BLANCHARD FUNDS, 497, 1997-09-02

BLANCHARD FUNDS
497, 1997-09-02

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BLANCHARD
GROUP OF FUNDS
BLANCHARD GLOBAL GROWTH FUND
BLANCHARD PRECIOUS METALS FUND, INC.
BLANCHARD FLEXIBLE INCOME FUND
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
Combined Prospectus

August 31, 1997

B L A N C H A R D

BLANCHARD GROUP OF FUNDS

COMBINED PROSPECTUS

. Blanchard Global Growth Fund

. Blanchard Precious Metals Fund, Inc.

. Blanchard Flexible Income Fund

. Blanchard Short-Term Flexible Income Fund

. Blanchard Flexible Tax-Free Bond Fund

Blanchard Funds (the "Trust"), which currently consists of six investment
portfolios, and Blanchard Precious Metals Fund, Inc. (the "Company"), which
currently consists of one investment portfolio (each portfolio individually
referred to as a "Fund" and collectively as the "Funds"), are open-end
management investment companies which offer separate investment alternatives for
different investor needs. This prospectus relates only to four portfolios of the
Trust. Virtus Capital Management, Inc. is the Funds' overall manager. There is
no guarantee that the Funds will achieve their investment objectives.

Please read this Prospectus carefully and retain it for future reference. A copy
of each Fund's Statement of Additional Information, dated August 31, 1997, has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. You may request a copy of the Statements of
Additional Information or a paper copy of this Prospectus, if you have received
your Prospectus electronically, free of charge by calling 1-800-829- 3863. To
obtain other information or make inquiries about the Funds, contact Signet
Financial Services, Inc. at 1-800-829-3863. The Statements of Additional
Information, material incorporated by reference into this document, and other
information regarding the Funds, is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS, OBLIGATIONS OF, OR
GUARANTEED BY SIGNET BANK OR ANY OF ITS AFFILIATES, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. IN ADDITION, THEY INVOLVE RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL INVESTED.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated August 31, 1997

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

HIGHLIGHTS 1 HOW TO REDEEM 21
- ------------------------------------- -------------------------------------

SUMMARY OF FUND EXPENSES 3 DISTRIBUTION OF SHARES OF THE
- ------------------------------------- FUNDS 23
-------------------------------------

FINANCIAL HIGHLIGHTS 4
- -------------------------------------
TAX MATTERS 24
-------------------------------------

THE FUNDS' INVESTMENT OBJECTIVES
AND POLICIES 6
PERFORMANCE INFORMATION 26
- ------------------------------------- -------------------------------------

MANAGEMENT OF THE FUNDS 16 ADDITIONAL INFORMATION ABOUT THE
- ------------------------------------- FUNDS 28
-------------------------------------

PORTFOLIO ADVISORY SERVICES 17
- ------------------------------------- ADDITIONAL INVESTMENT INFORMATION 30
-------------------------------------
HOW TO INVEST 18 CERTAIN INVESTMENT STRATEGIES AND
- ------------------------------------- POLICIES 34

INVESTOR SERVICES 20 -------------------------------------

- -------------------------------------

APPENDIX A 46

-------------------------------------

The Funds' investment objectives and policies are summarized below. See "The
Funds' Investment Objectives and Policies" for a more complete discussion.

BLANCHARD GLOBAL GROWTH FUND ("BGGF") seeks to provide long-term capital growth.
As worldwide investment and economic trends change rapidly, the flexible
investment strategy of the Fund permits it to follow a global allocation
strategy that contemplates shifts among strategic market sectors. These include
the following: U.S. Equities; U.S. Fixed Income; Foreign Equities; Foreign Fixed
Income; Precious Metals Securities; and Emerging Markets.

