub-custodian, it being understood that such
reliance in no way relieves the Custodian of its responsibilities
under this Contract. The Custodian will promptly report to the Trust
the results of such inspections, indicating any shortages or
discrepancies uncovered thereby, and take appropriate action to remedy
any such shortages or discrepancies.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by a Fund held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of a Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Trust;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of a Fund, in accordance
with the provisions of Section 2.17 hereof;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, returned or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name
of a Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.11 or into the name or nominee name of any
sub-custodian appointed pursuant to Section 1; or for exchange
for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of a Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with `street delivery custom'';
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own failure
to act in accordance with the standard of reasonable care or any
higher standard of care imposed upon the Custodian by any
applicable law or regulation if such above-stated standard of
reasonable care were not part of this Contract;
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of portfolio securities
of a Fund, but only against receipt of adequate collateral in the
form of (a) cash, in an amount specified by the Trust, (b)
certificate securities of a description specified by the Trust,
registered in the name of the Fund or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form
for transfer, or (c) securities of a description specified by the
Trust, transferred through a Securities System in accordance with
Section 2.12 hereof;
(11) For delivery as security in connection with any borrowings
requiring a pledge of assets by a Fund, but only against receipt
of amounts borrowed, except that in cases where additional
collateral is required to secure a borrowing already made,
further securities may be released for the purpose;
(12) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934, as amended, (the
`Exchange Act'') and a member of The National Association of
Securities Dealers, inc. (`NASD''), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions for a Fund;
(13) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in
connection with transaction for a Fund;
(14) Upon receipt of instructions from the transfer agent (`Transfer
Agent') for a Fund, for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in kind,
in satisfaction of requests by holders of Shares for repurchase
or redemption; and
(15) For any other proper corporate purpose, but only upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Executive Committee of the Trust on behalf of a
Fund signed by an officer of the Trust and certified by its
Secretary or an Assistant Secretary, specifying the securities to
be delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of a
particular Fund or in the name of any nominee of the Fund or of any
nominee of the Custodian which nominee shall be assigned exclusively
to the Fund, unless the Trust has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies affiliated with the Fund, or in the name or
nominee name of any agent appointed pursuant to Section 2.11 or in the
name or nominee name of any sub-custodian appointed pursuant to
Section 1. All securities accepted by the Custodian on behalf of a
Fund under the terms of this contract shall be in `street name'' or
other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Trust, subject only to draft or
order by the Custodian acting pursuant to the terms of this Contract,
and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Trust,
other than cash maintained in a joining repurchase account with other
affiliated funds pursuant to Section 2.14 of this Contract or by a
particular Fund in a bank account established and used in accordance
with Rule 17f-3 under the Investment Company Act of 1940, as amended,
(the `1940 Act''). Funds held by the Custodian for a Fund may be
deposited by it to its credit as Custodian in the Banking Department
of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust company
and the funds to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of Trustees
(`Board'') of the Trust. Such funds shall be deposited by the
Custodian in its capacity as Custodian for the Fund and shall be
withdrawable by the Custodian only in that capacity. If requested by
the Trust, the Custodian shall furnish the Trust, not later than
twenty (20) days after the last business day of each month, an
internal reconciliation of the closing balance as of that day in all
accounts described in this section to the balance shown on the daily
cash report for that day rendered to the Trust.
2.5 Payments for Shares. The Custodian shall made such arrangements with
the Transfer Agent of each Fund, as will enable the custodian to
receive the cash consideration due to each Fund and will deposit into
each Fund's account such payments as are received from the Transfer
Agent. The Custodian will provide timely notification to the Trust
and the Transfer Agent of any receipt by it of payments for Shares of
the respective Fund.
2.6 Availability of Federal Funds. Upon mutual agreement between the
trust and the Custodian, the Custodian shall made federal funds
available to the Funds as of specified times agreed upon from time to
time by the Trust and the Custodian in the amount of checks, clearing
house funds, and other non-federal funds received in payment for
Shares of the Funds which are deposited into the Funds' accounts.
2.7 Collection of Income.
(1)The Custodian shall collect on a timely basis all income and other
payments with respect to registered securities held hereunder to
which each Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely
basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and
shall credit such income, as collected, to each Fund's custodian
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become
due and shall collect interest when due on securities held
hereunder. The collection of income due the Funds on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Trust. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the
Trust with such information or data as may be necessary to assist
the Trust in arranging for the timely delivery to the Custodian of
the income to which each Fund is properly entitled.
(2)The Trust shall promptly notify the Custodian whenever income due
on securities is not collected in due course and will provide the
Custodian with monthly reports of the status of past due income.
