BLANCHARD
GROUP OF FUNDS
BLANCHARD
CAPITAL GROWTH FUND
PROSPECTUS
FEBRUARY 29,1996
THE BLANCHARD GROUP OF FUNDS
BLANCHARD CAPITAL GROWTH FUND
PROSPECTUS
BLANCHARD CAPITAL GROWTH FUND (THE "FUND") SEEKS TO PROVIDE LONG TERM CAPITAL
GROWTH THROUGH A BROAD PORTFOLIO OF COMMON STOCKS. TO ACHIEVE ITS INVESTMENT
OBJECTIVE, THE FUND INVESTS 100% OF ITS ASSETS IN THE CAPITAL GROWTH PORTFOLIO
(THE "PORTFOLIO"), AN OPEN-END MANAGEMENT INVESTMENT COMPANY ADVISED BY THE
CHASE MANHATTAN BANK, N.A. (THE "PORTFOLIO ADVISER"), WITH INVESTMENT
OBJECTIVES, POLICIES AND RESTRICTIONS IDENTICAL TO THOSE OF THE FUND.
The Portfolio invests primarily (i.e., at least 80% under normal circumstances)
in common stocks of issuers (including foreign issuers) that the Portfolio
Adviser believes are likely to benefit from changes or trends brought about by
social, economic, demographic and legislative developments considered
significant by the Portfolio Adviser. It is expected that the investments will
emphasize small and medium-sized companies which the Portfolio Adviser believes
have the potential to profit from significant changes or trends of the type
described above. Dividend income, if any, is a consideration incidental to
obtaining the Fund's objective of growth of capital.
The performance of the Fund depends on the performance of the Portfolio. The
Fund and Portfolio structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
For more information on this unique structure, see "Additional Information About
the Fund and the Portfolio" on page 21. There can be no guarantee that the Fund
and the Portfolio will achieve their investment objective.
Virtus Capital Management, Inc. ("VCM") is the Fund's manager.
Blanchard Funds (the "Trust"), which currently consists of eight 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. is the Funds' overall investment manager. There
is no guarantee that the Funds will achieve their investment objectives.
Please read this Prospectus carefully and retain it for future reference. The
Fund's Statement of Additional Information, dated February 29, 1996, 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, N.A. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated February 29, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
HIGHLIGHTS 1
- ------------------------------------------------------
FEE TABLE 3
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- ------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 6
- ------------------------------------------------------
ADDITIONAL INFORMATION ON INVESTMENT
POLICIES, TECHNIQUES AND RISK FACTORS 7
- ------------------------------------------------------
MANAGEMENT OF THE FUND 10
- ------------------------------------------------------
PORTFOLIO ADVISORY SERVICES 11
- ------------------------------------------------------
EFFECT OF BANKING LAWS 12
- ------------------------------------------------------
HOW TO INVEST 13
- ------------------------------------------------------
INVESTOR SERVICES 14
- ------------------------------------------------------
HOW TO REDEEM 16
- ------------------------------------------------------
DISTRIBUTION OF SHARES OF THE FUND 17
- ------------------------------------------------------
TAX MATTERS 18
- ------------------------------------------------------
PERFORMANCE COMPUTATION INFORMATION 20
- ------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUND
AND THE PORTFOLIO 21
- ------------------------------------------------------
OTHER INFORMATION 23
- ------------------------------------------------------
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 6 and 7).
FUND MANAGEMENT
VCM provides management services necessary for the Fund's operations. As of
January 31, 1996, VCM had more than $2.8 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 10).
The Portfolio Adviser, 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 One Chase Manhattan Plaza,
New York, New York 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others. See "Portfolio Advisory Services--The
Portfolio Adviser" (page 11) for information concerning the proposed merger of
The Chase Manhattan Corporation with and into Chemical Banking Corporation.
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 distribu-
tion 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 13 and 17).
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 16).
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 14).
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 18).
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 7).
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
For a better understanding of the expenses you will incur directly or indirectly
when investing in the Fund, a summary for the Fund is set forth below. The
summary combines the Fund's operational expenses with the pro rata portion of
its Portfolio's operational expenses. See "Management of the Fund." The trustees
believe that the aggregate per share expenses of the Fund and the Portfolio will
be approximately equal to the expenses the Fund would incur if its assets were
invested directly in the type of securities held by the Portfolio.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)............... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable).......................................................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable).................................... None
Exchange Fees.......................................................................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee (See "Management of the Fund") (after waiver)(1)........................................ 0.40%
12b-1 Fees (after waiver)(2)........................................................................... 0.22%
Other Expenses (after expense reimbursements)(3).................................................. 5.57%
Total Fund Operating Expenses (after waivers and reimbursements)(4).......................... 6.19%
</TABLE>
(1) The Management fee has been reduced to reflect the voluntary waiver by the
Manager. The Manager can terminate this voluntary waiver at any time at its
sole discretion. The maximum management fee is 1.10%.
(2) As a result of 12b-1 Fees of 0.50% per annum of the Fund's average daily
net assets, a shareholder who has been in the Fund for 14.5 years may pay
more than the economic equivalent of the maximum front-end sales charges
permitted by the Rules of the National Association of Securities Dealers,
Inc. The 12b-1 fees have been reduced to reflect the voluntary waiver by
the Distributor. The Distributor can terminate this voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.50%.
(3) Other expenses have been reduced to reflect the reimbursement of other
operating expenses by the Manager.
(4) Total Fund operating expenses would have been 8.16% absent the voluntary
waivers by the Manager and Distributor and reimbursement of other operating
expenses by the Manager. VCM has agreed to cap the Fund's total operating
expenses beginning July 12, 1995 through July 11, 1997, so that the expense
ratio of the Fund will not exceed the Fund's expense ratio for the
six-month period ended April 30, 1995.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period................................................. $62 $182 $300 $583
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. IN ADDITION, THE 5%
ANNUAL RETURN SHOULD NOT BE CONSIDERED REPRESENTATIVE OF PAST OR FUTURE RETURNS,
AND ACTUAL RETURNS MAY BE GREATER OR LESS THAN THE ILLUSTRATION ABOVE.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following ratios and per share data for a share of capital stock outstanding
throughout the period have been audited by Price Waterhouse LLP, the Fund's
independent public accountants. The financial highlights should be read in
conjunction with the Financial Statements and notes thereto and the unqualified
report of independent accountants included in the Annual Report to Shareholders
which is incorporated by reference into the Statement of Additional Information.
This table should be read in conjunction with the Fund's financial statements
and notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1995
--------------------
BLANCHARD
CAPITAL
GROWTH FUND
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.00
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment loss (0.26)
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.92
- -------------------------------------------------------------------------------------------- -------
Total from investment operations 0.66
- -------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS --
- -------------------------------------------------------------------------------------------- -------
Net asset value, end of period $ 7.66
- -------------------------------------------------------------------------------------------- -------
TOTAL RETURN 9.43%
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses (a) 6.19%
- --------------------------------------------------------------------------------------------
Net investment loss (4.20%)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement(b) 1.97%
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,711
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the Fund's proportionate share of the respective Portfolio's
expenses, and the Fund's waivers and expense reimbursements by the Fund's
Manager and Distributor.
(b) This voluntary expense decrease is reflected in both the expense and net
investment loss ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated October 31, 1995, which may be obtained free of charge from
the Fund by calling 1-800-829-3863.
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND
The graph below illustrates the hypothetical investment of $10,000 in
Blanchard Capital Growth Fund (the "Fund") from September 30, 1987 to October
31, 1995 compared to the Standard and Poor's 500 Index. To achieve its
investment objective, the Fund invests 100% of its assets in the Portfolio,
which has identical investment objectives. The performance of the Fund,
therefore, depends on the performance of the Portfolio. Because the Fund had no
performance history prior to November 1, 1994, the graph set forth below,
insofar as it relates to the period prior to November 1, 1994, presents
historical performance for the Portfolio adjusted to reflect expenses estimated
at the Fund's inception to be charged to shareholders of the Fund.
[GRAPH]
* THE AVERAGE ANNUAL RETURNS QUOTED ABOVE ASSUMES THE REINVESTMENT OF
- - -
DISTRIBUTIONS. TOTAL RETURN INCLUDES CHANGES IN PRINCIPAL VALUE. AVERAGE
ANNUAL RETURN IS TOTAL RETURN ANNUALIZED AND COMPOUNDED. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS.
+ The S&P 500 Total Return Index is not adjusted to reflect sales charges,
-
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The index is unmanaged.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the Fund or the index.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio seeks to achieve its investment objective of long-term capital
growth by investing primarily (i.e., at least 80% of its assets under normal
circumstances) in common stocks. The Portfolio will invest in stocks of issuers
(including foreign issuers) of small to mid-sized companies with average market
capitalization of $500 million to $4 billion. An investor should be aware that
investment in small capitalization issuers may be more volatile than investments
in issuers with larger market capitalizations due to a more narrow scope of
investment activities, and correspondingly greater susceptibility to changes in
the business cycles of such small capitalization companies. The Portfolio
Adviser intends to use both quantitative and fundamental research to identify
undervalued stocks with a catalyst for positive change. Current income, if any,
is a consideration incidental to the Portfolio's objective of long term capital
growth. Dividend income, if any, is a consideration incidental to the Fund's
objective of growth of capital.
POLICIES OF THE FUND
The Portfolio will be substantially fully invested and, in normal circumstances,
the Portfolio will invest at least 80% of its assets in common stocks which are
traded on the New York Stock Exchange and on NASDAQ. The number of stocks paying
dividends will fluctuate based on portfolio holdings. U.S. stocks have
historically been one of the very best ways to achieve growth. However, the
Portfolio also may invest up to 20% of its net assets in stocks of foreign
issuers. Investments in foreign securities are subject to certain risks to which
investments in domestic securities are not subject, including political or
economic instability of the issuer or country of issue and the possibility of
the imposition of exchange controls. The Portfolio reserves the right to invest
more than 20% of its assets in cash, cash equivalents and debt securities for
temporary defensive purposes during periods that the Portfolio Adviser considers
to be particularly risky for investment in common stocks. See "Additional
Information on Investment Policies, Techniques and Risk Factors" on page 7 of
this Prospectus and in the discussion in the Statement of Additional
Information.
The Portfolio may enter into certain transactions commonly referred to as
"derivatives" such as stock index futures contracts, options on stock index
futures contracts, options on stock indexes and options on equity securities for
the purpose of hedging the portfolio. "Additional Information on Investment
Policies, Techniques and Risk Factor" and Appendix A in the Statement of
Additional Information contain a more complete description of the hedging
instruments to be traded, as well as further information concerning the
investment policies and techniques of the Portfolio. In addition, the Statement
of Additional Information includes a further discussion of futures and option
contracts to be entered into by the Portfolio. Although the Portfolio will enter
into futures and option contracts for hedging purposes only, the use of such
instruments does involve transaction costs and certain risks, which are
discussed below and in Appendix A in the Statement of Additional Information.
The investment objectives of the Fund and the Portfolio are fundamental and may
not be changed without approval by a majority of the outstanding shares, as
defined in the Investment Company Act of 1940 (the "1940 Act"). Shareholder
approval is not required to change the investment policies described above or in
"Additional Information on Investment Policies, Techniques and Risk
Factors." However, in the event of a change in the Fund or Portfolio investment
policies, shareholders will be given 30 days prior written notice.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
- --------------------------------------------------------------------------------
To the extent the assets of the Portfolio are not invested in common stocks,
they will consist of or be invested in cash, cash equivalents and short-term
debt securities, such as U.S. Government securities, bank obligations and
commercial paper, and in repurchase agreements. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.
Among the common stocks in which the Portfolio may invest are stocks of foreign
issuers, although at present the Portfolio does not intend to invest more than
20% of its assets in such securities. These securities may represent a greater
degree of risk (e.g., risk related to exchange rate fluctuation, tax provisions,
war or expropriation) than do securities of domestic issuers.
Because the value of securities and the income derived therefrom may fluctuate
according to the earnings of the issuers and changes in economic and market
conditions, there can be no assurance that the investment objectives of the Fund
and the Portfolio will be achieved.
REPURCHASE AGREEMENTS. The Portfolio may, when appropriate, enter into
repurchase agreements (a purchase of and simultaneous commitment to resell a
security at an agreed-upon price and date which is usually not more than seven
days from the date of purchase) only with member banks of the Federal Reserve
System and security dealers believed creditworthy and only if fully
collateralized by U.S. Government obligations or other securities in which the
Portfolio is permitted to invest. In the event the seller fails to pay the
agreed-to sum on the agreed-upon delivery date, the underlying security could be
sold by the Portfolio, but the Portfolio might incur a loss in doing so, and in
certain cases may not be permitted to sell the security. As an operating policy,
the Portfolio, through the custodian bank, takes constructive possession of the
collateral underlying repurchase agreements. Additionally, procedures have been
established for the Portfolio to monitor, on a daily basis, the market value of
the collateral underlying all repurchase agreements to ensure that the
collateral is at least 100% of the value of the repurchase agreements. No more
than 10% of the total assets of the Portfolio will be invested in securities
which are subject to legal or contractual restrictions on resale, including
securities that are not readily marketable and repurchase agreements maturing in
more than seven days.
PORTFOLIO TURNOVER. It is not intended that the assets of the Portfolio will be
invested in securities for the purpose of short-term profits. The Portfolio
Adviser anticipates that the annual turnover of the Portfolio's securities will
not be in excess of 100%. However, the Portfolio will dispose of portfolio
securities whenever the Portfolio Adviser believes that changes are appropriate.
Generally, the primary consideration in placing portfolio securities
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. For a complete discussion of portfolio transactions
and brokerage allocation, see "Portfolio Transactions" in the Statement of
Additional Information.
PORTFOLIO SECURITIES LENDING. Although the Portfolio does not intend to engage
in such activity in the ordinary course of business, the Portfolio is permitted
to lend 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 100% of the current
market value 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, 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 Portfolio Adviser to be of good standing and
will not be made unless, in the judgment of the Portfolio Adviser, the
consideration to be earned from such loans justifies the risk.
NON-U.S. SECURITIES. Investing in securities issued by foreign corporations and
governments involves considerations and possible risks not typically associated
with investing in securities issued by domestic corporations and the U.S.
Government. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the U.S. or other countries) or changed circumstances in
dealings between countries. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods.