BLANCHARD PRECIOUS METALS FUND, INC. ("BPMF") seeks to provide long-term capital
appreciation and preservation of purchasing power through investments in
physical precious metals, such as gold, silver, platinum and palladium, and in
securities of companies involved with precious metals. A secondary objective of
the Fund is to reduce the risk of loss of capital and decrease the volatility
often associated with precious metals investments by changing the allocation of
its assets from precious metals securities to physical precious metals and/or
investing in short-term instruments and government securities during periods
when the Fund's portfolio manager believes the precious metals markets may
experience declines.

BLANCHARD FLEXIBLE INCOME FUND ("BFIF") seeks to provide high current income
while seeking opportunities for capital appreciation. The Fund is designed for
fixed-income investors with a long-term investment horizon. The Fund invests in
different fixed income securities markets: U.S. Government Securities,
Investment Grade Fixed Income Securities, High Yield Securities and
International Fixed Income Securities. In seeking its objective of high current
income, the Fund also takes into consideration preservation of capital.

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND ("BSTFIF") seeks to provide a high
level of current income consistent with preservation of capital by investing
primarily in a broad range of short-term debt securities. The Fund will normally
maintain a dollarweighted average portfolio maturity of three years or less. The
Fund intends to invest primarily in investment-grade securities.

BLANCHARD FLEXIBLE TAX-FREE BOND FUND ("BFTFBF") seeks to provide a high level
of current interest income exempt from Federal income tax consistent with the
preservation of principal. The Fund invests primarily in bonds of varying
maturities issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities and instrumentalities, the interest from which, in the
opinion of bond counsel for the issuer, is exempt from Federal income tax. The
Fund has no restrictions on the maturities of bonds that it may purchase.
Rather, it retains the flexibility to lengthen or shorten the overall maturity
of its portfolio based on its Portfolio Adviser's outlook on interest rate
movements, as it attempts to reduce any price volatility. The Fund invests
primarily in high quality, investment-grade bonds.

HIGHLIGHTS
- -------------------------------------------------------------------------------

FUND MANAGEMENT

Virtus Capital Management, Inc. ("VCM") provides the overall management services
necessary for the Funds' operations. As of June 30, 1997, VCM had more than $1.9
billion in assets under management. VCM selected, and continually monitors and
evaluates, the Funds' Portfolio Advisers. The Portfolio Advisers are responsible
for the selection of each Fund's portfolio investments.

VCM receives monthly compensation from each Fund based on the amount of assets
under management. VCM, not the Fund, pays the fees of each Portfolio Adviser
pursuant to a sub-advisory agreement. See "Management of the Funds" and
"Portfolio Advisory Services."

HOW TO INVEST AND REDEEM

You may purchase shares directly from Federated Securities Corp. (the
"Distributor"), which is each Fund's principal distributor. You may also
purchase shares from broker-dealers who have entered into a dealer agreement
with the Distributor.

The minimum amount required to open an account in any of the Funds is $3,000
($2,000 for qualified retirement plans, such as IRAs and Keoghs). The minimum
subsequent investment requirement for all Funds is $200. There is no fee for
additional investments made to existing accounts, nor is there a fee charged
when redeeming shares, sometimes called a back-end load. Each Fund has also
adopted a distribution plan which permits the reimbursement of distribution
expenses by the Fund on an annual basis. See "How to Invest" and "Distribution
of Shares of the Funds."

You may redeem your shares on any business day at the next determined net
asset value calculated after Signet Financial Services, Inc. ("Signet") has
received the redemption request in proper form. See "How to Redeem."

Each Fund reserves the right to close to further new investments if such Fund's
Portfolio Adviser believes that the Fund's size may hamper their effectiveness
in managing the portfolio. In this event, no new investments will be accepted
until further review. Shareholders who have established accounts prior to the
closure date will be allowed to add to their accounts.

INVESTOR SERVICES AND PRIVILEGES

The Funds offer certain investor services and privileges that may be suited to
your particular investment needs, including free Telephone Exchange
Privileges, Investment and Withdrawal Plans and various Retirement Plans. See
"Investor Services."