The Trust will furnish the Custodian with a weekly report of
accrued/past due income for the fund. Once an item is identified
as past due and the Trust has furnished the necessary claim
documentation to the Custodian, the Custodian will then initiate a
claim on behalf of the Trust. The Custodian will furnish the
Trust with a status report monthly unless the parties otherwise
agree.
2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out moneys of each Fund in the following cases
only:
(1)Upon the purchase of securities, futures contracts or options on
futures contracts for the account of a Fund but only (a) against
the delivery of such securities, or evidence of title to futures
contracts, to the Custodian (or any bank, banking firm or trust
company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the fund or in
the name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer, (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.12 hereof or (c) in the case
of repurchase agreements entered into between the Trust and any
other party, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase for the
account of the Fund of securities owned by the Custodian along
with written evidence of the agreement by the Custodian to
repurchase such securities from the Fund;
(2)In connection with conversion, exchange or surrender of securities
owned by a Fund as set forth in Section 2.2 hereof;
(3)For the redemption or repurchase of Shares of a Fund issued by the
Trust as set forth in Section 2.10 hereof;
(4)For the payment of any expense or liability incurred by a Fund,
including but not limited to the following payments for the
account of the Fund: interest; taxes; management, accounting,
transfer agent and legal fees; and operating expenses of the Fund,
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
(5)For the payment of any dividends on Shares of a Fund declared
pursuant to the governing documents of the Trust;
(6)For payment of the amount of dividends received in respect of
securities sold short;
(7)For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution
of the Executive Committee of the Trust on behalf of a Fund signed
by an officer of the Trust and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for purchase of securities for the
account of a Fund is made by the Custodian in advance of receipt of
the securities purchased, in the absence of specific written
instructions from the Trust to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of a Fund. From
such funds as may be available for the purpose of repurchasing or
redeeming Shares of a Fund, but subject to the limitations of the
Declaration of Trust and any applicable votes of the Board of the
Trust pursuant thereto, the Custodian, shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment
to holders of shares of such Fund who have delivered to the Transfer
Agent a request for redemption or repurchase of their shares including
without limitation through bank drafts, automated clearinghouse
facilities, or by other means. In connection with the redemption or
repurchase of Shares of the Funds, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming shareholders.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
of 1940, as amended, and any applicable state law or regulation, to
act as a custodian, as its agent to carry out such of the provisions
of this Section 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve
the Custodian of its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities System. The Custodian may
deposit and/or maintain securities owned by the Funds in a clearing
agency registered with the Securities and Exchange Commission
(`SEC'') under Section 17A of the Exchange Act, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as `Securities System'' in accordance
with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
(1) The custodian may keep securities of each Fund in a Securities
System provided that such securities are represented in an
account (`Account'') of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for customers;
(2) The records of the Custodian with respect to securities of the
Funds which are maintained in a Securities System shall identify
by book-entry those securities belonging to each Fund;
(3) The Custodian shall pay for securities purchased for the account
of each Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (ii) the making of an entry on the account of the Fund. The
Custodian shall transfer securities sold for the account of a
Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian
to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System of transfers of
securities for the account of a Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to the
Trust at its request. Upon request, the Custodian shall furnish
the Trust confirmation of each transfer to or from the account of
a Fund in the form of a written advice or notice and shall
furnish to the Trust copies of daily transaction sheets
reflecting each day's transactions in the Securities System for
the account of a Fund.
(4) The Custodian shall provide the Trust with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
(5) The Custodian shall have received the initial certificate,
required by Section 9 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable t the Trust for any loss or damage to a
Fund resulting from use of the Securities system by reason of any
negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Trust, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the
Securities System or any other person which the custodian may
have as a consequence of any such loss or damage if and to the
extent that a Fund has not been made whole for any such loss or
damage.
(7) The authorization contained in this Section 2.12 shall not
relieve the Custodian from using reasonable care and diligence in
making use of any Securities System.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for an on behalf of each Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the provisions of any agreement among the Trust, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements
in connection with transactions for a Fund, (ii) for purpose of
segregating cash or government securities in connection with options
purchased, sold or written for a Fund or commodity futures contracts
or options thereon purchased or sold for a Fund, (iii) for the purpose
of compliance by the Trust or a Fund with the procedures required by
any release or releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions, a certified copy
of a resolution of the Board or of the Executive Committee signed by
an officer f the Trust and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.14 Joint Repurchase Agreements. Upon the receipt of Proper Instructions,
the Custodian shall deposit and/or maintain any assets of a Fund and
any affiliated funds which are subject to joint repurchase
transactions in an account established solely for such transactions
for the Fund and its affiliated funds. For purposes of this Section
2.14, `affiliated funds'' shall include all investment companies and
their portfolios for which subsidiaries or affiliates of Federated
Investors serve as investment advisers, distributors or administrators
in accordance with applicable exemptive orders from the SEC. The
requirements of segregation set forth in Section 2.1 shall be deemed
to be waived with respect to such assets.