The Portfolio may 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. 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 Portfolio's
trustees do not believe that such adjustments will adversely affect holders of
ECU-denominated securities or the marketability of such securities. European
governments and supranational organizations (discussed below), in particular,
issue ECU-denominated securities.
The Portfolio may invest in securities issued by supranational 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.
The Portfolio may invest its assets in securities of foreign issuers in the form
of sponsored ADRs, EDRs, or other similar securities representing securities of
foreign issuers. ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying foreign securities. EDRs are
receipts issued by a European financial institution evidencing a similar
arrangement.
FUTURES AND OPTIONS TRANSACTIONS. The Fund may invest its assets in derivative
and related instruments subject only to the Fund's investment objective and
policies and the requirement that to avoid leveraging the Fund, the Fund
maintains 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.
The value of some derivative or similar instruments in which the Fund invests
may be particularly sensitive to changes in prevailing interest rates or other
economic factors, and--like other investments of the Fund--the ability of the
Fund to successfully utilize these instruments may depend in part upon the
ability of the Portfolio Adviser to forecast interest rates and other economic
factors correctly. If the Portfolio Adviser incorrectly forecasts such factors
and has taken positions in derivative or similar instruments contrary to
prevailing market trends, the Fund could be exposed to the risk of a loss. The
Fund might not employ any or all of the strategies described herein, and no
assurance can be given that any strategy used will succeed.
To the extent permitted by the investment objectives and policies of each Fund,
and as described more fully in the Fund's Statement of Additional Information,
the Fund may:
. purchase, write and exercise call and put options on securities,
- ------
securities indexes and foreign currencies (including using options in
combination with securities, other options or derivative instruments);
. enter into futures contracts and options on futures contracts;
- ------
. employ forward currency and interest-rate contracts;
- ------
. purchase and sell mortgage-backed and asset-backed securities; and
- ------
. purchase and sell structured products.
- ------
RISK FACTORS
As explained more fully in the Statement of Additional Information, 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.
An incorrect correlation could result in a loss on both the hedged
assets in the Fund 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 Portfolio Adviser may incorrectly forecast interest rates, market
- ------
values or other economic factors in utilizing a derivatives strategy. In
such a case, the Fund 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 Fund.
- ------
Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Fund than hedging
strategies using the same instruments.
. There can be no assurance that a liquid market will exist at a time when
- ------
the Fund 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 a
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.
. 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, forward contracts, foreign exchanges or foreign boards of
trade, 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 Fund 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.
For additional information concerning the use and risks involved in the
acquisition, ownership or sale of futures contracts and options thereon,
including certain percentage limitations on the use of such instruments, see
"Investment Objective, Policies and Restrictions" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the 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 Trust Corporation Limited ("CMTC"), at an annual rate
of .05% of the Portfolio's average daily net assets pursuant to an
Administration Agreement wherein CMTC 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
- --------------------------------------------------------------------------------
THE PORTFOLIO ADVISER
The Portfolio Adviser, 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 One Chase Manhattan Plaza,
New York, NY 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others.
David Klassen, Vice President of the Portfolio Adviser, is responsible for the
day-to-day management of the Portfolio. He is a member of the Chase Private
Bank's in-house investment management research team, specializing in technology
and financial issues and uses a model which scans over 1,600 equity securities
in their quest for attractive value. Mr. Klassen, Head of U.S. Equity Funds
Management and Research for Chase, has been with the Portfolio Adviser since
March 1992. Mr. Klassen has managed the Portfolio since March 1995.
The Portfolio Adviser and its affiliates may have deposit, loan and other
commercial banking relationships with the issuers of securities purchased on
behalf of the Portfolio, including outstanding loans to such issuers which may
be repaid in whole or in part with the proceeds of securities so purchased. The
Portfolio Adviser has informed the Portfolio that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of the Portfolio Adviser.
On August 27, 1995, The Chase Manhattan Corporation announced its entry into an
Agreement and Plan of Merger (the "Merger Agreement") with Chemical Banking
Corporation ("Chemical"), a bank holding company, pursuant to which The Chase
Manhattan Corporation will merge with and into Chemical (the "Holding Company
Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The consummation of the
Holding Company Merger is subject to certain closing conditions, including the
receipt of certain regulatory approvals. The shareholders of each holding
company approved the merger on December 11, 1995. The Holding Company Merger is
expected to be completed on or about February 29, 1996.
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 1-800-829-3863. 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:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
------------------ -----------------------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
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 is an open-end investment management company which seeks to
achieve its investment objectives by investing 100% of its assets in the
Portfolio, which is a separate registered investment company with identical
investment objectives as the Fund. The investment objectives of the Fund and the
Portfolio may not be changed without shareholder approval. Shareholders will be
provided with written notice 30 days prior to any such changes in investment
objectives. Therefore, an investor's interest in a 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 be allocated a proportionate share of the Portfolio's income
and expenses, in addition to unrealized and realized gains and losses. However,
other investors investing in the Portfolio are not required to buy their shares
at the same public offering prices as the Fund. Investors in the Fund should be
aware that these differences may result in differences in returns experienced by
investors in the different funds that invest in the Portfolio. Such differences
in returns are also present in other mutual fund structures.
Small 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.) Also, funds with a greater pro rata ownership in the Portfolio could
have effective voting control of the operations of the Portfolio. Certain
changes in the Portfolio's investment objective, policies or restrictions may
require the Fund to redeem its investment in the Portfolio. Any such 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. The distribution
in kind may also result in a less diversified portfolio of investments or
adversely affect the liquidity of the Fund. In addition, the investment of the
Fund may be withdrawn from the Portfolio at any time if the Board of Trustees
determines that it is in the best interest of that Fund to do so. Upon any such
withdrawal, the Board of Trustees would consider what action might be taken,
including the investment of all of the assets of the Fund in another pooled
investment entity having the same investment objective as the Fund or retaining
an investment adviser to manage the Fund's assets in accordance with the
investment policies of the Portfolio.
In addition to the Fund, other mutual funds invest in the Portfolio. Information
on these other feeder funds may be obtained by calling 1-800-829-3863. See
"Investment Objective and Polices," "Additional Information on Investment
Policies, Techniques and Risk Factors" and "Management of the Fund" for more
information.
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. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, has been appointed the independent accountants for the
Fund.
The Blanchard Group of Funds are available through Signet Financial Services,
Inc., member NASD, and are advised by Virtus Capital Management, Inc., an
affiliate of Signet Financial Services, Inc.
Investment products available through Signet Financial Services, Inc., are
not deposits, obligations of, or guaranteed by Signet Bank, Signet Financial
Services, Inc., Chase, any other bank or financial institution, and are
not insured by the FDIC or any Federal Agency. In addition, they involve
risk, including possible loss of principal invested.
BLANCHARD
Cusip 093265403
GO1386-05 (2/96)
(1741) 10PC0296
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 29, 1996 (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 10
Computation of Net Asset Value 12
Performance Information 12
Additional Purchase and Redemption Information 13
Tax Matters 14
The Management of the FUND 18
Management Services 26
Administrative Services 26
Distribution Plan 26
Description of the FUND 27
Shareholder Reports 27
Appendix A A-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank, N.A.
Distributor
Federated Securities Corp.
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Price Waterhouse LLP
Dated: February 29, 1996
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.
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.
The investment restrictions of the FUND and the Portfolio, as described
below, are fundamental and may not be changed without approval by a
majority of the outstanding shares of the FUND or the Portfolio which means
the vote of the lesser of (i) 67% or more of the shares of the FUND or
total beneficial interests of the Portfolio present at the meeting, if the
holders of more than 50% of the outstanding shares of the FUND or total
beneficial interests of the Portfolio are present or represented by proxy
or (ii) more than 50% of the outstanding shares of the FUND or total
beneficial interests of the Portfolio.
INVESTMENT POLICIES
The following information supplements and should be read in conjunction
with the Prospectus discussion of investment policies and with the Appendix
included at the end of the Prospectus.
U.S. GOVERNMENT SECURITIES - Although the Portfolio invests primarily
in common stocks, it may also maintain cash reserves and invest in a
variety of short-term debt securities, including obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
which have remaining maturities not exceeding one year. Agencies and
instrumentalities that issue or guarantee debt securities and have been
established or sponsored by the U.S. Government include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks, the Federal Land Banks, the Federal
National Mortgage Association and the Student Loan Marketing Association.
Certain of these securities may not be backed by the full faith and credit
of the U.S. Government.
BANK OBLIGATIONS - Investments by the Portfolio in short-term debt
securities as described above also include investments in obligations
(including certificates of deposit and bankers' acceptances) of those U.S.
banks 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.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction.
Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the
maturity date.
COMMERCIAL PAPER - Investments by the Portfolio in short-term debt
securities also include investments in commercial paper, which represents
short-term, unsecured promissory notes issued in bearer form by bank
holding companies, corporations and finance companies. The commercial
paper purchased for the Portfolio will consist of direct obligations of
domestic issuers which, at the time of investment, are (i) rated "P-1" by
Moody's or "A-1" or better by Standard & Poor's, (ii) issued or guaranteed
as to principal and interest by issuers or guarantors having an existing
debt security rating of "Aa" or better by Moody's or "AA" or better by
Standard & Poor's, or (iii) securities which, if not rated, are, in the
Portfolio Adviser's opinion, of an investment quality comparable to rated
commercial paper in which the Portfolio may invest. The rating "P-1" is
the highest commercial paper rating assigned by Moody's and the ratings "A-
1" and "A-1+" are the highest commercial paper ratings assigned by Standard
& Poor's. Debt securities rated "Aa" or better by Moody's or "AA" or
better by Standard & Poor's are generally regarded as high-grade
obligations and such ratings indicate that the ability to pay principal and
interest is very strong.
REPURCHASE AGREEMENTS - The Portfolio may, when appropriate, enter into
repurchase agreements only with member banks of the Federal Reserve System
and securities dealers believed creditworthy, and only if fully
collateralized by U.S. Government obligations or other 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 may be deemed 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.
The Portfolio will not be invested in a repurchase agreement maturing in
more than seven days if any such investment together with securities
subject to restrictions on transfer held by the Portfolio exceed 10% of its
total net assets. Repurchase agreements are also subject to the same risks
described below with respect to stand-by commitments.
LOANS OF PORTFOLIO SECURITIES - Certain securities dealers who make
"short sales" or who wish to obtain particular securities for short periods
may seek to borrow them from an institutional investor such as the
Portfolio. The Portfolio reserves the right to seek to increase its income
by lending its portfolio securities. Under present regulatory policies,
including those of the Board of Governors of the Federal Reserve System and
the Securities and Exchange Commission, such loans may be made only to
member firms of the New York Stock Exchange, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Under a loan, the Portfolio has the
right to call a loan and obtain the securities loaned at any time on five
days' notice.
During the existence of a loan, the Portfolio continues to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned and also receives compensation based on investment of the
collateral. The Portfolio does not, however, have the right to vote any
securities having voting rights during the existence of the loan, but can
call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be
made only to dealers deemed by the Portfolio to be of good standing, and
when, in the judgment of the Portfolio, the consideration that can be
earned currently from securities loans of this type justifies the attendant
risk. In the event the Portfolio makes securities loans, it is not
intended that the value of the securities loaned would exceed 30% of the
value of the Portfolio's total assets.
ADDITONAL 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 a 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 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 Portfolio Adviser to
forecast interest rates and other economic factors correctly. If the
Portfolio Adviser incorrectly forecasts such factors and has taken
positions in derivative or related 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.
DERIVATIVE AND RELATED INSTRUMENTS
To the extent permitted by the investment objectives and policies of
the Portfolio, and as described more fully below, the Portfolio may:
purchase, write and exercise call and put options on securities,
securities indexes and foreign currencies (including using options
in combination with securities, other options or derivative
instruments);
enter into futures contracts and options on futures contracts;
employ forward currency and interest-rate contracts;
purchase and sell mortgage-backed and asset-backed securities; and
purchase and sell structured products.
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 Portfolio Adviser 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, forward contracts, foreign exchanges or foreign
boards of trade, 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 the Portfolio's use of various
strategies involving derivatives and related instruments.
OPTIONS ON SECURITIES, SECURITIES INDEXES, CURRENCIES AND DEBT
INSTRUMENTS. The Portfolio may PURCHASE, SELL or EXERCISE call and put
options on:
securities;
securities indexes;
currencies; or
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, a 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.
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;
stock index futures contracts;
foreign currency futures contracts;
futures contracts on specified instruments; and
options on these futures contracts ("futures options").
The futures contracts and futures options may be based on various
securities 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) and other financial instruments and indices.
These instruments may be used to hedge portfolio positions and
transactions as well as to gain exposure to markets. For example, a
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 a Portfolio intends to
acquire an instrument or enter into a position. For example, a 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. 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 related 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 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 related 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.
MORTGAGE-BACKED SECURITIES. The Portfolio may purchase mortgage-
backed securities--i.e., securities representing an ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations. Mortgage loans
included in the pool--but not the security itself--may be insured by the
Government National Mortgage Association or the Federal Housing
Administration or guaranteed by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or the Veterans Administration.
Mortgage-backed securities provide investors with payments consisting of
both interest and principal as the mortgages in the underlying mortgage
pools are paid off. Although providing the potential for enhanced returns,
mortgage-backed securities can also be volatile and result in unanticipated
losses.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will usually result in the return of the greater part
of the principal invested far in advance of the maturity of the mortgages
in the pool. The actual yield of a mortgage-backed security may be
adversely affected by the prepayment of mortgages included in the mortgage
pool underlying the security.
The Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage
investment conduits ("REMICs") and in pools of certain other asset-backed
bonds and mortgage pass-through securities. Like a bond, interest and
prepaid principal are paid, in most cases, semi-annually. CMOs are
collateralized by a portfolio of mortgage pass-through securities
guaranteed by the U.S. Government, or U.S. Government-related, entities,
and their income streams.
CMOs are structured into multiple classes, the bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is
first returned to investors holding the shortest maturity class. Investors
holding the longer maturity classes receive principal only after the first
class has been retired. An investor is partially protected against a
sooner than desired return of principal because of the sequential payments.
REMICs include governmental and/or private entities that issue a fixed
pool of mortgages secured by an interest in real property. REMICs are
related to CMOs in that they issue multiple classes of securities. REMICs
issued by private entities are not U.S. Government securities and are not
directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer.