DIVIDENDS

BGGF and BPMF intend to declare dividends at least annually from net investment
income. BSTFIF, BFTFBF and BFIF intend to declare dividends daily and pay
monthly from net investment income. Dividends are automatically reinvested in
additional Fund shares at net asset value on the payment date and are reflected
in the statements we send you, unless you elect to receive them in cash, in
which case we will send you a monthly check. See "Tax Matters."

SPECIAL CONSIDERATIONS

The Funds are non-diversified funds. Non-diversified Funds may be invested in a
limited number of issues; thus, there may be greater risk in an investment in
these Funds than in diversified investment companies. Moreover, there are
potential risks associated with certain of the Funds' investments and additional
risk considerations that may be associated with certain techniques and
strategies employed by the Funds, including those relating to investments in
foreign securities and futures and options transactions. Such risks may not be
incurred by other investment companies which have similar investment objectives,
but which do not use these techniques and strategies.

Blanchard Funds is organized as a Massachusetts business trust, and the
Blanchard Precious Metals Fund, Inc. is organized as a Maryland corporation. In
each state, nomenclature varies. For convenience, in this Prospectus, you will
be referred to as "shareholders," your Fund shares as "shares" and your
directors or trustees as "Board Members." In addition, the portfolio advisers
will be collectively referred to as "Portfolio Advisers."

SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
BGGF BPMF BFIF BSTFIF BFTFBF
---- ---- ---- ------ ------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........... NONE NONE NONE NONE NONE
Maximum Sales Load Imposed on Reinvested
Dividends
(as a percentage of offering price)........... NONE NONE NONE NONE NONE
Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable)........ NONE NONE NONE NONE NONE
Redemption Fees
(as a percentage of amount redeemed, if
applicable)................................... NONE NONE NONE NONE NONE
Exchange Fee................................... NONE NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver if applicable)(1). 1.00% 1.00% 0.74% 0.50% 0.00%
12b-1 Fees (after waiver if applicable)(2)..... 0.75% 0.75% 0.25% 0.25% 0.00%
Other Expenses (after waivers if
applicable)(3)................................ 0.77% 0.57% 0.60% 0.64% 1.01%
Total Fund Operating Expenses (after waivers
if applicable)(4)........................... 2.52% 2.32% 1.59% 1.39% 1.01%
</TABLE>
(1) The management fee of Flexible Income Fund, Short-Term Flexible Income Fund
and Flexible Tax-Free Bond Fund have been reduced to reflect the voluntary
waiver by the investment adviser. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75% for the Flexible Income Fund, Short-Term Flexible Income Fund and the
Flexible Tax-Free Bond Fund.

(2) The maximum 12b-1 fee for the Flexible Tax-Free Bond Fund is 0.25%.

(3) Other expenses would have been 1.24% for the Flexible Tax-Free Bond Fund
absent the voluntary waivers by the administrator. The administrator can
terminate the voluntary waiver at any time at its sole discretion.
(4) Total Fund Operating Expenses would have been 1.60% for Flexible Income
Fund, 1.64% for Short-Term Flexible Income Fund and 2.24% for Flexible
Tax-Free Bond Fund absent the voluntary waivers described above in Notes 1,
2 and 3.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds will bear either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Management of the Funds" and "Distribution of Shares of the Funds." For the
Global Growth Fund and the Precious Metals Fund, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charges
permitted under the National Association of Securities Dealers, Inc.

Example:

You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return; and (2) redemption at the end of each time period. As noted in
the table above, the Funds charge no redemption fees.