2.15 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of a Fund held by it and in
connection with transfers of securities.
2.16 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of a Fund or a nominee of a Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Trust such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.17 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Trust all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund and
the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held
for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Trust all written information
received by the Custodian from issuers of the securities whose tender
or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Trust desires to take action with
respect to any tender offer, exchange offer or any other similar
transaction, the Trust shall notify the custodian in writing at least
three business days prior to the date on which the Custodian is to
take such action. However, the Custodian shall nevertheless exercise
its best efforts to take such action in the event that notification is
received three business days or less prior to the date on which action
is required. For securities which are not held in nominee name, the
Custodian will act as a secondary source of information and will not
be responsible for providing corporate action notification to the
Trust.
2.18 Proper Instructions. Proper Instructions as used throughout this
Section 2 means a writing signed or initialed by one or more person or
persons as the Board shall have from time to time authorized. Each
such writing shall set forth the specific transaction or type of
transaction involved. Oral instructions will be considered by a
person previously authorized in Proper Instructions to give such
instructions with respect to the transaction involved. The Trust
shall cause all oral instructions to be confirmed in writing. Upon
receipt of a certificate of the Secretary or an Assistant Secretary as
to the authorization by the Board of the Trust accompanied by a
detailed description of procedures approved by the Board, Proper
Instructions may include communications effected directly between
electromechanical or electronic devices provided that the Board and
the Custodian are satisfied that such procedures afford adequate
safeguards for a Fund's assets.
2.19 Actions Permitted Without Express Authority. The Custodian may in its
discretion, without express authority from the Trust:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this Contract, provided that all such payments shall be accounted
for to the Trust in such form that it may be allocated to the
affected Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of a Fund, checks, drafts and
other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and
other dealings with the securities and property of each Fund
except as otherwise directed by the Trust.
2.20 Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or other
instrument or paper reasonably believed by it to be genuine and to
have been properly executed on behalf of a Fund. The Custodian may
receive and accept a certified copy of a vote of the Board of the
Trust as conclusive evidence (a) of the authority of any person to act
in accordance with such vote or (b) of any determination of or any
action by the Board pursuant to the Declaration of Trust as described
in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the
contrary.
3. Duties of Custodian With Respect to the Books of Account and
Regulatory
Reporting.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of the Trust to keep the
books of account of each Fund and appointed to report on behalf of each
Fund to the Board, the SEC and other regulatory bodies.
4. Records.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet
the obligations of the Trust and the Funds under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-a and 31a-2
thereunder, and specifically including identified cost records used for tax
purposes. All such records shall be the property of the Trust and shall at
all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Trust
and employees and agents of the SEC. In the event of termination of this
Contract, the Custodian will deliver all such records to the Trust, to a
successor Custodian, or to such other person as the Trust may direct. The
Custodian shall supply daily to the Trust a tabulation of securities owned
by a Fund and held by the Custodian and shall, when requested to do so by
the Trust and for such compensation as shall be agreed upon between the
Trust and the Custodian, include certificate numbers in such tabulations.
When requested by the Trust and for such compensation as shall be agreed
upon between the Trust and the Custodian, this tabulation shall include
certificate numbers. In addition, the Custodian shall electronically
transmit daily to the Trust information pertaining to security trading and
other investment activity and all other cash activity of a Fund.
5. Opinion of Funds' Independent Auditors.
The Custodian shall take all reasonable action, as the Trust may from
time to time request, to obtain form year to year favorable opinions from
each Fund's independent auditors with respect to its activities hereunder
in connection with the preparation of the Fund's registration statement,
periodic reports, or any other reports to the SEC and with respect to any
other requirements of such Commission.
6. Reports to Trust by Independent Auditors.
The Custodian shall provide the Trust, at such times as the Trust may
reasonably require, with reports by independent auditors for each fund on
the account system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian for the Fund
under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Trust, to provided
reasonable assurance that any material inadequacies would be disclosed by
such examination and, if there are no such inadequacies, the reports hall
so state.
7. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time
between the Trust and the Custodian.