STRUCTURED PRODUCTS. The Portfolio may purchase interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of certain debt obligations, thereby creating
"structured products." 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. 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 also invest in other types of structured products,
including among others, spread trades and notes linked by a formula (e.g.,
a multiple) to the price of an underlying instrument or currency. A spread
trade is an investment position relating to a difference in the prices or
interest rates of two securities or currencies 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 or currencies.
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.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS
Regulations of the CFTC require that the Portfolio enters into
transactions in futures contracts and options thereon for hedging purposes
only, in order to assure that it is not deemed to be a "commodity pool"
under such regulations. In particular, CFTC regulations require that all
short futures positions be entered into for the purpose of hedging the
value of securities held in the Portfolio's portfolio, and that all long
futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an
amount determined by reference to certain cash and securities positions
maintained for the Portfolio, and accrued profits on such positions. In
addition, the Portfolio may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial margin deposits on
its existing futures positions and premiums paid for options on futures
contracts would exceed 5% of the market value of the Portfolio's total
assets.
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 hedging 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.
In addition to the foregoing requirements, the Portfolio's Board of
Trustees has adopted an additional restriction on the use of futures
contracts and options thereon, requiring that the aggregate market value of
the futures contracts held by the Portfolio not exceed 50% of the market
value of its total assets. Neither this restriction nor any policy with
respect to the above-referenced restrictions, would be changed by the Board
of Trustees without considering the policies and concerns of the various
federal and state regulatory agencies.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth below, the FUND
has adopted the following investment restrictions to enable it to invest in
the Portfolio:
It is a fundamental policy of the FUND that because it holds no
portfolio securities except interests in the Portfolio, the FUND's
investment objective, policies and restrictions shall be identical to the
Portfolio's investment objective, policies and restrictions, except for the
following: the FUND (1) may invest more than 5% of its assets in another
issuer, (2) may, consistent with Section 12 of the 1940 Act, invest in
securities issued by other registered investment companies, (3) may invest
more than 10% of its net assets in the securities of a registered
investment company, (4) may hold more than 10% of the voting securities of
a registered investment company, (5) will concentrate its investments in
the investment company and (6) will not issue senior securities except as
permitted by an exemptive order of the SEC.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate its
assets, except that, as a temporary measure for extraordinary or
emergency purposes, it may borrow in an amount not to exceed 1/3
of the current value of its net assets, including the amount
borrowed, and may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings (it is intended that,
aside from reverse repurchase transactions, money would be
borrowed by the Portfolio only from banks and only to accommodate
requests for the repurchase of shares of the Portfolio while
effecting an orderly liquidation of portfolio securities),
provided that collateral arrangements with respect to the
Portfolio's permissible futures and options transactions,
including initial and variation margin, are not considered to be a
pledge of assets for purposes of this restriction; the Portfolio
will not purchase investment securities if its outstanding
borrowing, including reverse repurchase agreements, exceeds 5% of
the value of the Portfolio's total assets;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may
be necessary for the clearance of purchases and sales of
securities and except that, with respect to the Portfolio's
permissible options and futures transactions, deposits of initial
and variation margin may be made in connection with the purchase,
ownership, holding or sale of futures or options positions;
(3) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter
under the Securities Act of 1933 in selling a portfolio security;
(4) 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 U.S. Government securities or
(iii) 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;
(5) knowingly invest in securities which are subject to
legal or contractual restrictions on resale (including securities
that are not readily marketable, but not including repurchase
agreements maturing in not more than seven days) if, as a result
thereof, more than 10% of the FUND's or Portfolio's total assets
(taken at market value) would be so invested (including repurchase
agreements maturing in more than seven days);
(6) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real
estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts in the ordinary course
of business, other than (i) permissible futures and options
transactions or (ii) forward purchases and sales of foreign
currencies or securities;
(7) purchase securities of any issuer if such purchase at
the time thereof would cause more than 10% of the voting
securities of such issuer to be held by the Portfolio;
(8) make short sales of securities or maintain a short
position; except that the Portfolio may make such short sales of
securities or maintain a short position if when a short position
is open the Portfolio owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, and unless not
more than 10% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time (it is
the present intention of management to make such sales only for
the purpose of deferring realization of gain or loss for federal
income tax purposes; such sales would not be made of securities
subject to outstanding options);
(9) concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the
Portfolio's investment objective, up to 25% of the assets of the
Portfolio, at market value at the time of each investment, may be
invested in any one industry, except that positions in options and
futures shall not be subject to this restriction; or
(10) issue any senior security (as that term is defined in
the 1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder,
provided that collateral arrangements with respect to the
Portfolio's permissible options and futures transactions,
including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for purposes of
this restriction.
The Portfolio is not permitted to make loans to other persons, except
(i) through the lending of its portfolio securities and provided that any
such loans not exceed 30% of the Portfolio's total assets (taken at market
value), (ii) through the use of repurchase agreements or the purchase of
short-term obligations and provided that not more than 10% of the
Portfolio's total assets will be invested in repurchase agreements maturing
in more than seven days, or (iii) by purchasing, subject to the limitation
in paragraph 5 above, a portion of an issue of debt securities of types
commonly distributed privately to financial institutions, for which
purposes the purchase of short-term commercial paper or a portion of an
issue of debt securities which are part of an issue to the public shall not
be considered the making of a loan.
For purposes of the investment restrictions described above and the
state and federal restrictions described below, 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. For purposes of Investment Restriction No. 9, 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".
The Portfolio has also adopted the following non-fundamental investment
policy which may be changed without shareholder approval. The Portfolio
may enter into repurchase agreements (a purchase of and a simultaneous
commitment to resell a security at an agreed-upon price on an agreed-upon
date) only with member banks of the Federal Reserve System and securities
dealers believed creditworthy and only if fully collateralized by U.S.
Government obligations or other securities in which the Portfolio is
permitted to invest. If the vendor of a repurchase agreement fails to pay
the sum agreed to on the agreed-upon delivery date, the Portfolio would
have the right to sell the securities constituting the collateral; however,
the Portfolio might thereby incur a loss and in certain cases may not be
permitted to sell such securities. Moreover, as noted above in
paragraph 5, the Portfolio may not, as a matter of fundamental policy,
invest more than 10% of its total assets in repurchase agreements maturing
in more than seven days.
The Portfolio has no current intention of engaging in the following
activities in the foreseeable future: (i) writing, purchasing or selling
puts, calls or combinations thereof with respect to U.S. Government
securities; (ii) purchasing voting securities of any issuer.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain
federal and state statutes and regulatory policies, as a matter of
operating policy, the Portfolio will not: (i) sell any security which it
does not own unless by virtue of its ownership of other securities the
Portfolio has at the time of sale a right to obtain securities, without
payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is
made upon the same conditions, (ii) invest for the purpose of exercising
control or management, (iii) invest more than 5% of the FUND's assets in
companies which, including predecessors, have a record of less than three
years' continuous operation, (iv) invest in warrants valued at the lower of
cost or market, in excess of 5% of the value of the FUND's net assets, and
no more than 2% of such value may be warrants which are not listed on the
New York or American Stock Exchanges, (v) purchase or retain in the
Portfolio's portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or trustee
of the Portfolio, or is an officer or director of the Portfolio 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, (vi) as to 50% of the Portfolio's total assets,
purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be deemed
a single class. These policies are not fundamental and may be changed by
the Portfolio's Board of Trustees without shareholder approval.
PERCENTAGE AND RATING RESTRICTIONS: If a percentage or rating
restriction on investment or utilization of assets set forth above or
referred to in the Prospectus is adhered to at the time an investment is
made or assets are so utilized, a later change in percentage resulting from
changes in the value of the portfolio securities or a later change in the
rating of a portfolio security of the Portfolio will not be considered a
violation of policy.
PORTFOLIO TURNOVER: 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%.
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 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)
The FUND's cumulative total return for the fiscal year ended October
31, 1995 was 9.43% and the
Portfolio's cumulative total return from inception through October 31, 1995
was 348.38%.
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the FUND's registration statement. In calculating the
ending redeemable value, the pro rata share of the account opening fee is
deducted from the initial $1,000 investment and all dividends and
distributions by the FUND are assumed to have been reinvested at net asset
value as described in the prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding
the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth
above in order to compare more accurately the FUND's performance with other
measures of investment return. For example, in comparing the FUND's total
return with data published by Lipper Analytical Services, Inc. or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on
the reinvestment date. Percentage increases are determined by subtracting
the initial net asset value of the investment from the ending net asset
value and by dividing the remainder by the beginning net asset value. The
FUND does not, for these purposes, deduct the pro rata share of the account
opening fee 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 investment
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 birthdate, 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)
HENNY, KOCHUBA, MEYER AND FLAHERTY
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA
BIRTHDATE: JUNE 18, 1924 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Henny, Kochuba, Meyer &
Flaherty; Director, Eat'N Park
Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of
the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
EDWARD C. GONZALES(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
HENNY, KOCHUBA, MEYER AND FLAHERTY
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA
BIRTHDATE: OCTOBER 6, 1926 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Henny, Kochuba, Meyer &
Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General
Partner of the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
PRESIDENT, DUQUESNE UNIVERSITY
PITTSBURGH, PA
BIRTHDATE: DECEMBER 20, 1932 TRUSTEE 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 Managment, 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 Securites 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.
THE FUNDS
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 31, 1995, Officers and Trustees own less than 1% of the
outstanding shares of each FUND.
To the best knowledge of the FUND, as of February 12, 1996, one
shareholder owned 5% or more of the outstanding shares of the FUND:
Fairfield Tire Center Inc., Fairfield, California, owned approximately
20,510 shares (9.06%).
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.
P Y
R E
T A I A
R G N R
U E C
S I F
T P I
E A R
E L S
T
O
C B
C E
U C
P A
A M
T E
I A
O
N T
S R
U
F S
O T
R E
E
T
H
E
L
A
S
F 6 C 1
e 3 h 9
r a 8
g i 4
u r
s m
a
R n
e
i a
d n
, d
I C
I h
I i
9 e
7 f
1
E
W x
e e
s c
t u
t
R i
o v
a e
d
N O
e f
w f
i
C c
a e
n r
a ,
a
n L
, u
m
C e
T l
i
0 t
6 e
8
4 C
0 o
r
p
o
r
a
t
i
o
n
,
s
i
n
c
e
S
e
p
t
e
m
b
e
r
1
9
8
5
;
T
r
u
s
t
e
e
,
M
o
r
g
a
n
S
t
a
n
l
e
y
P
o
r
t
f
o
l
i
o
s
;
f
r
o
m
J
a
n
u
a
r
y
1
9
8
5
t
h
r
o
u
g
h
S
e
p
t
e
m
b
e
r
1
9
8
5
,
D
i
r
e
c
t
o
r
o
f
C
o
r
p
o
r
a
t
e
F
i
n
a
n
c
e
,
N
o
y
e
s
P
a
r
t
n
e
r
s
(
i
n
v
e
s
t
m
e
n
t
a
d
v
i
s
o
r
y
f
i
r
m
)
;
f
r
o
m
1
9
8
2
t
h
r
o
u
g
h
1
9
8
4
,
M
a
n
a
g
i
n
g
D
i
r
e
c
t
o
r
,
B
e
r
n
h
a
r
d
A
s
s
o
c
i
a
t
e
s
(
v
e
n
t
u
r
e
c
a
p
i
t
a
l
f
i
r
m
)
.
R 6 F 1
i 1 o 9
c r 8
h m 4
a e
r r
d
D
E i
. s
t
T r
e i
n c
t
H
a S
k u
e p
n e
4 r
i
B n
a t
r e
n n
f d
i e
e n
l t
d
o
R f
o
a S
d c
P h
i o
t o
t l
s s
f ,
o
r M
d o
, n
r
N o
Y e
1 N
4 o
5 .
3
4 2
a
n
d
O
r
l
e
a
n
s
C
o
u
n
t
i
e
s
,
N
e
w
Y
o
r
k
;
C
h
a
i
r
m
a
n
o
f
t
h
e
F
i
n
a
n
c
e
a
n
d
t
h
e
A
u
d
i
t
a
n
d
A
c
c
o
u
n
t
i
n
g
C
o
m
m
i
t
t
e
e
s
,
M
e
m
b
e
r
o
f
t
h
e
E
x
e
c
u
t
i
v
e
C
o
m
m
i
t
t
e
e
;
C
h
a
i
r
m
a
n
o
f
t
h
e
B
o
a
r
d
a
n
d
P
r
e
s
i
d
e
n
t
,
N
e
w
Y
o
r
k
S
t
a
t
e
T
e
a
c
h
e
r
s
'
R
e
t
i
r
e
m
e
n
t
S
y
s
t
e
m
.
W 5 V 1
i 4 i 9
l c 8
l e 7
i
a P
m r
e
J s
. i
d
A e
r n
m t
s
t a
r n
o d
n
g T
4 r
9 e
a
A s
s u
p r
e e
n r
,
W
a I
y n
U g
p e
p r
e s
r o
l
S l
a -
d R
d a
l n
e d
R C
i o
v m
e p
r a
, n
y
N .
J
0
7
4
5
8
J 6 A 1
o 6 t 9
h t 8
n o 4
r
R n
. e
H y
.
i
B n
l
u P
m r
3 i
2 v
2 a
t
M e
a
i P
n r
a
S c
t t
r i
e c
e e
t ;
L
a f
k o
e r
v m
i e
l r
l l
e y
,
a
C
T P
a
0 r
6 t
0 n
3 e
9 r
i
n
t
h
e
l
a
w
f
i
r
m
o
f
R
i
c
h
a
r
d
s
,
O
'
N
e
i
l
&
A
l
l
e
g
a
e
r
t
;
C
o
m
m
i
s
s
i
o
n
e
r
o
f
A
g
r
i
c
u
l
t
u
r
e
-
S
t
a
t
e
o
f
C
o
n
n
e
c
t
i
c
u
t
,
1
9
9
2
-
1
9
9
5
.
* 6 R 1
J 4 e 9
o t 9
s i 0
e r
p e
h d
;
J
. C
o
H m
a m
r e
k r
i c
n i
s a
2 l
5
7 S
e
P c
l t
a o
n r
t
a E
t x
i e
o c
n u
t
C i
i v
r e
c
l a
e n
d
S
o E
u x
t e
h c
P u
o t
n i
t v
e e
V V
e i
d c
r e
a
P
B r
e e
a s
c i
h d
, e
n
F t
L
o
3 f
2
0 T
8 h
2 e
C
h
a
s
e
M
a
n
h
a
t
t
a
n
B
a
n
k
,
N
.