<TABLE>
<CAPTION>
BGGF BPMF BFIF BSTFIF BFTFBF
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
1 year............................................. $ 26 $ 24 $ 16 $ 14 $ 10
3 years............................................ $ 78 $ 72 $ 50 $ 44 $ 32
5 years............................................ $134 $124 $ 87 $ 76 $ 55
10 years........................................... $286 $266 $189 $167 $122
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

FINANCIAL HIGHLIGHTS--BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------
(For a share outstanding throughout each period)
The financial highlights for the periods ended September 30, 1996 or April 30,
1996 have been audited by Deloitte & Touche LLP, independent auditors of
Blanchard Funds and Blanchard Precious, Metals Fund, Inc. (collectively referred
to as the "Funds"). Their reports dated November 15, 1996 are included in the
Funds respective Annual Reports, which are incorporated by reference. This table
should be read in conjunction with the Funds' financial statements and notes
thereto, which may be obtained free of charge from the Funds. <TABLE> <CAPTION>
Net realized Distributions
and from net
unrealized realized gain
Net asset gain/(loss) on Distributions Distributions on investments
Period ended value, Net investments Total from from net in excess of Tax and foreign
April 30, or beginning investment and foreign investment investment net investment return currency
September 30, of period income/(loss) currency operations income income(g) of capital transactions
- ------------- --------- ------------- -------------- ---------- ------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1987(a) $ 8.00 0.01 2.50 2.51 -- -- -- --
1988 $10.51 0.14 (0.21) (0.07) (0.12) -- -- (0.64)
1989 $ 9.68 0.22 0.49 0.71 (0.10) -- -- (0.18)
1990 $10.11 0.30 0.09 0.39 (0.38) -- -- (0.50)
1991 $ 9.62 0.30 0.14 0.44 (0.21) -- -- (0.21)
1992 $ 9.64 0.33 0.26 0.59 (0.31) -- -- --
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
1996(b) $11.53 0.08 0.13 0.21 -- -- -- --
BPMF
1989(c) $ 8.00 0.02 (0.83) (0.81) -- -- -- --
1990 $ 7.19 (0.03)(k) (0.59)(k) (0.62) -- -- (0.14) (0.03)
1991 $ 6.30 (0.08)(k) (0.93)(k) (1.01) -- -- -- --
1992 $ 5.29 (0.09)(k) (0.16)(k) (0.25) -- -- -- --
1993 $ 5.04 (0.08)(k) 1.87(k) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(k) 2.01(k) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10)(k) 2.75(k) 2.65 -- -- -- --
1996(b) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
BFIF
1993(d) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 -- -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(b) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(o) --
BSTFIF
1993(e) $ 3.00 0.00(o) 0.00(o) 0.00(o) (0.00)(o) -- -- (0.00)(o)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(o) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(o) -- --
1996(b) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(o) (0.01) --
BFTFBF
1994(f) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) (0.00)(o) -- --
1996(b) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
</TABLE>

*Computed on an annualized basis.
(a) Reflects operations for the period from June 1, 1986 (commencement of
operations) to April 30, 1987.
(b) The funds have changed their fiscal year ends from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.
(c) Reflects operations for the period from June 22, 1988 (commencement of
operations) to April 30, 1989.
(d) Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.
(e) Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.
(f) Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.
(g) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