8. Responsibility of Custodian.
The Custodian shall be held to a standard of reasonable care in
carrying out the provisions of this Contract; provided, however, that the
Custodian shall be held to any higher standard of care which would be
imposed upon the Custodian shall be held to any higher standard of care of
which would be imposed upon the Custodian by any applicable law or
regulation if such above stated standard of reasonable care was not part of
this Contract. The Custodian shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Trust) on all matters, and
shall be without liability for any action reasonably taken or omitted
pursuant to such advice, provided that such action is not in violation of
applicable federal or state laws or regulations, and is in good faith and
without negligence. Subject to the limitations set forth in Section 15
hereof, the Custodian shall be kept indemnified by the Trust but only from
the assets of the fund involved in the issue at hand and be without
liability for any action taken or thing done by it in carrying out the
terms and provisions of this contract in accordance with the above
standards.
In order that the indemnification provisions contained in this Section
8 shall apply, however, it is understood that if in any case the Trust may
be asked to indemnify or save the Custodian harmless, the Trust shall be
fully and promptly advised of all pertinent facts concerning the situation
in question, and it is further understood that the Custodian will use all
reasonable care to identify and notify the Trust promptly concerning any
situation which presents or appears likely to present the probability or
such a claim for indemnification. The Trust shall have the option to
defend the Custodian against any claim which may be the subject of this
indemnification, and in the event that the Trust so elects it will so
notify the custodian and thereupon the Trust shall take over complete
defense of the claim, and the Custodian shall in such situation initiate no
further legal or other expenses for which it shall seek indemnification
under this Section. The Custodian shall in no case confess any claim or
make any compromise in any case in which the Trust will be asked to
indemnify the Custodian except with the Trust's prior written consent.
Notwithstanding the foregoing, the responsibility of the Custodian
with respect to redemptions effected by check shall be in accordance with a
separate Agreement entered into between the Custodian and the Trust.
If the Trust requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may,
in the reasonable opinion of the Custodian, result in the Custodian or its
nominee assigned to a Fund being liable for the payment of money or
incurring liability of some other form, the Custodian may request the
Trust, as a prerequisite to requiring the Custodian t take such action, to
provide indemnity to the Custodian in an amount and form satisfactory to
the Custodian.
Subject to the limitations set forth in Section 15 hereof, the Trust
agrees to indemnify and hold harmless the Custodian and its nominee from
and against all taxes, charges, expenses, assessments, claims and
liabilities (including counsel fees) (referred to herein as authorized
charges) incurred or assessed against it or its nominee in connection with
the performance with this Contract, except such as may arise from it or its
nominee's own failure to act in accordance with the standard of reasonable
care or any higher standard of care which would be imposed upon the
Custodian by any applicable law or regulation if such above-stated standard
of reasonable care were not part of this Contract. To secure any
authorized charges and any advances of cash or securities made by the
Custodian to or for the benefit of a Fund for any purpose which results in
the Fund incurring an overdraft at the end of the any business day or for
extraordinary or emergency purposes during any business day, the Trust
hereby grants to the Custodian a security interest in and pledges to the
Custodian securities held for the Fund by the Custodian, in an amount not
to exceed 10 percent of the Fund's gross assets, the specific securities to
be designated in writing from time to time by the Trust or the Fund's
investment adviser. Should the Trust fail to make such designation, or
should it instruct the Custodian to make advances exceeding the percentage
amount set forth above and should the Custodian do so, the Trust hereby
agrees that the Custodian shall have a security interest in all securities
or other property purchased for a Fund with the advances by the Custodian,
which securities or property shall be deemed to be pledged to the
Custodian, and the written instructions of the Trust instructing their
purchase shall be considered the requisite description and designation of
the property so pledged for purposes of the requirements of the Uniform
Commercial Code. Should the Trust fail to cause a Fund to repay promptly
any authorized charges or advances of cash or securities, subject to the
provision of the second paragraph of this Section 8 regarding
indemnification, the Custodian shall be entitled to use available cash and
to dispose of pledged securities and property as is necessary to repay any
such advances.
9. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided,
may be amended at any time by mutual agreement of the parties hereto and
may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect
not sooner than sixty (60) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.12
hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board of the Trust has approved the
initial use of a particular Securities System as required in each case by
Rule 17f-4 under the Investment Company Act of 1940, as amended; provided
further, however, that the Trust shall not amend or terminate this Contract
in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust and further provided, that the Trust
may at any time by action of its Board (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the
Comptroller of the currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Trust shall pay to the Custodian
such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
10. Successor Custodian.
If a successor custodian shall be appointed by the board of the Trust,
the Custodian shall, upon termination, deliver to such successor custodian
at the office of the Custodian, duly endorsed and in the form for transfer,
all securities then held by it hereunder for each Fund and shall transfer
to separate accounts of the successor custodian all of each Fund's
securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the
Board of the Trust, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board shall have been delivered to the
Custodian on or before the date when such termination shall be come
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a `bank'' as defined in the 1940 Act, of its own
selection, having and aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $100,000,000, all
securities, funds and other properties held by the Custodian and all
instruments held by the Custodian relative thereto and all other property
held by it under this Contract for each Fund and to transfer to separate
accounts of such successor custodian all of each Fund's securities held in
any Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the certified copy of the vote referred to
or of the Board to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations
of the Custodian shall remain in full force and effect.
11. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and
the Trust may from time to time agree on such provisions interpretive of or
in addition to the provisions of this Contract as may in their joint
opinion be consistent with the general tenor of this Contract. Any such
interpretive or additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Declaration of Trust. No interpretive
or additional provisions made as provided in the proceeding sentence shall
be deemed to be an amendment of this Contract.
12. Massachusetts Law to Apply.
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
13. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Custodian
at 7 North 8th Street, Richmond, Virginia 23219, or to such other address
as the Trust or the Custodian may hereafter specify, shall be deemed to
have been properly delivered or given hereunder to the respective address.
14. Counterparts.
This Contract may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
15. Limitations of Liability.
The Custodian is expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees
that the obligations and liabilities assumed by the Trust and any Fund
pursuant to this Contract, including without limitation, any obligation or
liability to indemnify the custodian pursuant to Section 8 hereof, shall be
limited in any case to the relevant Fund and its assets and that the
Custodian shall not seek satisfaction of any such obligation from the
shareholder of the relevant Fund, from any other Fund or its shareholders
or from the Trustees, Officers, employees or agents of the Trust, or any of
them. In addition, in connection with the discharge and satisfaction of
any claim made by the Custodian against the Trust, for whatever reasons,
involving more than one Fund, the Trust shall have the exclusive right to
determine the appropriate allocations of liability for any such claim
between or among the Funds.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf of its duly authorized representative
and its seal to be hereunder affixed as of the 14th day of October, 1995.
ATTEST: BLANCHARD FUNDS
/s/ C. Grant Anderson By: /s/ Joseph A. Machi
Assistant Secretary Vice President
C. Grant Anderson Joseph A. Machi
ATTEST SIGNET TRUST COMPANY
/s/ Robert E. Perrin, Jr. By: /s/ Joseph A. Rose
Vice President & Treasurer Sr. Vice President
Exhibit 8 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AMENDMENT NO. 1
to
Custodian Contract
between
BLANCHARD FUNDS and SIGNET TRUST COMPANY
contract dated October 14, 1995
ADD section 16.: OVERDRAFTS
If the Custodian should in its sole discretion advance funds on behalf of
any Series which results in an overdraft because the moneys held by the
Custodian in the separate account for such Series shall be insufficient to
pay the total mount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Proper Instruction, or which
results in an overdraft in the separate account of such Series for some
other reason, such overdraft shall be deemed to be a loan made by the
Custodian to the Fund for such Series payable on demand and shall bear
interest from the date incurred at a rate per annum (based on a 360 day
year for the actual number of days involved) equal to one percent over the
Federal Funds Rate.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed as of the day and year first written
above.
Attest: Blanchard Funds,
/s/ C. Grant Anderson By: /s/ Joseph S. Machi
Assistant Secretary Vice President
C. Grant Anderson Joseph S. Machi
Attest: Signet Trust Company
/s/ Marie B. Wimble By: /s/ Joseph A. Rose
Secretary Sr. Vice President
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<NUMBER> 09
<NAME> Blanchard Funds
Blanchard Growth and Income Fund
<PERIOD-TYPE> 12-mos
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<PERIOD-END> Oct-31-1996
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<ACCUMULATED-NII-PRIOR> (23,610)
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<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Blanchard Funds
Blanchard Capital Growth Fund
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 1,203,028
<INVESTMENTS-AT-VALUE> 1,531,400
<RECEIVABLES> 95,754
<ASSETS-OTHER> 106,806
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,733,960
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,112
<TOTAL-LIABILITIES> 28,112
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,243,554
<SHARES-COMMON-STOCK> 194,365
<SHARES-COMMON-PRIOR> 223,270
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<OVERDISTRIBUTION-GAINS> 0
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