A
.
f
r
o
m
1
9
8
5
t
h
r
o
u
g
h
1
9
8
9
.
H
e
h
a
s
b
e
e
n
e
m
p
l
o
y
e
d
b
y
C
h
a
s
e
i
n
n
u
m
e
r
o
u
s
c
a
p
a
c
i
t
i
e
s
a
n
d
o
f
f
i
c
e
s
s
i
n
c
e
1
9
5
4
.
D
i
r
e
c
t
o
r
o
f
B
l
e
s
s
i
n
g
s
C
o
r
p
o
r
a
t
i
o
n
,
J
e
f
f
e
r
s
o
n
I
n
s
u
r
a
n
c
e
C
o
m
p
a
n
y
o
f
N
e
w
Y
o
r
k
,
M
o
n
t
i
c
e
l
l
o
I
n
s
u
r
a
n
c
e
C
o
m
p
a
n
y
a
n
d
N
a
t
i
o
n
a
r
.
* 6 C 1
H 0 o 9
. n 9
s 2
R u
i l
c t
h a
a n
r t
d ,
V R
a e
r p
t u
a b
b l
e i
d c
i
a B
n a
P n
. k
O
. o
f
B
o N
x e
w
2
9 Y
6 o
B r
e k
a ;
c
h f
o
R r
o m
a e
d r
H l
e y
n ,
d
r S
i e
c n
k i
' o
s r
H I
e n
a v
d e
S s
o t
u m
t e
h n
p t
o
r O
t f
, f
i
M c
E e
r
0 ,
4
5 D
7 i
6 v
i
s
i
o
n
E
x
e
c
u
t
i
v
e
o
f
t
h
e
I
n
v
e
s
t
m
e
n
t
M
a
n
a
g
e
m
e
n
t
D
i
v
i
s
i
o
n
o
f
T
h
e
C
h
a
s
e
M
a
n
h
a
t
t
a
n
B
a
n
k
,
N
.
A
.
,
1
9
8
0
t
h
r
o
u
g
h
1
9
9
1
.
S 6 R 1
t 3 e 9
u t 9
a i 2
r r
t e
d
W ;
.
f
C o
r r
a m
g e
i r
n l
, y
J P
r r
. e
1 s
0 i
8 d
e
V n
a t
l ,
l
e F
y a
i
R r
o f
a i
d e
C l
o d
s
T
C e
o s
b t
, i
n
C g
T
L
0 a
6 b
8 o
0 r
7 a
t
o
r
y
,
I
n
c
.
H
e
h
a
s
p
r
e
v
i
o
u
s
l
y
s
e
r
v
e
d
i
n
a
v
a
r
i
e
t
y
o
f
m
a
r
k
e
t
i
n
g
,
m
a
n
u
f
a
c
t
u
r
i
n
g
a
n
d
g
e
n
e
r
a
l
m
a
n
a
g
e
m
e
n
t
p
o
s
i
t
i
o
n
s
w
i
t
h
U
n
i
o
n
C
a
m
p
C
o
r
p
.
,
T
r
i
n
i
t
y
P
a
p
e
r
&
P
l
a
s
t
i
c
s
C
o
r
p
.
,
a
n
d
C
o
n
o
v
e
r
I
n
d
u
s
t
r
i
e
s
.
I 6 R 1
r 4 e 9
v t 9
i i 2
n r
g e
d
L ;
.
V
T i
h c
o e
d
e P
8 r
0 e
s
P i
e d
r e
k n
i t
n
s o
f
R
o Q
a u
d o
G t
r r
e o
e n
n
w S
i y
c s
h t
, e
m
C s
T .
0 H
6 e
8
3 h
0 a
s
p
r
e
v
i
o
u
s
l
y
s
e
r
v
e
d
i
n
a
n
u
m
b
e
r
o
f
e
x
e
c
u
t
i
v
e
p
o
s
i
t
i
o
n
s
w
i
t
h
C
o
n
t
r
o
l
D
a
t
a
C
o
r
p
.
,
i
n
c
l
u
d
i
n
g
P
r
e
s
i
d
e
n
t
o
f
i
t
s
L
a
t
i
n
A
m
e
r
i
c
a
n
O
p
e
r
a
t
i
o
n
s
,
a
n
d
G
e
n
e
r
a
l
M
a
n
a
g
e
r
o
f
i
t
s
D
a
t
a
S
e
r
v
i
c
e
s
b
u
s
i
n
e
s
s
.
* Interested Trustees as defined under the 1940 Act by virtue of their
ownership of shares of the Portfolio Adviser.
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
N A T
A G O
M G T
E R A
, E L
G
P A C
O T O
S E M
I P
T C E
I O N
O M S
N P A
W E T
I N I
T S O
H A N
T
T I P
H O A
E N I
D
F F
U R T
N O O
D M
S T T
H R
E U
S
F T
U E
N E
D S
S
( F
1 R
) O
M
T
H
E
F
U
N
D
S
A
N
D
F
U
N
D
C
O
M
P
L
E
X
*
J $ $
o - -
h 0 0
n - -
F f
. o
r
D
o t
n h
a e
h
u F
e u
, n
C d
h
a C
i o
r m
m p
a l
n e
x
a
n
d
T
r
u
s
t
e
e
T $ $
h 4 2
o 0 ,
m 1 4
a . 8
s 0 0
0
G f
. o
r
B
i t
g h
l e
e
y F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
J $ $
o 4 2
h 2 ,
n 9 6
. 5
T 0 7
. 0
f
C o
o r
n
r t
o h
y e
,
F
J u
r n
. d
,
C
T o
r m
u p
s l
t e
e x
e
W $ $
i 4 2
l 2 ,
l 9 6
i . 5
a 0 7
m 0
f
J o
. r
C t
o h
p e
e
l F
a u
n n
d d
,
C
T o
r m
u p
s l
t e
e x
e
J $ $
a 4 2
m 2 ,
e 9 6
s . 5
0 7
E 0
. f
o
D r
o
w t
d h
, e
T F
r u
u n
s d
t
e C
e o
m
p
l
e
x
L $ $
a 4 2
w 0 ,
r 1 4
e . 8
n 0 0
c 0
e f
o
D r
.
t
E h
l e
l
i F
s u
, n
d
M
. C
D o
. m
, p
l
T e
r x
u
s
t
e
e
E $ $
d 4 2
w 2 ,
a 9 6
r . 5
d 0 7
0
L f
. o
r
F
l t
a h
h e
e
r F
t u
y n
, d
J C
r o
. m
, p
l
T e
r x
u
s
t
e
e
E $ $
d - -
w 0 0
a - -
r
d f
o
C r
.
t
G h
o e
n
z F
a u
l n
e d
s
, C
o
P m
r p
e l
s e
i x
d
e
n
t
,
T
r
u
s
t
e
e
a
n
d
T
r
e
a
s
u
r
e
r
P $ $
e 4 2
t 0 ,
e 1 4
r . 8
0 0
E 0
. f
o
M r
a
d t
d h
e e
n
, F
u
T n
r d
u
s C
t o
e m
e p
l
e
x
G $ $
r 4 2
e 0 ,
g 1 4
o . 8
r 0 0
y 0
f
F o
. r
M t
e h
y e
e
r F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
J $ $
o 4 2
h 0 ,
n 1 4
. 8
E 0 0
. 0
f
M o
u r
r
r t
a h
y e
,
F
J u
r n
. d
,
C
J o
. m
D p
. l
, e
x
S
.
J
.
D
.
,
T
r
u
s
t
e
e
W $ $
e 4 2
s 0 ,
l 1 4
e . 8
y 0 0
0
W f
. o
r
P
o t
s h
v e
a
r F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
M $ $
a 4 2
r 0 ,
j 1 4
o . 8
r 0 0
i 0
e f
o
P r
.
t
S h
m e
u
t F
s u
, n
d
T
r C
u o
s m
t p
e l
e e
x
(1) The aggregate compensation is provided for the Funds which was
comprised of eleven portfolios on
December 31, 1995. Information is furnished for the period from May
2, 1995, date of election of Trustees,
to December 31, 1995.
* 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, 1995.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the
Portfolio:
P T
e o
C n t
a s a
p i l
i o C
t n o
a m
l o p
r e
G R n
r e s
o t a
w i t
t r i
h e o
m n
P e f
o n r
r t o
t B m
f e
o n "
l e F
i f u
o i n
( t d
1 s
) C
A o
c m
c p
r l
u e
e x
d "
a (
s 2
)
F
u
n
d
E
x
p
e
n
s
e
s
F $ 0 $
e 7 7
r , 8
g 5 ,
u 9 4
s 4 5
. 6
R 6 .
e 7 6
i 5
d
,
I
I
I
,
T
r
u
s
t
e
e
R 5 0 5
i , 2
c 0 ,
h 6 3
a 3 0
r . 4
d 1 .
2 3
E 9
.
T
e
n
H
a
k
e
n
,
T
r
u
s
t
e
e
W 5 0 4
i , 6
l 0 ,
l 6 6
i 3 3
a . 2
m 1 .
2 3
J 4
.
A
r
m
s
t
r
o
n
g
,
T
r
u
s
t
e
e
J 4 0 5
o , 1
h 9 ,
n 5 3
5 0
R . 4
. 4 .
H 2 3
. 7
B
l
u
m
,
T
r
u
s
t
e
e
J 5 0 5
o , 2
s 0 ,
e 6 3
p 3 0
h . 4
1 .
J 2 3
. 9
H
a
r
k
i
n
s
,
T
r
u
s
t
e
e
H 1 0 7
. 3 4
, ,
R 3 8
i 7 0
c 6 4
h . .
a 6 4
r 2 4
d
V
a
r
t
a
b
e
d
i
a
n
,
T
r
u
s
t
e
e
S 5 0 5
t , 2
u 0 ,
a 6 3
r 3 0
t . 4
1 .
W 2 3
. 9
C
r
a
g
i
n
,
J
r
.
,
T
r
u
s
t
e
e
I 5 0 5
r , 2
v 0 ,
i 6 3
n 3 0
g . 4
1 .
L 2 3
. 9
T
h
o
d
e
,
T
r
u
s
t
e
e
(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,
1995 to December 31, 1995 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,
and Thode are 11, 11, 8, 11, 3, 3 and 3 respectively.
Y
E H
A I
R G
S H
E
O S
F T
S
E A
R N
V N
I U
C A
E L
C
O
M
P
E
N
S
A
T
I
O
N
P
A
I
D
B
Y
A
L
L
V
I
S
T
A
F
U
N
D
S
4 4 5 5
0 5 0 5
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
1 4 4 5 5
0 0 5 0 5
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
9 3 4 4 4
6 0 5 9
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
8 3 3 4 4
2 6 0 4
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
7 2 3 3 3
8 1 5 8
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
6 2 2 3 3
4 7 0 3
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
5 2 2 2 2
0 2 5 7
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
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 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 July 12, 1995 to
October 31, 1995, 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, 1995, the FUND paid $3,105 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, 1995. The Financial Statements for the fiscal year ended
October 31, 1995 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 RATINGS
BOND RATINGS
Moody's Investors Service, Inc. - Bonds which are rated Aaa are judged
to be the best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong positions of such issues. Bonds which are rated Aa are judged to be
of high quality by all standards. Together with Aaa group they comprise
what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long term
risks appear somewhat larger than in Aaa securities. Bonds which are rated
A possess many favorable investment attributes and are to be considered as
upper medium grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future. Moody's applies
numerical modifiers "1," "2" and "3" in each generic rating classification
from Aa through B in its corporate bond rating system. The modifier "1"
indicates that the security ranks in the higher end of its generic rating
category; the modifier "2" indicates a mid-range ranking; and the modifier
"3" indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Ratings Group Bonds rated AAA have the highest
rating assigned by Standard & Poor's. Capacity to pay interes t and repay
principal is extremely strong. Bonds rated AA have a very strong capacity
to pay interest and repay principal and differ from AAA issues only in
small degree. Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of change in circumstances and economic conditions than bonds in
higher rated categories.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high
grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of an AAA bond is
showing of earnings several times or many times interest requirements, with
such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Bonds rated AA by Fitch are
judged by Fitch to be of safety virtually beyond question and are readily
salable, whose merits are not unlike those of the AAA class, but whose
margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secured but influenced as to rating by the
lesser financial power of the enterprise and more local type market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit
quality with negligible risk factors; only slightly more than U.S. Treasury
debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit
quality with strong protection factors. Risk is modest but may vary
slightly from time to time because of economic conditions.
Bonds rated TBW-1 are judged by Thomson BankWatch, Inc. to be of the
highest credit quality with a very high degree of likelihood that principal
and income will be paid on a timely basis. Bonds rated TBW-2 offer a
strong degree of safety regarding repayment. The relative degree of
safety, however, is not as high as TBW-1.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers: Prime 1-Highest
Quality; Prime 2-Higher Quality; Prime 3-High Quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2, and 3 to indicate the relative degree of
safety. The designation A-1 indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. A "+" designation is
applied to those issues rated "A-1" which possess safety characteristics.
Capacity for timely payment on issues with the designation A-2 is strong.
However, the relative degree of safety is not as high as for issues
designated A-1. Issues carrying the designation A-3 have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good
Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor. Paper rated Duff-2 is
regarded as having good certainty of timely payment, good access to capital
markets and sound liquidity factors and company fundamentals. Risk factors
are small.
G01623-02 (2/96)
093265403
BLANCHARD
GROUP OF FUNDS
BLANCHARD
GROWTH & INCOME FUND
PROSPECTUS
FEBRUARY 29,1996
THE BLANCHARD GROUP OF FUNDS
BLANCHARD GROWTH & INCOME FUND
PROSPECTUS
Blanchard Growth & Income Fund (the "Fund") seeks to provide long term capital
appreciation and to provide dividend income through a broad portfolio of common
stocks. To achieve its investment objectives, the Fund invests 100% of its
assets in the Growth & Income Portfolio (the "Portfolio"), an open-end
management investment company advised by The Chase Manhattan Bank, N.A. (the
"Portfolio Adviser"), with investment objectives, policies and restrictions
identical to those of the Fund.