FINANCIAL HIGHLIGHTS--BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Distributions
in excess Ratios to Average Net Assets
of net realized Net -------------------------------------------
gain on asset Expense Net assets,
investments and value, Net waiver/ end of Average
foreign currency Total end Total investment reimburse- period commission
transactions(g) distributions of period return(h) Expenses income/(loss) ment(i) (000 omitted) rate paid(j)
- ---------------- ------------- --------- --------- -------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- -- $10.51 31.38% 3.10%* 0.34%* -- $149,018 --
-- (0.76) $ 9.68 (0.57%) 2.28% 1.42% -- $246,569 --
-- (0.28) $10.11 7.54% 2.29% 2.27% -- $244,048 --
-- (0.88) $ 9.62 3.74% 2.28% 2.86% -- $233,300 --
-- (0.42) $ 9.64 4.61% 2.36% 2.84% -- $193,593 --
-- (0.31) $ 9.92 6.24% 2.31% 2.31% -- $128,047 --
-- (0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 --
-- (1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 --
(0.22) (0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 --
-- (0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 --
-- -- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040
-- -- $ 7.19 (10.20%) 3.99%*(l)(m) 0.77%*(l)(n) -- $ 25,837 --
(0.10) (0.27) $ 6.30 (10.90%) 2.95% (0.40%) -- $ 31,539 --
-- -- $ 5.29 (16.00%) 3.05% (1.28%) -- $ 24,924 --
-- -- $ 5.04 (4.70%) 3.09% (1.57%) -- $ 20,900 --
-- -- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 --
-- -- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 --
(1.06) (1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 --
-- -- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 --
-- -- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199
-- (0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 --
-- (0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 --
-- (0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 --
-- (0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 --
-- (0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 --
-- (0.00)(o) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 --
-- (0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 --
-- (0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 --
-- (0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 --
-- (0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 --
-- (0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 --
-- (0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 --
-- (0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 --
-- (0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 --
<CAPTION>
Distributions
in excess
of net realized
gain on
investments and
foreign currency Portfolio
transactions(g) turnover
- ----------------- ---------
<S> <C>
-- 70%
-- 120%
-- 85%
-- 88%
-- 78%
-- 109%
-- 138%
-- 166%
(0.22) 221%
-- 91%
-- 47%
-- 21%
(0.10) 56%
-- 57%
-- 62%
-- 66%
-- 174%
(1.06) 116%
-- 176%
-- 36%
-- 129%
-- 346%
-- 455%
-- 431%
-- 87%
-- 36%
-- 212%
-- 84%
-- 291%
-- 21%
-- 190%
-- 170%
-- 275%
-- 25%
</TABLE>

(h) Based on net asset value.
(i) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(j) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(k) Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.
(l) Net of expense reimbursement.
(m) During the Fund's first year (1989), the net expense ratio to average net
assets would have been 4.03%, if a portion of the 12b-1 distribution and
management fees had not been waived by the prior distributor and prior
manager, respectively.
(n) The investment income ratio to average net assets would have been 0.72%, if
a portion of the 12b-1 distribution and management fees had not been waived
by the prior distributor and prior manager, respectively.
(o) Less than one cent per share.
Further information about the Funds' performance is contained in the Funds'
Annual Reports dated September 30, 1996, which may be obtained free of
charge from the Funds.

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------------------

The investment objectives and policies of each Fund are described below.
Specific investment techniques that may be employed by the Funds are described
in a separate section of this Prospectus and in each Fund's Statement of
Additional Information. Our investment objectives and certain policies, except
as noted, are fundamental and can only be changed by vote of a majority of the
outstanding shares of a particular Fund. We may not always achieve our
objectives, but will follow the investment standards described below.

BLANCHARD GLOBAL GROWTH FUND

The Fund seeks to provide long-term capital growth. Current income is incidental
to the Fund's objective. The Fund attempts to achieve its objective through the
implementation of the strategy outlined below. The Fund will invest, under
normal market conditions, at least 65% of the value of its total assets in
securities of at least three different countries.

The Fund's investment policies reflect the opinion of Mellon Capital Management,
Inc. ("MCM" or the "Portfolio Adviser"), the Fund's portfolio adviser or
sub-adviser, that the world economic system is characterized by various cycles
affecting, among other things, business activities, inflation, interest rates,
currencies, and price levels and that by shifting its assets among the six
investment sectors, the Fund can take advantage of investment opportunities
created by such cycles. MCM believes that within each cycle, certain investment
sectors offer more investment opportunities than others. Naturally, there can be
no guarantee that MCM can predict business cycles with 100% accuracy or that the
objective of the Fund can be achieved.

When Fund management believes that market conditions warrant a temporary
defensive position, it may invest up to 100% of the Fund's assets in cash,
including foreign currencies, short-term instruments such as commercial paper,
bank certificates of deposit, bankers' acceptances, or repurchase agreements for
such securities and securities of the U.S. government and its agencies and
instrumentalities.

VCM has identified the following six strategic investment sectors which have
generally responded, both positively and negatively, to almost all major
economic trends. A percentage of the Fund's assets need not be allocated into
all sectors. The following table indicates the maximum percentage of total
assets of the Fund that may be invested in each sector. The Fund may have zero
percent allocated to any sector when deemed appropriate by MCM.

PERCENTAGE OF TOTAL ASSETS OF THE FUND IN EACH SECTOR

<TABLE>
<CAPTION>
SECTORS MAXIMUM
------- -------
<S> <C>
U.S. Equities Sector 65%
Foreign Equities Sector 65%
U.S. Fixed Income Sector 65%
Foreign Fixed Income Sector 65%
Precious Metals Securities Sector 25%
Emerging Markets Sector 15%
</TABLE>

The Portfolio Adviser will actively allocate Fund assets, through investments in
the U.S. Equities, Foreign Equities, U.S. Fixed Income and Foreign Fixed Income
Sectors, across the major debt and equity markets of the world, overweighting
sectors that the Portfolio Adviser believes are undervalued. The Portfolio
Adviser may also allocate Fund assets to the Precious Metals Securities Sector
and the Emerging Markets Sector in an attempt to further diversify portfolio
holdings, protect against increases in inflation and enhance overall returns.
The Portfolio Adviser will monitor currency exposure, and such exposure will be
actively hedged as currencies become overvalued.

It is possible that an overlapping of investments among the six investment
sectors may occur. For example, investments in U.S. equity securities are not
found only in the U.S. Equities Sector, as the Precious Metals Securities Sector
may invest in common stocks of U.S. precious metals-related companies as well.
Therefore, if the U.S. Equities Sector was at its maximum allocation of 65% of
the Fund's assets, and the Precious Metals Securities Sector had investments in
U.S. common stocks of precious metals companies, the total assets of the Fund
invested in U.S. equity securities could exceed 65%.

U.S. EQUITIES, FOREIGN EQUITIES, U.S. FIXED INCOME AND FOREIGN FIXED INCOME
SECTORS. Within the four U.S. and foreign equities and income sectors, the
Portfolio Adviser will use a highly disciplined process to determine the
percentage of the Fund's assets which will be from time-to-time allocated among
each U.S. and foreign country's markets, based upon the Portfolio Adviser's
assessment of risk and the degree by which each such market is currently
undervalued. (The foreign countries which will be included within the Foreign
Equities and the Foreign Fixed Income Sectors are the following: Australia,
Austria, Belgium, Canada, Denmark, France, Finland, Germany, Hong Kong, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Singapore/Malaysia, South
Africa, Spain, Sweden, Switzerland and the United Kingdom. This list may be
modified from time-to-time to conform to the list of countries included in the
Morgan Stanley Capital International World Index [the "Morgan Stanley Index"]).

In estimating the relative attractiveness of each asset class, MCM will take
into account various factors. Common stocks will be evaluated using a
"dividend-discount" model. This model provides an expected return of the
relevant common stock index of each market in which the Fund may invest (i.e.,
the Standard & Poor's 500 Composite Stock Price Index* [the "S&P 500 Index"] for
the U.S. Equities Sector, and the separate country indices comprising the Morgan
Stanley Index for the Foreign Equities Sector) based upon earnings for companies
whose stocks are included in such Indices. The expected bond return is that
expected to be produced by long-term bonds with credit risks similar to bonds
rated Aa by Moody's Investors Service, Inc. ("Moody's") or AA by Standard &
Poor's Ratings Group ("Standard & Poor's").
- --------
*"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)" and "Standard & Poor's 500"
are trademarks of McGraw-Hill, Inc. and have been licensed for use by MCM.