The Portfolio invests primarily (i.e., at least 80% under normal circumstances)
in common stocks of issuers (including foreign issuers) ranging from small to
medium to large capitalizations. For the most part, the Portfolio Adviser will
pursue a "contrary opinion" investment approach selecting common stocks that are
currently out of favor with investors in the stock market. These securities are
usually characterized by a relatively low price/earnings ratio (using normalized
earnings), a low ratio of market price to book value, or underlying asset values
that the Portfolio Adviser believes are not fully reflected in the current
market price.
The performance of the Fund depends on the performance of the Portfolio. The
Fund and Portfolio structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
For more information on this unique structure, see "Additional Information About
the Fund and the Portfolio" on Page 22. There can be no guarantee that the Fund
and the Portfolio will achieve their investment objectives.
Virtus Capital Management, Inc. ("VCM") is the Fund's manager.
Blanchard Funds (the "Trust"), which currently consists of eight 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. is the Funds' overall investment manager. There
is no guarantee that the Funds will achieve their investment objectives.
Please read this Prospectus carefully and retain it for future reference. The
Fund's Statement of Additional Information, dated February 29, 1996, 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, N.A. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated February 29, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
HIGHLIGHTS 1
- ------------------------------------------------------
FEE TABLE 3
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- ------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 6
- ------------------------------------------------------
ADDITIONAL INFORMATION ON INVESTMENT
POLICIES, TECHNIQUES AND RISK FACTORS 7
- ------------------------------------------------------
MANAGEMENT OF THE FUND 11
- ------------------------------------------------------
PORTFOLIO ADVISORY SERVICES 12
- ------------------------------------------------------
EFFECT OF BANKING LAWS 13
- ------------------------------------------------------
HOW TO INVEST 13
- ------------------------------------------------------
INVESTOR SERVICES 15
- ------------------------------------------------------
HOW TO REDEEM 16
- ------------------------------------------------------
DISTRIBUTION OF SHARES OF THE FUND 18
- ------------------------------------------------------
TAX MATTERS 19
- ------------------------------------------------------
PERFORMANCE COMPUTATION INFORMATION 20
- ------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUND
AND THE PORTFOLIO 22
- ------------------------------------------------------
OTHER INFORMATION 24
- ------------------------------------------------------
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 6 and 7).
FUND MANAGEMENT
VCM provides management services necessary for the Fund's operations. As of
January 31, 1996, VCM had more than $2.8 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 11).
The Portfolio Adviser, 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 One Chase Manhattan Plaza,
New York, New York 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others. See "Portfolio Advisory Services--The
Portfolio Adviser" (page 12) for information concerning the proposed merger of
The Chase Manhattan Corporation with and into Chemical Banking Corporation.
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 distribu-
tion 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 13 and 18).
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 16).
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 15).
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 19).
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 7).
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
For a better understanding of the expenses you will incur directly or indirectly
when investing in the Fund, a summary for the Fund is set forth below. The
summary combines the Fund's operational expenses with the pro rata portion of
its Portfolio's operational expenses. See "Management of the Fund". The trustees
believe that the aggregate per share expenses of the Fund and the Portfolio will
be approximately equal to the expenses the Fund would incur if its assets were
invested directly in the type of securities held by the Portfolio.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)............... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable).......................................................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable).................................... None
Exchange Fees.......................................................................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee (See "Management of the Fund") (after waiver) (1)....................................... 0.40%
12b-1 Fees (after waiver) (2).......................................................................... 0.33%
Other Expenses (after expense reimbursements)(3)................................................... 3.08%
Total Fund Operating Expenses (after waivers and reimbursements) (4).......................... 3.81%
</TABLE>
- ---------
(1) The Management fee has been reduced to reflect the voluntary waiver by the
Manager. The Manager can terminate this voluntary waiver at any time at its
sole discretion. The maximum management fee is 1.10%.
(2) As of a result of 12b-1 fees of 0.50% per annum of the Fund's average daily
net assets, a shareholder who has been in the Fund for 14.5 years may pay
more than the economic equivalent of the maximum front-end sales charges
permitted by the Rules of the National Association of Securities Dealers,
Inc. The 12b-1 fees have been reduced to reflect the voluntary waiver by the
Distributor. The Distributor can terminate this voluntary waiver at any time
at its sole discretion. The maximum 12b-1 fee is 0.50%.
(3) Other expenses have been reduced to reflect the reimbursement of other
operating expenses by the Manager.
(4) Total Fund operating expenses would have been 4.58%, absent the voluntary
waivers by the Manager and Distributor and reimbursement of other operating
expenses by the Manager. VCM has agreed to cap the Fund's total operating
expenses beginning July 12, 1995 through July 11, 1997, so that the expense
ratio of the Fund will not exceed the Fund's expense ratio for the six-month
period ended April 30, 1995.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period................................................................. $38 $116 $196 $404
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. IN ADDITION, THE 5%
ANNUAL RETURN SHOULD NOT BE CONSIDERED REPRESENTATIVE OF PAST OR FUTURE RETURNS,
AND ACTUAL RETURNS MAY BE GREATER OR LESS THAN THE ILLUSTRATION ABOVE.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following ratios and per share data for a share of capital stock outstanding
throughout the period have been audited by Price Waterhouse LLP, the Fund's
independent public accountants. The financial highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of independent accountants included in the Annual Report to Shareholders
which is incorporated by reference into the Statement of Additional Information.
This table should be read in conjunction with the Fund's financial statements
and notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1995
----------------
BLANCHARD
GROWTH &
INCOME FUND
----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.00
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment loss (0.03)
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.15
- -------------------------------------------------------------------------------------------- -------
Total from investment operations 1.12
- -------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)
- -------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 8.11
- -------------------------------------------------------------------------------------------- -------
TOTAL RETURN 16.03%
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses (a) 3.81%
- --------------------------------------------------------------------------------------------
Net investment loss (0.64%)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.77%
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted)
$6,443
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the Fund's proportionate share of the respective Portfolio's
expenses, and the Fund's waivers and expense reimbursements by the Fund's
Manager and Distributor.
(b) This voluntary expense decrease is reflected in both the expense and net
investment loss ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated October 31, 1995, which may be obtained free of charge from
the Fund by calling 1-800-829-3863.
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND
The graph below illustrates the hypothetical investment of $10,000 in the
Blanchard Growth & Income Fund (the "Fund") from September 30, 1987 to October
31, 1995 compared to the Standard and Poor's 500 Index. To achieve its
investment objectives, the Fund invests 100% of its assets in the Portfolio,
which has identical investment objectives. The performance of the Fund,
therefore, depends on the performance of the Portfolio. Because the Fund had no
performance history prior to November 1, 1994, the graph set forth below,
insofar as it relates to the period prior to November 1, 1994, presents
historical performance for the Portfolio adjusted to reflect expenses estimated
at the Fund's inception to be charged to shareholders of the Fund.
[GRAPH]
* THE AVERAGE ANNUAL RETURNS QUOTED ABOVE ASSUME THE REINVESTMENT OF
- -
DISTRIBUTIONS. TOTAL RETURN INCLUDES CHANGES IN PRINCIPAL VALUE. AVERAGE
ANNUAL RETURN IS TOTAL RETURN ANNUALIZED AND COMPOUNDED. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS.
+The S&P 500 Total Return Index is not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The index is unmanaged.
This chart is for comparative purposes only and is not intended to reflect on
future performance of the Fund or the index.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
The Portfolio seeks to achieve its investment objectives of long-term capital
appreciation and secondarily, dividend income, by investing primarily (i.e., at
least 80% of its assets under normal market conditions) in common stocks. In
addition, the Portfolio may invest up to 20% of its net assets in convertible
debentures. Convertible debentures are securities which may be converted or
exchanged by the holder into shares of the underlying common stock at a stated
exchange ratio. A convertible debenture may also be subject to redemption by the
issuer but only after a date and under certain circumstances (including a
specified price) established on issue. The Portfolio will invest its assets in
stocks of issuers (including foreign issuers) ranging from small to medium to
large capitalizations. In the opinion of the Portfolio Adviser, small
capitalization issuers are those with a market capitalization of under $500
million; medium capitalization issuers are those with a market capitalization
ranging between $500 million to $3 billion; and large capitalization issuers are
those issuers with a market capitalization in excess of $3 billion. An investor
should be aware that investment in small capitalization issuers may be more
volatile than investments in issuers with market capitalizations greater than
$500 million or less than $3 billion due to the narrow scope of their business
activities, and correspondingly greater susceptibility to changes in the
business cycle of such small capitalization issuers. For the most part, the
Portfolio Adviser will pursue a "contrary opinion" investment approach,
selecting common stocks that are currently out of favor with investors in the
stock market. These securities are usually characterized by a relatively low
price/ earnings ratio (using normalized earnings), a low ratio of market price
to book value, or underlying asset values that the Portfolio Adviser believes
are not fully reflected in the current market price. The Portfolio Adviser will
use a similar approach in selecting convertible debentures; in addition to the
value of the underlying equity security, the Portfolio Adviser will consider the
added investment value of the convertible debenture to produce income for the
Portfolio. The Portfolio Adviser believes that the market risk involved in this
policy will be moderated somewhat by the anticipated dividend returns on the
stocks to be held by the Portfolio.
POLICIES OF THE FUND
The Portfolio will be substantially fully invested and, in normal circumstances,
the Portfolio will invest at least 80% of its assets in common stocks which are
traded on the New York Stock Exchange and on NASDAQ. The number of stocks paying
dividends will fluctuate based on portfolio holdings. U.S. stocks have
historically been one of the very best ways to achieve growth. However, the
Portfolio also may invest up to 20% of its net assets in stocks of foreign
issuers. Investments in foreign securities are subject to certain risks to which
investments in domestic securities are not subject, including political or
economic instability of the issuer or country of issue and the possibility of
the imposition of exchange controls. However, the Portfolio reserves the right
to invest more than 20% of its assets in cash, cash equivalents and debt
securities for temporary defensive purposes during periods that the Portfolio
Adviser considers to be particularly risky for investment in common stocks. See
"Additional Information on Investment Policies, Techniques and Risk Factors" on
page 7 of this Prospectus and in the discussion in the Statement of Additional
Information.
The Portfolio may enter into certain transactions commonly referred to as
"derivatives" such as stock index futures contracts, options on stock index
futures contracts, options on stock indexes and
options on equity securities for the purpose of hedging the portfolio.
"Additional Information on Investment Policies, Techniques and Risk Factors" and
Appendix A in the Statement of Additional Information contain a more complete
description of the hedging instruments to be traded, as well as further
information concerning the investment policies and techniques of the Portfolio.
In addition, the Statement of Additional Information includes a further
discussion of futures and option contracts to be entered into by the Portfolio.
Although the Portfolio will enter into futures and option contracts for hedging
purposes only, the use of such instruments does involve transaction costs and
certain risks, which are discussed below and in Appendix A in the Statement of
Additional Information.
The investment objectives of the Fund and the Portfolio are fundamental and may
not be changed without approval by a majority of the outstanding shares, as
defined in the Investment Company Act of 1940 (the "1940 Act"). Shareholder
approval is not required to change the investment policies described above or in
"Additional Information on Investment Policies, Techniques and Risk Factors".
However, in the event of a change in the Fund or Portfolio investment policies,
shareholders will be given 30 days prior written notice.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
- --------------------------------------------------------------------------------
To the extent the assets of the Portfolio are not invested in common stocks,
they will consist of or be invested in cash, cash equivalents and short-term
debt securities, such as U.S. Government securities, bank obligations and
commercial paper, and in repurchase agreements. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.
Among the common stocks in which the Portfolio may invest are stocks of foreign
issuers, although at present the Portfolio does not intend to invest more than
20% of its assets in such securities. These securities may represent a greater
degree of risk (e.g., risk related to exchange rate fluctuation, tax provisions,
war or expropriation) than do securities of domestic issuers.
Because the value of securities and the income derived therefrom may fluctuate
according to the earnings of the issuers and changes in economic and market
conditions, there can be no assurance that the investment objectives of the Fund
and the Portfolio will be achieved.
REPURCHASE AGREEMENTS. The Portfolio may, when appropriate, enter into
repurchase agreements (a purchase of and simultaneous commitment to resell a
security at an agreed-upon price and date which is usually not more than seven
days from the date of purchase) only with member banks of the Federal Reserve
System and security dealers believed creditworthy and only if fully
collateralized by U.S. Government obligations or other securities in which the
Portfolio is permitted to invest. In the event the seller fails to pay the
agreed-to sum on the agreed-upon delivery date, the underlying security could be
sold by the Portfolio, but the Portfolio might incur a loss in doing so, and in
certain cases may not be permitted to sell the security. As an operating policy,
the Portfolio, through the custodian bank, takes constructive possession of the
collateral underlying repurchase agreements. Additionally, procedures have been
established for the Portfolio to monitor, on a daily basis, the market value of
the collateral underlying all repurchase agreements to ensure that the
collateral is at least 100% of the value of the repurchase agreements. No more
than 10% of the total assets of the Portfolio will be invested in securities
which are subject to legal or contractual
restrictions on resale, including securities that are not readily marketable and
repurchase agreements maturing in more than seven days.
PORTFOLIO TURNOVER. It is not intended that the assets of the Portfolio will be
invested in securities for the purpose of short-term profits. The Portfolio
Adviser anticipates that the annual turnover of the Portfolio's securities will
not be in excess of 100%. However, the Portfolio will dispose of portfolio
securities whenever the Portfolio Adviser believes that changes are appropriate.
Generally, the primary consideration in placing portfolio securities
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. For a complete discussion of portfolio transactions
and brokerage allocation, see "Portfolio Transactions" in the Statement of
Additional Information.
PORTFOLIO SECURITIES LENDING. Although the Portfolio does not intend to engage
in such activity in the ordinary course of business, the Portfolio is permitted
to lend 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 100% of the current market value 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,
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
Portfolio Adviser to be of good standing and will not be made unless, in the
judgment of the Portfolio Adviser, the consideration to be earned from such
loans justifies the risk.
NON-U.S. SECURITIES. Investing in securities issued by foreign corporations and
governments involves considerations and possible risks not typically associated
with investing in securities issued by domestic corporations and the U.S.
Government. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the U.S. or other countries) or changed circumstances in
dealings between countries. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods.
The Portfolio may 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. 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 Portfolio's trustees do not believe that such adjustments will
adversely affect holders of ECU-denominated securities or the marketability of
such securities. European governments and supranational organizations (discussed
below), in particular, issue ECU-denominated securities.