The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's.
Standard & Poor's makes no representation or warranty, express or implied, to
the owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the S&P 500 Index to track general stock market performance. Standard & Poor's
only relationship to MCM is the licensing of certain trademarks and trade names
of Standard & Poor's and of the S&P 500 Index which is determined, composed and
calculated by Standard & Poor's without regard to MCM or the Fund. Standard &
Poor's has no obligation to take the needs of MCM or the

Once expected return and volatility (risk) estimates are developed for each
asset class within the four U.S. and foreign equity and fixed income sectors,
the Portfolio Adviser will attempt to identify apparent imbalances in the
relative prices of the securities of each market, using a computer model.

To implement its allocation strategy, the Portfolio Adviser will invest in the
following securities: (i) in the U.S. Equity Sector, the Portfolio Adviser will
invest in a diversified portfolio of common stocks which seeks to track the
performance of the S&P 500 Index; (ii) in the U.S. Fixed Income Sector, the
Portfolio Adviser will invest in a diversified portfolio of U.S. fixed income
obligations which seeks to track the performance of the Lehman Long- Term
Treasury Index; (iii) in the Foreign Equities Sector, the Portfolio Adviser will
invest in a diversified portfolio of common stocks which seeks to track the
performance of individual country segments of the Morgan Stanley Index; (iv) and
in the Foreign Fixed Income Sector, the Portfolio Adviser will invest in a
portfolio of foreign government fixed income obligations which seeks to track
the individual country segments of the Salomon Brothers World Government (5+)
Bond Index.

The Fund is not an "Index Fund," and thus does not have a policy of weighting
its portfolio so as to approximate the relative composition of the securities
contained in the indices which it seeks to track. Rather, it seeks to track
performance by investing in a select group of securities (each of which is
included in the relevant index) which the Portfolio Adviser believes, taken
together, will represent the performance of the index as a whole.

PRECIOUS METALS SECURITIES SECTOR. Precious metals securities include
securities of metal mining producer and non-producer companies that are
engaged in (i) the exploration, refining and development of gold, silver,
palladium, and platinum; (ii) the manufacture or production of products
incorporating such precious metals (for example, jewelry, photographic
supplies and medical equipment and supplies); or (iii) the marketing of
precious metals or precious metals products. Such

- --------
Footnote continued from page 7.
owners of the Fund into consideration in determining, composing or calculating
the S&P 500 Index. Standard & Poor's is not responsible for and has not
participated in the determination of the prices and amount of the Fund or the
timing of the issuance or sale of the Fund or in the determination or
calculation of the equation by which the Fund is to be converted into cash.
Standard & Poor's has no obligation or liability in connection with the
administration, marketing or trading of the Fund.

STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY MCM,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.

marketing companies may be in the industries named above or in separate
industries that fall into the category of wholesale-retail trade. A company will
be considered to be "engaged in" such activity if it derives more than 50% of
its revenues from or devotes more than 50% of its assets to such activity.

In particular, the Portfolio Adviser may invest in (1) publicly-traded common
stocks, (2) securities convertible into common stocks, such as convertible
preferred stock, convertible debentures, convertible rights and warrants (to the
extent permissible by the Fund's investment policies), and (3) debt securities
of such companies, all of which are believed by the Portfolio Adviser to have
the potential for appreciation.

EMERGING MARKETS SECTOR. The Fund may invest in emerging country equity
securities, which would include common stock, preferred stock (including
convertible preferred stock), bonds, notes and debentures convertible into
common or preferred stock, stock purchase warrants and rights, equity interests
in trusts and partnerships and American, Global or other types of Depository
Receipts of companies; (i) the principal securities market for which is an
emerging country; (ii) that alone or on a consolidated basis derive 50% or more
of their annual revenue from either goods produced, sales made or services
performed in emerging countries; or (iii) that are organized under the laws of,
and with a principal office in, an emerging country. Determinations as to
eligibility will be made by the Portfolio Adviser based upon publicly available
information and inquiries made to the companies.