The Portfolio may invest in securities issued by supranational 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.
The Portfolio may invest its assets in securities of foreign issuers in the form
of sponsored ADRs, EDRs, or other similar securities representing securities of
foreign issuers. ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying foreign securities. EDRs are
receipts issued by a European financial institution evidencing a similar
arrangement.
FUTURES AND OPTIONS TRANSACTIONS. The Fund may invest its assets in derivative
and related instruments subject only to the Fund's investment objective and
policies and the requirement that to avoid leveraging the Fund, the Fund
maintains 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.
The value of some derivative or similar instruments in which the Fund invests
may be particularly sensitive to changes in prevailing interest rates or other
economic factors, and--like other investments of the Fund--the ability of the
Fund to successfully utilize these instruments may depend in part upon the
ability of the Portfolio Adviser to forecast interest rates and other economic
factors correctly. If the Portfolio Adviser incorrectly forecasts such factors
and has taken positions in derivative or similar instruments contrary to
prevailing market trends, the Fund could be exposed to the risk of a loss. The
Fund might not employ any or all of the strategies described herein, and no
assurance can be given that any strategy used will succeed.
To the extent permitted by the investment objectives and policies of each Fund,
and as described more fully in the Fund's Statement of Additional Information,
the Fund may:
. purchase, write and exercise call and put options on securities,
- ------
securities indexes and foreign currencies (including using options in
combination with securities, other options or derivative instruments);
. enter into futures contracts and options on futures contracts;
- ------
. employ forward currency and interest-rate contracts;
- ------
. purchase and sell mortgage-backed and asset-backed securities; and
- ------
. purchase and sell structured products.
- ------
RISK FACTORS
As explained more fully in the Statement of Additional Information, 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.
An incorrect correlation could result in a loss on both the hedged
assets in the Fund 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 Portfolio Adviser may incorrectly forecast interest rates, market
- ------
values or other economic factors in utilizing a derivatives strategy. In
such a case, the Fund 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 Fund.
- ------
Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to the Fund than hedging
strategies using the same instruments.
. There can be no assurance that a liquid market will exist at a time when
- ------
the Fund 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 a
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.
. 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, forward contracts, foreign exchanges or foreign boards of
trade, 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 Fund 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.
For additional information concerning the use and risks involved in the
acquisition, ownership or sale of futures contracts and options thereon,
including certain percentage limitations on the use of such instruments, see
"Investment Objectives, Policies and Restrictions" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the 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 Trust Corporation Limited ("CMTC"), at an annual rate
of .05% of the Portfolio's average daily net assets pursuant to an
Administration Agreement wherein CMTC 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
- --------------------------------------------------------------------------------
THE PORTFOLIO ADVISER
The Portfolio Adviser, 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 One Chase Manhattan Plaza,
New York, NY 10081. The Portfolio Adviser, including its predecessor
organizations, has over 100 years of money management experience and renders
investment advisory services to others.
David Klassen and Greg Adams, Vice Presidents of the Portfolio Adviser, are
responsible for the day-to-day management of the Portfolio. Each is a member of
the Chase Private Bank's in-house investment management research team,
specializing in technology and financial issues and uses a model which scans
over 1,600 equity securities in their quest for attractive value. Mr. Klassen,
Head of U.S. Equity Funds Management and Research for Chase has been with the
Portfolio Adviser since March 1992 and Mr. Adams, Director of U.S. Equity
Research for Chase has been with the Portfolio Adviser since 1987. Messrs.
Klassen and Adams have co-managed the Portfolio since March 1995.
The Portfolio Adviser and its affiliates may have deposit, loan and other
commercial banking relationships with the issuers of securities purchased on
behalf of the Portfolio, including outstanding loans to such issuers which may
be repaid in whole or in part with the proceeds of securities so purchased. The
Portfolio Adviser has informed the Portfolio that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of the Portfolio Adviser.
On August 27, 1995, The Chase Manhattan Corporation announced its entry into an
Agreement and Plan of Merger (the "Merger Agreement") with Chemical Banking
Corporation ("Chemical"), a bank holding company, pursuant to which The Chase
Manhattan Corporation will merge with and into Chemical (the "Holding Company
Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The consummation of the
Holding Company Merger is subject to certain closing conditions, including the
receipt of certain regulatory approvals. The shareholders of each holding
company approved the merger on December 11, 1995. The Holding Company Merger is
expected to be completed on or about February 29, 1996.
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 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 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, 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 1-800-829-3863. 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:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
------------------ -----------------------------------
<C> <S>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
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 Capital Growth 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. 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 is an open-end investment management company which seeks to
achieve its investment objectives by investing 100% of its assets in the
Portfolio, which is a separate registered investment company with identical
investment objectives as the Fund. The investment objectives of the Fund and the
Portfolio may not be changed without shareholder approval. Shareholders will be
provided with written notice 30 days prior to any such changes in investment
objectives. Therefore, an investor's interest in a 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 be allocated a proportionate share of the Portfolio's income
and expenses, in addition to unrealized and realized gains and losses. However,
other investors investing in the Portfolio are not required to buy their shares
at the same public offering prices as the Fund. Investors in the Fund should be
aware that these differences may result in differences in returns experienced by
investors in the different funds that invest in the Portfolio. Such differences
in returns are also present in other mutual fund structures.
Small 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.) Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to redeem its investment in the Portfolio. Any
such 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.
The distribution in kind may also result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. In addition, the
investment of the Fund may be withdrawn from the Portfolio at any time if the
Board of Trustees determines that it is in the best interest of that Fund to do
so. Upon any such withdrawal, the Board of Trustees would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment objectives as the
Fund or retaining an investment adviser to manage the Fund's assets in
accordance with the investment policies of the Portfolio.
In addition to the Fund, other mutual funds invest in the Portfolio. Information
on these other feeder funds may be obtained by calling 1-800-829-3863. See
"Investment Objectives and Polices", "Additional Information on Investment
Policies, Techniques and Risk Factors" and "Management of the Fund" for more
information.
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. Price Waterhouse LLP, 1177 Avenue of the Americas, New
York, New York 10036, has been appointed the independent accountants for the
Fund.
The Blanchard Group of Funds are available through Signet Financial Services,
Inc., member NASD, and are advised by Virtus Capital Management, Inc., an
affiliate of Signet Financial Services, Inc.
Investment products available through Signet Financial Services, Inc., are
not deposits, obligations of, or guaranteed by Signet Bank, Signet Financial
Services, Inc., Chase, any other bank or financial institution, and are
not insured by the FDIC or any Federal Agency. In addition, they involve
risk, including possible loss of principal invested.
BLANCHARD
Cusip 093265304
GO1386-04 (2/96)
(1741) 11PC0296
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 29, 1996 (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 11
Computation of Net Asset Value 12
Performance Information 13
Additional Purchase and Redemption Information 14
Tax Matters 14
The Management of the FUND 19
Management Services 28
Administrative Services 29
Distribution Plan 29
Description of the FUND 30
Shareholder Reports 30
Appendix A A-1
Manager
Virtus Capital Management, Inc.
Portfolio Adviser
The Chase Manhattan Bank, N.A.
Distributor
Federated Securities Corp.
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Price Waterhouse LLP Dated: February 29,
1996
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.
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.
The investment restrictions of the FUND and the Portfolio, as described
below, are fundamental and may not be changed without approval by a
majority of the outstanding shares of the FUND or the Portfolio which means
the vote of the lesser of (i) 67% or more of the shares of the FUND or
total beneficial interests of the Portfolio present at the meeting, if the
holders of more than 50% of the outstanding shares of the FUND or total
beneficial interests of the Portfolio are present or represented by proxy
or (ii) more than 50% of the outstanding shares of the FUND or total
beneficial interests of the Portfolio.
INVESTMENT POLICIES
The following information supplements and should be read in conjunction
with the Prospectus discussion of investment policies and with the Appendix
included at the end of the Prospectus.
U.S. GOVERNMENT SECURITIES - Although the Portfolio invests primarily
in common stocks, it may also maintain cash reserves and invest in a
variety of short-term debt securities, including obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
which have remaining maturities not exceeding one year. Agencies and
instrumentalities that issue or guarantee debt securities and have been
established or sponsored by the U.S. Government include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks, the Federal Land Banks, the Federal
National Mortgage Association and the Student Loan Marketing Association.
Certain of these securities may not be backed by the full faith and credit
of the U.S. Government.
BANK OBLIGATIONS - Investments by the Portfolio in short-term debt
securities as described above also include investments in obligations
(including certificates of deposit and bankers' acceptances) of those U.S.
banks 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.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction.
Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the
maturity date.
COMMERCIAL PAPER - Investments by the Portfolio in short-term debt
securities also include investments in commercial paper, which represents
short-term, unsecured promissory notes issued in bearer form by bank
holding companies, corporations and finance companies. The commercial
paper purchased for the Portfolio will consist of direct obligations of
domestic issuers which, at the time of investment, are (i) rated "P-1" by
Moody's or "A-1" or better by Standard & Poor's, (ii) issued or guaranteed
as to principal and interest by issuers or guarantors having an existing
debt security rating of "Aa" or better by Moody's or "AA" or better by
Standard & Poor's, or (iii) securities which, if not rated, are, in the
Portfolio Adviser's opinion, of an investment quality comparable to rated
commercial paper in which the Portfolio may invest. The rating "P-1" is
the highest commercial paper rating assigned by Moody's and the ratings "A-
1" and "A-1+" are the highest commercial paper ratings assigned by Standard
& Poor's. Debt securities rated "Aa" or better by Moody's or "AA" or
better by Standard & Poor's are generally regarded as high-grade
obligations and such ratings indicate that the ability to pay principal and
interest is very strong.
REPURCHASE AGREEMENTS - The Portfolio may, when appropriate, enter into
repurchase agreements only with member banks of the Federal Reserve System
and securities dealers believed creditworthy, and only if fully
collateralized by U.S. Government obligations or other 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 may be deemed 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.
The Portfolio will not be invested in a repurchase agreement maturing in
more than seven days if any such investment together with securities
subject to restrictions on transfer held by the Portfolio exceed 10% of its
total net assets. Repurchase agreements are also subject to the same risks
described below with respect to stand-by commitments.
LOANS OF PORTFOLIO SECURITIES - Certain securities dealers who make
"short sales" or who wish to obtain particular securities for short periods
may seek to borrow them from an institutional investor such as the
Portfolio. The Portfolio reserves the right to seek to increase its income
by lending its portfolio securities. Under present regulatory policies,
including those of the Board of Governors of the Federal Reserve System and
the Securities and Exchange Commission, such loans may be made only to
member firms of the New York Stock Exchange, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Under a loan, the Portfolio has the
right to call a loan and obtain the securities loaned at any time on five
days' notice.
During the existence of a loan, the Portfolio continues to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned and also receives compensation based on investment of the
collateral. The Portfolio does not, however, have the right to vote any
securities having voting rights during the existence of the loan, but can
call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be
made only to dealers deemed by the Portfolio to be of good standing, and
when, in the judgment of the Portfolio, the consideration that can be
earned currently from securities loans of this type justifies the attendant
risk. In the event the Portfolio makes securities loans, it is not
intended that the value of the securities loaned would exceed 30% of the
value of the Portfolio's total assets.
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 a 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 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 Portfolio Adviser to
forecast interest rates and other economic factors correctly. If the
Portfolio Adviser incorrectly forecasts such factors and has taken
positions in derivative or related 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.
DERIVATIVE AND RELATED INSTRUMENTS
To the extent permitted by the investment objectives and policies of
the Portfolio, and as described more fully below, the Portfolio may:
purchase, write and exercise call and put options on securities,
securities indexes and foreign currencies (including using options
in combination with securities, other options or derivative
instruments);
enter into futures contracts and options on futures contracts;
employ forward currency and interest-rate contracts;
purchase and sell mortgage-backed and asset-backed securities; and
purchase and sell structured products.
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 Portfolio Adviser 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, forward contracts, foreign exchanges or foreign
boards of trade, 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 the Portfolio's use of various
strategies involving derivatives and related instruments.
OPTIONS ON SECURITIES, SECURITIES INDEXES, CURRENCIES AND DEBT
INSTRUMENTS. The Portfolio may PURCHASE, SELL or EXERCISE call and put
options on:
securities;
securities indexes;
currencies; or
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, a 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.
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;
stock index futures contracts;
foreign currency futures contracts;
futures contracts on specified instruments; and
options on these futures contracts ("futures options").
The futures contracts and futures options may be based on various
securities 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) and other financial instruments and indices.
These instruments may be used to hedge portfolio positions and
transactions as well as to gain exposure to markets. For example, a
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 a Portfolio intends to
acquire an instrument or enter into a position. For example, a 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. 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 related 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 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 related 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.
MORTGAGE-BACKED SECURITIES. The Portfolio may purchase mortgage-
backed securities--i.e., securities representing an ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations. Mortgage loans
included in the pool--but not the security itself--may be insured by the
Government National Mortgage Association or the Federal Housing
Administration or guaranteed by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation or the Veterans Administration.
Mortgage-backed securities provide investors with payments consisting of
both interest and principal as the mortgages in the underlying mortgage
pools are paid off. Although providing the potential for enhanced returns,
mortgage-backed securities can also be volatile and result in unanticipated
losses.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will usually result in the return of the greater part
of the principal invested far in advance of the maturity of the mortgages
in the pool. The actual yield of a mortgage-backed security may be
adversely affected by the prepayment of mortgages included in the mortgage
pool underlying the security.
The Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage
investment conduits ("REMICs") and in pools of certain other asset-backed
bonds and mortgage pass-through securities. Like a bond, interest and
prepaid principal are paid, in most cases, semi-annually. CMOs are
collateralized by a portfolio of mortgage pass-through securities
guaranteed by the U.S. Government, or U.S. Government-related, entities,
and their income streams.
CMOs are structured into multiple classes, the bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is
first returned to investors holding the shortest maturity class. Investors
holding the longer maturity classes receive principal only after the first
class has been retired. An investor is partially protected against a
sooner than desired return of principal because of the sequential payments.
REMICs include governmental and/or private entities that issue a fixed
pool of mortgages secured by an interest in real property. REMICs are
related to CMOs in that they issue multiple classes of securities. REMICs
issued by private entities are not U.S. Government securities and are not
directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer.
STRUCTURED PRODUCTS. The Portfolio may purchase interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of certain debt obligations, thereby creating
"structured products." 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. 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 also invest in other types of structured products,
including among others, spread trades and notes linked by a formula (e.g.,
a multiple) to the price of an underlying instrument or currency. A spread
trade is an investment position relating to a difference in the prices or
interest rates of two securities or currencies 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 or currencies.
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.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS
Regulations of the CFTC require that the Portfolio enters into
transactions in futures contracts and options thereon for hedging purposes
only, in order to assure that it is not deemed to be a "commodity pool"
under such regulations. In particular, CFTC regulations require that all
short futures positions be entered into for the purpose of hedging the
value of securities held in the Portfolio's portfolio, and that all long
futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an
amount determined by reference to certain cash and securities positions
maintained for the Portfolio, and accrued profits on such positions. In
addition, the Portfolio may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial margin deposits on
its existing futures positions and premiums paid for options on futures
contracts would exceed 5% of the market value of the Portfolio's total
assets.
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 hedging 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.
In addition to the foregoing requirements, the Portfolio's Board of
Trustees has adopted an additional restriction on the use of futures
contracts and options thereon, requiring that the aggregate market value of
the futures contracts held by the Portfolio not exceed 50% of the market
value of its total assets. Neither this restriction nor any policy with
respect to the above-referenced restrictions, would be changed by the Board
of Trustees without considering the policies and concerns of the various
federal and state regulatory agencies.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth below, the FUND
has adopted the following investment restrictions to enable it to invest in
the Portfolio:
It is a fundamental policy of the FUND that because it holds no
portfolio securities except interests in the Portfolio, the FUND's
investment objectives, policies and restrictions shall be identical to the
Portfolio's investment objectives, policies and restrictions, except for
the following: the FUND (1) may invest more than 5% of its assets in
another issuer, (2) may, consistent with Section 12 of the 1940 Act, invest
in securities issued by other registered investment companies, (3) may
invest more than 10% of its net assets in the securities of a registered
investment company, (4) may hold more than 10% of the voting securities of
a registered investment company, (5) will concentrate its investments in
the investment company and (6) will not issue senior securities except as
permitted by an exemptive order of the SEC.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate its
assets, except that, as a temporary measure for extraordinary or
emergency purposes, it may borrow in an amount not to exceed 1/3
of the current value of its net assets, including the amount
borrowed, and may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings (it is intended that,
aside from reverse repurchase transactions, money would be
borrowed by the Portfolio only from banks and only to accommodate
requests for the repurchase of shares of the Portfolio while
effecting an orderly liquidation of portfolio securities),
provided that collateral arrangements with respect to the
Portfolio's permissible futures and options transactions,
including initial and variation margin, are not considered to be a
pledge of assets for purposes of this restriction; the Portfolio
will not purchase investment securities if its outstanding
borrowing, including reverse repurchase agreements, exceeds 5% of
the value of the Portfolio's total assets;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may
be necessary for the clearance of purchases and sales of
securities and except that, with respect to the Portfolio's
permissible options and futures transactions, deposits of initial
and variation margin may be made in connection with the purchase,
ownership, holding or sale of futures or options positions;
(3) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter
under the Securities Act of 1933 in selling a portfolio security;
(4) 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 U.S. Government securities or
(iii) 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;
(5) knowingly invest in securities which are subject to
legal or contractual restrictions on resale (including securities
that are not readily marketable, but not including repurchase
agreements maturing in not more than seven days) if, as a result
thereof, more than 10% of the FUND's or Portfolio's total assets
(taken at market value) would be so invested (including repurchase
agreements maturing in more than seven days);
(6) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real
estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts in the ordinary course
of business, other than (i) permissible futures and options
transactions or (ii) forward purchases and sales of foreign
currencies or securities;
(7) purchase securities of any issuer if such purchase at
the time thereof would cause more than 10% of the voting
securities of such issuer to be held by the Portfolio;
(8) make short sales of securities or maintain a short
position; except that the Portfolio may make such short sales of
securities or maintain a short position if when a short position
is open the Portfolio owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short, and unless not
more than 10% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time (it is
the present intention of management to make such sales only for
the purpose of deferring realization of gain or loss for federal
income tax purposes; such sales would not be made of securities
subject to outstanding options);
(9) concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the
Portfolio's investment objective, up to 25% of the assets of the
Portfolio, at market value at the time of each investment, may be
invested in any one industry, except that positions in options and
futures shall not be subject to this restriction; or
(10) issue any senior security (as that term is defined in
the 1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder,
provided that collateral arrangements with respect to the
Portfolio's permissible options and futures transactions,
including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for purposes of
this restriction.
The Portfolio is not permitted to make loans to other persons, except
(i) through the lending of its portfolio securities and provided that any
such loans not exceed 30% of the Portfolio's total assets (taken at market
value), (ii) through the use of repurchase agreements or the purchase of
short-term obligations and provided that not more than 10% of the
Portfolio's total assets will be invested in repurchase agreements maturing
in more than seven days, or (iii) by purchasing, subject to the limitation
in paragraph 5 above, a portion of an issue of debt securities of types
commonly distributed privately to financial institutions, for which
purposes the purchase of short-term commercial paper or a portion of an
issue of debt securities which are part of an issue to the public shall not
be considered the making of a loan.
For purposes of the investment restrictions described above and the
state and federal restrictions described below, 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. For purposes of Investment Restriction No. 9, 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".
The Portfolio has also adopted the following non-fundamental investment
policy which may be changed without shareholder approval. The Portfolio
may enter into repurchase agreements (a purchase of and a simultaneous
commitment to resell a security at an agreed-upon price on an agreed-upon
date) only with member banks of the Federal Reserve System and securities
dealers believed creditworthy and only if fully collateralized by U.S.
Government obligations or other securities in which the Portfolio is
permitted to invest. If the vendor of a repurchase agreement fails to pay
the sum agreed to on the agreed-upon delivery date, the Portfolio would
have the right to sell the securities constituting the collateral; however,
the Portfolio might thereby incur a loss and in certain cases may not be
permitted to sell such securities. Moreover, as noted above in
paragraph 5, the Portfolio may not, as a matter of fundamental policy,
invest more than 10% of its total assets in repurchase agreements maturing
in more than seven days.
The Portfolio has no current intention of engaging in the following
activities in the foreseeable future: (i) writing, purchasing or selling
puts, calls or combinations thereof with respect to U.S. Government
securities; (ii) purchasing voting securities of any issuer.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain
federal and state statutes and regulatory policies, as a matter of
operating policy, the Portfolio will not: (i) sell any security which it
does not own unless by virtue of its ownership of other securities the
Portfolio has at the time of sale a right to obtain securities, without
payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is
made upon the same conditions, (ii) invest for the purpose of exercising
control or management, (iii) invest more than 5% of the FUND's assets in
companies which, including predecessors, have a record of less than three
years' continuous operation, (iv) invest in warrants valued at the lower of
cost or market, in excess of 5% of the value of the FUND's net assets, and
no more than 2% of such value may be warrants which are not listed on the
New York or American Stock Exchanges, (v) purchase or retain in the
Portfolio's portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or trustee
of the Portfolio, or is an officer or director of the Portfolio 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, or (vi) as to 50% of the Portfolio's total assets,
purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be deemed
a single class. These policies are not fundamental and may be changed by
the Portfolio's Board of Trustees without shareholder approval.
PERCENTAGE AND RATING RESTRICTIONS: If a percentage or rating
restriction on investment or utilization of assets set forth above or
referred to in the Prospectus is adhered to at the time an investment is
made or assets are so utilized, a later change in percentage resulting from
changes in the value of the portfolio securities or a later change in the
rating of a portfolio security of the Portfolio will not be considered a
violation of policy.
PORTFOLIO TURNOVER: 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 71%.
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 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, 1995 was 16.03% and the Portfolio's cumulative total return from
inception through October 31, 1995 was 435.78%.
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 investment
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 birthdate, 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)
HENNY, KOCHUBA, MEYER AND FLAHERTY
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA
BIRTHDATE: JUNE 18, 1924 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Henny, Kochuba, Meyer &
Flaherty; Director, Eat'N Park
Restaurants, Inc., and Statewide
Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of
the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
EDWARD C. GONZALES(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
HENNY, KOCHUBA, MEYER AND FLAHERTY
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA
BIRTHDATE: OCTOBER 6, 1926 TRUSTEE OF THE FUND; Attorney-at-law;
Shareholder, Henny, Kochuba, Meyer &
Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General
Partner of the Funds.
JOHN E. MURRAY, JR., J.D., S.J.D.
PRESIDENT, DUQUESNE UNIVERSITY
PITTSBURGH, PA
BIRTHDATE: DECEMBER 20, 1932 TRUSTEE 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 Managment, 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 Securites 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.
THE FUNDS
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 31, 1995, Officers and Trustees own less than 1% of
the outstanding shares of each FUND.
To the best knowledge of the FUND, as of February 12, 1996,one
shareholder owned 5% or more of the outstanding shares of the FUND:
Stephens Inc., Little Rock, Arkansas, owned approximately 328,740 shares
(27.57%).
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.
P Y
R E
T A I A
R G N R
U E C
S I F
T P I
E A R
E L S
T
O
C B
C E
U C
P A
A M
T E
I A
O
N T
S R
U
F S
O T
R E
E
T
H
E
L
F 6 C 1
e 3 h 9
r a 8
g i 4
u r
s m
a
R n
e
i a
d n
, d
I C
I h
I i
9 e
7 f
1
E
W x
e e
s c
t u
t
R i
o v
a e
d
N O
e f
w f
i
C c
a e
n r
a ,
a
n L
, u
m
C e
T l
i
0 t
6 e
8
4 C
0 o
r
p
o
r
a
t
i
o
n
,
s
i
n
c
e
S
e
p
t
e
m
b
e
r
1
9
8
5
;
T
r
u
s
t
e
e
,
M
o
r
g
a
n
S
t
a
n
l
e
y
P
o
r
t
f
o
l
i
o
s
;
f
r
o
m
J
a
n
u
a
r
y
1
9
8
5
t
h
r
o
u
g
h
S
e
p
t
e
m
b
e
r
1
9
8
5
,
D
i
r
e
c
t
o
r
o
f
C
o
r
p
o
r
a
t
e
F
i
n
a
n
c
e
,
N
o
y
e
s
P
a
r
t
n
e
r
s
(
i
n
v
e
s
t
m
e
n
t
a
d
v
i
s
o
r
y
f
i
r
m
)
;
f
r
o
m
1
9
8
2
t
h
r
o
u
g
h
1
9
8
4
,
M
a
n
a
g
i
n
g
D
i
r
e
c
t
o
r
,
B
e
r
n
h
a
r
d
A
s
s
o
c
i
a
t
e
s
(
v
e
n
t
u
r
e
c
a
p
i
t
a
l
f
i
r
m
)
.
R 6 F 1
i 1 o 9
c r 8
h m 4
a e
r r
d
D
E i
. s
t
T r
e i
n c
t
H
a S
k u
e p
n e
4 r
i
B n
a t
r e
n n
f d
i e
e n
l t
d
o
R f
o
a S
d c
P h
i o
t o
t l
s s
f ,
o
r M
d o
, n
r
N o
Y e
1 N
4 o
5 .
3
4 2
a
n
d
O
r
l
e
a
n
s
C
o
u
n
t
i
e
s
,
N
e
w
Y
o
r
k
;
C
h
a
i
r
m
a
n
o
f
t
h
e
F
i
n
a
n
c
e
a
n
d
t
h
e
A
u
d
i
t
a
n
d
A
c
c
o
u
n
t
i
n
g
C
o
m
m
i
t
t
e
e
s
,
M
e
m
b
e
r
o
f
t
h
e
E
x
e
c
u
t
i
v
e
C
o
m
m
i
t
t
e
e
;
C
h
a
i
r
m
a
n
o
f
t
h
e
B
o
a
r
d
a
n
d
P
r
e
s
i
d
e
n
t
,
N
e
w
Y
o
r
k
S
t
a
t
e
T
e
a
c
h
e
r
s
'
R
e
t
i
r
e
m
e
n
t
S
y
s
t
e
m
.
W 5 V 1
i 4 i 9
l c 8
l e 7
i
a P
m r
e
J s
. i
d
A e
r n
m t
s
t a
r n
o d
n
g T
4 r
9 e
a
A s
s u
p r
e e
n r
,
W
a I
y n
U g
p e
p r
e s
r o
l
S l
a -
d R
d a
l n
e d
R C
i o
v m
e p
r a
, n
y
N .
J
0
7
4
5
8
J 6 A 1
o 6 t 9
h t 8
n o 4
r
R n
. e
H y
.
i
B n
l
u P
m r
3 i
2 v
2 a
t
M e
a
i P
n r
a
S c
t t
r i
e c
e e
t ;
L
a f
k o
e r
v m
i e
l r
l l
e y
,
a
C
T P
a
0 r
6 t
0 n
3 e
9 r
i
n
t
h
e
l
a
w
f
i
r
m
o
f
R
i
c
h
a
r
d
s
,
O
'
N
e
i
l
&
A
l
l
e
g
a
e
r
t
;
C
o
m
m
i
s
s
i
o
n
e
r
o
f
A
g
r
i
c
u
l
t
u
r
e
-
S
t
a
t
e
o
f
C
o
n
n
e
c
t
i
c
u
t
,
1
9
9
2
-
1
9
9
5
.
* 6 R 1
J 4 e 9
o t 9
s i 0
e r
p e
h d
;
J
. C
o
H m
a m
r e
k r
i c
n i
s a
2 l
5
7 S
e
P c
l t
a o
n r
t
a E
t x
i e
o c
n u
t
C i
i v
r e
c
l a
e n
d
S
o E
u x
t e
h c
P u
o t
n i
t v
e e
V V
e i
d c
r e
a
P
B r
e e
a s
c i
h d
, e
n
F t
L
o
3 f
2
0 T
8 h
2 e
C
h
a
s
e
M
a
n
h
a
t
t
a
n
B
a
n
k
,
N
.
A
.
f
r
o
m
1
9
8
5
t
h
r
o
u
g
h
1
9
8
9
.
H
e
h
a
s
b
e
e
n
e
m
p
l
o
y
e
d
b
y
C
h
a
s
e
i
n
n
u
m
e
r
o
u
s
c
a
p
a
c
i
t
i
e
s
a
n
d
o
f
f
i
c
e
s
s
i
n
c
e
1
9
5
4
.
D
i
r
e
c
t
o
r
o
f
B
l
e
s
s
i
n
g
s
C
o
r
p
o
r
a
t
i
o
n
,
J
e
f
f
e
r
s
o
n
I
n
s
u
r
a
n
c
e
C
o
m
p
a
n
y
o
f
N
e
w
Y
o
r
k
,
M
o
n
t
i
c
e
l
l
o
I
n
s
u
r
a
n
c
e
C
o
m
p
a
n
y
a
n
d
N
a
t
i
o
n
a
r
.
6 C 1
0 o 9
* n 9
H s 2
. u
l
R t
i a
c n
h t
a ,
r
d R
e
V p
a u
r b
t l
a i
b c
e
d B
i a
a n
n k
P
. o
O f
.
N
B e
o w
x
Y
2 o
9 r
6 k
B ;
e
a f
c o
h r
m
R e
o r
a l
d y
H ,
e
n S
d e
r n
i i
c o
k r
'
s I
n
H v
e e
a s
d t
S m
o e
u n
t t
h
p O
o f
r f
t i
, c
e
M r
E ,
0 D
4 i
5 v
7 i
6 s
i
o
n
E
x
e
c
u
t
i
v
e
o
f
t
h
e
I
n
v
e
s
t
m
e
n
t
M
a
n
a
g
e
m
e
n
t
D
i
v
i
s
i
o
n
o
f
T
h
e
C
h
a
s
e
M
a
n
h
a
t
t
a
n
B
a
n
k
,
N
.
A
.
,
1
9
8
0
t
h
r
o
u
g
h
1
9
9
1
.
S 6 R 1
t 3 e 9
u t 9
a i 2
r r
t e
d
W ;
.
f
C o
r r
a m
g e
i r
n l
, y
J P
r r
. e
1 s
0 i
8 d
e
V n
a t
l ,
l
e F
y a
i
R r
o f
a i
d e
C l
o d
s
T
C e
o s
b t
, i
n
C g
T
L
0 a
6 b
8 o
0 r
7 a
t
o
r
y
,
I
n
c
.
H
e
h
a
s
p
r
e
v
i
o
u
s
l
y
s
e
r
v
e
d
i
n
a
v
a
r
i
e
t
y
o
f
m
a
r
k
e
t
i
n
g
,
m
a
n
u
f
a
c
t
u
r
i
n
g
a
n
d
g
e
n
e
r
a
l
m
a
n
a
g
e
m
e
n
t
p
o
s
i
t
i
o
n
s
w
i
t
h
U
n
i
o
n
C
a
m
p
C
o
r
p
.
,
T
r
i
n
i
t
y
P
a
p
e
r
&
P
l
a
s
t
i
c
s
C
o
r
p
.
,
a
n
d
C
o
n
o
v
e
r
I
n
d
u
s
t
r
i
e
s
I 6 R 1
r 4 e 9
v t 9
i i 2
n r
g e
d
L ;
.
V
T i
h c
o e
d
e P
8 r
0 e
s
P i
e d
r e
k n
i t
n
s o
f
R
o Q
a u
d o
G t
r r
e o
e n
n
w S
i y
c s
h t
, e
m
C s
T .
0 H
6 e
8
3 h
0 a
s
p
r
e
v
i
o
u
s
l
y
s
e
r
v
e
d
i
n
a
n
u
m
b
e
r
o
f
e
x
e
c
u
t
i
v
e
p
o
s
i
t
i
o
n
s
w
i
t
h
C
o
n
t
r
o
l
D
a
t
a
C
o
r
p
.
,
i
n
c
l
u
d
i
n
g
P
r
e
s
i
d
e
n
t
o
f
i
t
s
L
a
t
i
n
A
m
e
r
i
c
a
n
O
p
e
r
a
t
i
o
n
s
,
a
n
d
G
e
n
e
r
a
l
M
a
n
a
g
e
r
o
f
i
t
s
D
a
t
a
S
e
r
v
i
c
e
s
b
u
s
i
n
e
s
s
.
* Interested Trustees as defined under the 1940 Act by virtue of their
ownership of shares of the Portfolio Adviser.
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
N A T
A G O
M G T
E R A
, E L
G
P A C
O T O
S E M
I P
T C E
I O N
O M S
N P A
W E T
I N I
T S O
H A N
T
T I P
H O A
E N I
D
F F
U R T
N O O
D M
S T T
H R
E U
S
F T
U E
N E
D S
S
( F
1 R
) O
M
T
H
E
F
U
N
D
S
A
N
D
F
U
N
D
C
O
M
P
L
E
X
*
J $ $
o - -
h 0 0
n - -
F f
. o
r
D
o t
n h
a e
h
u F
e u
, n
C d
h
a C
i o
r m
m p
a l
n e
x
a
n
d
T
r
u
s
t
e
e
T $ $
h 4 2
o 0 ,
m 1 4
a . 8
s 0 0
0
G f
. o
r
B
i t
g h
l e
e
y F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
J $ $
o 4 2
h 2 ,
n 9 6
. 5
T 0 7
. 0
f
C o
o r
n
r t
o h
y e
,
F
J u
r n
. d
,
C
T o
r m
u p
s l
t e
e x
e
W $ $
i 4 2
l 2 ,
l 9 6
i . 5
a 0 7
m 0
f
J o
. r
C t
o h
p e
e
l F
a u
n n
d d
,
C
T o
r m
u p
s l
t e
e x
e
J $ $
a 4 2
m 2 ,
e 9 6
s . 5
0 7
E 0
. f
o
D r
o
w t
d h
, e
T F
r u
u n
s d
t
e C
e o
m
p
l
e
x
L $ $
a 4 2
w 0 ,
r 1 4
e . 8
n 0 0
c 0
e f
o
D r
.
t
E h
l e
l
i F
s u
, n
d
M
. C
D o
. m
, p
l
T e
r x
u
s
t
e
e
E $ $
d 4 2
w 2 ,
a 9 6
r . 5
d 0 7
0
L f
. o
r
F
l t
a h
h e
e
r F
t u
y n
, d
J C
r o
. m
, p
l
T e
r x
u
s
t
e
e
E $ $
d - -
w 0 0
a - -
r
d f
o
C r
.
t
G h
o e
n
z F
a u
l n
e d
s
, C
o
P m
r p
e l
s e
i x
d
e
n
t
,
T
r
u
s
t
e
e
a
n
d
T
r
e
a
s
u
r
e
r
P $ $
e 4 2
t 0 ,
e 1 4
r . 8
0 0
E 0
. f
o
M r
a
d t
d h
e e
n
, F
u
T n
r d
u
s C
t o
e m
e p
l
e
x
G $ $
r 4 2
e 0 ,
g 1 4
o . 8
r 0 0
y 0
f
F o
. r
M t
e h
y e
e
r F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
J $ $
o 4 2
h 0 ,
n 1 4
. 8
E 0 0
. 0
f
M o
u r
r
r t
a h
y e
,
F
J u
r n
. d
,
C
J o
. m
D p
. l
, e
x
S
.
J
.
D
.
,
T
r
u
s
t
e
e
W $ $
e 4 2
s 0 ,
l 1 4
e . 8
y 0 0
0
W f
. o
r
P
o t
s h
v e
a
r F
, u
n
T d
r
u C
s o
t m
e p
e l
e
x
M $ $
a 4 2
r 0 ,
j 1 4
o . 8
r 0 0
i 0
e f
o
P r
.
t
S h
m e
u
t F
s u
, n
d
T
r C
u o
s m
t p
e l
e e
x
(1) The aggregate compensation is provided for theFunds which was
comprised of eleven portfolios on
December 31, 1995. Information is furnished for the period from May
2, 1995, date of election of
Trustees, to December 31, 1995.
* 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, 1995.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the
Trust:
P T
G e o
r n t
o s a
w i l
t o C
h n o
m
a o p
n r e
d R n
e s
I t a
n i t
c r i
o e o
m m n
e e f
P n r
o t o
r B m
t e
f n "
o e F
l f u
i i n
o t d
( s
1 C
) A o
c m
c p
r l
u e
e x
d "
a (
s 2
)
F
u
n
d
E
x
p
e
n
s
e
s
F $ 0 $
e 1 7
r 4 8
g , ,
u 3 4
s 9 5
3 6
R . .
e 1 6
i 6 5
d
,
I
I
I
,
T
r
u
s
t
e
e
R 9 0 5
i , 2
c 5 ,
h 9 3
a 5 0
r . 4
d 4 .
5 3
E 9
.
T
e
n
H
a
k
e
n
,
T
r
u
s
t
e
e
W 9 0 4
i , 6
l 5 ,
l 9 6
i 5 3
a . 2
m 4 .
5 3
J 4
.
A
r
m
s
t
r
o
n
g
,
T
r
u
s
t
e
e
J 9 0 5
o , 1
h 5 ,
n 9 3
5 0
R . 4
. 4 .
H 5 3
. 7
B
l
u
m
,
T
r
u
s
t
e
e
J 9 0 5
o , 2
s 3 ,
e 7 3
p 6 0
h . 4
6 .
J 3 3
. 9
H
a
r
k
i
n
s
,
T
r
u
s
t
e
e
H 1 0 7
. 8 4
, ,
R 1 8
i 5 0
c 9 4
h . .
a 1 4
r 3 4
d
V
a
r
t
a
b
e
d
i
a
n
,
T
r
u
s
t
e
e
S 9 0 5
t , 2
u 5 ,
a 9 3
r 5 0
t . 4
4 .
W 5 3
. 9
C
r
a
g
i
n
,
J
r
.
,
T
r
u
s
t
e
e
I 9 0 5
r , 2
v 5 ,
i 9 3
n 5 0
g . 4
4 .
L 5 3
. 9
T
h
o
d
e
,
T
r
u
s
t
e
e
(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,
1995 to December 31, 1995 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, and Thode are 11, 11, 8, 11, 3, 3 and 3 respectively.
Y
E H
A I
R G
S H
E
O S
F T
S
E A
R N
V N
I U
C A
E L
C
O
M
P
E
N
S
A
T
I
O
N
P
A
I
D
B
Y
A
L
L
V
I
S
T
A
F
U
N
D
S
4 4 5 5
0 5 0 5
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
1 4 4 5 5
0 0 5 0 5
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
9 3 4 4 4
6 0 5 9
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
8 3 3 4 4
2 6 0 4
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
7 2 3 3 3
8 1 5 8
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
6 2 2 3 3
4 7 0 3
, , , ,
0 0 0 0
0 0 0 0
0 0 0 0
5 2 2 2 2
0 2 5 7
, , , ,
0 5 0 5
0 0 0 0
0 0 0 0
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 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 July 12, 1995 to
October 31, 1995, 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, 1995, the FUND paid $12,203 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, 1995. The Financial Statements for the fiscal year ended
October 31, 1995 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 RATINGS
BOND RATINGS
Moody's Investors Service, Inc. - Bonds which are rated Aaa are
judged to be the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong positions of such issues. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with Aaa group
they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long term risks appear somewhat larger than in Aaa securities. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's applies numerical modifiers "1," "2" and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier "1" indicates that the security ranks in the higher end of its
generic rating category; the modifier "2" indicates a mid-range ranking;
and the modifier "3" indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Ratings Group Bonds rated AAA have the highest
rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity
to pay interest and repay principal and differ from AAA issues only in
small degree. Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of change in circumstances and economic conditions than bonds in
higher rated categories.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high
grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of an AAA bond is
showing of earnings several times or many times interest requirements, with
such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Bonds rated AA by Fitch are
judged by Fitch to be of safety virtually beyond question and are readily
salable, whose merits are not unlike those of the AAA class, but whose
margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secured but influenced as to rating by the
lesser financial power of the enterprise and more local type market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit
quality with negligible risk factors; only slightly more than U.S. Treasury
debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit
quality with strong protection factors. Risk is modest but may vary
slightly from time to time because of economic conditions.
Bonds rated TBW-1 are judged by Thomson BankWatch, Inc. to be of
the highest credit quality with a very high degree of likelihood that
principal and income will be paid on a timely basis. Bonds rated TBW-2
offer a strong degree of safety regarding repayment. The relative degree
of safety, however, is not as high as TBW-1.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers: Prime 1-Highest
Quality; Prime 2-Higher Quality; Prime 3-High Quality.
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment. Ratings are graded into
four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2, and 3 to indicate the relative degree of
safety. The designation A-1 indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. A "+" designation is
applied to those issues rated "A-1" which possess safety characteristics.
Capacity for timely payment on issues with the designation A-2 is strong.
However, the relative degree of safety is not as high as for issues
designated A-1. Issues carrying the designation A-3 have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial
rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very
Good Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned
by Duff. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor. Paper rated Duff-2 is
regarded as having good certainty of timely payment, good access to capital
markets and sound liquidity factors and company fundamentals. Risk factors
are small.
G01623-01 (2/96)
093265304
APPENDIX
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The
Blanchard Capital Growth Fund (the "Fund") is represented by a broken solid
line. The Standard & Poor's Total Return Index (the "S&P Total Return") is
represented by a solid line. The line graph is a visual representation of
a comparison of change in value of a $10,000 hypothetical investment in
the Fund and the S&P 500 Total Return. The "x" axis reflects the cost of
the investment. The "y" axis reflects the cost of the investment. The
right margin reflects the ending value of the hypothetical investment in
the Fund as compared to the S&P 500 Total Return; the ending values were
$40,352 and $23,282, respectively. The box in the left quadrant of the
graphic presentation indicates the Fund's Average Annual Returns through
10/31/95; beginning with the one year, five year and since inception; the
Average Annual Returns were 9.43%, 23.89% and 18.76%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The
Blanchard Growth & Income Fund (the "Fund") is represented by a broken
solid line. The Standard & Poor's Total Return Index (the "S&P Total
Return") is represented by a solid line. The line graph is a visual
representation of a comparison of change in value of a $10,000 hypothetical
investment in the Fund and the S&P 500 Total Return. The "x" axis
reflects the cost of the investment. The "y" axis reflects the cost of the
investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500 Total Return; the ending
values were $49,421 and $23,282, respectively. The box in the left
quadrant of the graphic presentation indicates the Fund's Average Annual
Returns through 10/31/95; beginning with the one year, five year and since
inception; the Average Annual Returns were16.03%, 20.15% and 21.77%,
respectively.