An emerging country is any country that the International Bank for
Reconstruction and Development (more commonly known as the World Bank) has
determined to have a low or middle income economy. There are currently over 130
countries which are considered to be emerging countries, approximately 40 of
which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Currently investing in many
emerging countries is not feasible or may involve unacceptable political risks.
The Emerging Markets Sector will focus its investments on those emerging market
countries in which the Portfolio Adviser believes the economies are developing
strongly and in which the markets are becoming more sophisticated.

In addition to the normal determinants of interest rates, inflation, economic
growth and currency movements, country selections and weightings in emerging
growth markets are determined by developmental trends, credit ratings, the
political environment, market liquidity, progress towards privatization and the
degree of foreign investor interest. In addition to emphasizing industries which
are crucial to the development trend in a country and assessing financial
reporting standards and the availability of public information, stock selection
is based on a fundamental analysis of specific criteria including (i) quality of
management; (ii) stock fundamentals (strong earnings growth and profit
potential, positive cash flow, sound balance sheet, geographical sales and
profit spread, and good marketability in shares); and (iii) price and timing.

Depository receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In addition, the
issuers of the stock of unsponsored depository receipts are not obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of the depository
receipts.

OPTIONS AND FUTURES. With respect to all sectors, the Portfolio Adviser may
utilize stock and bond futures and options, currency hedging, and other
investment techniques described under "Certain

Investment Strategies and Policies--Options and Futures" and in the Fund's
Statement of Additional Information, subject to the limitations set forth
therein.

BLANCHARD PRECIOUS METALS FUND, INC.

The Fund's primary investment objective is to provide long-term capital
appreciation and preservation of purchasing power through investments in
physical precious metals and securities of companies involved with precious
metals. A secondary objective is to reduce the risk of loss of capital and
decrease the volatility often associated with precious metals investments by
changing the allocation of the Fund's assets from precious metals securities to
physical precious metals investments and/or investing in short-term instruments
and government securities during periods when the Portfolio Adviser, Cavelti
Capital Management Ltd., believes the precious metals markets may experience
declines.

For the purpose of this Fund, the term "Precious Metals Securities" refers to
the debt and equity securities of domestic and foreign companies listed on
domestic and foreign exchanges which are directly involved in the exploration,
development, mining, refining, manufacturing, dealing or marketing of precious
metals or precious metals products. A company will be considered to be "involved
in" such activity if it derives more than 50% of its revenues from or devotes
more than 50% of its assets to such activity. The Fund may invest in (1)
publicly-traded common stocks, (2) securities convertible into common stocks,
such as convertible preferred stock, convertible debentures, convertible rights
and warrants (to the extent permissible by the Fund's investment policies), and
(3) debt securities of such companies, all of which are believed by the
Portfolio Adviser to have the potential for appreciation. In addition, when the
Portfolio Adviser believes that market conditions warrant, the Fund may invest
up to 100% of its assets in certain short-term instruments.

The Fund may, from time to time, invest up to 5% of its assets in unrated
foreign debt securities which are judged by the Portfolio Adviser to be of at
least comparable quality to lower-rated U.S. debt securities (usually defined as
Baa or lower by Moody's or BBB or lower by Standard & Poor's). The selection of
unrated foreign debt securities will depend to a great extent on the credit
analysis performed by the Portfolio Adviser. Since it is possible that the Fund
could have up to 100% of its total assets in equity securities of domestic and
foreign companies directly involved in the exploration, development, mining,
refining, manufacturing, dealing or marketing of precious metals or precious
metals products, the Fund may be subject to greater risks and greater market
fluctuations than funds with a more diversified general equity portfolio.

The Fund may invest up to 49% of its total assets in physical precious metal of
gold, silver, platinum or palladium through holdings in bullion or precious
metals certificates or storage receipts representing the physical metals. When
the Fund invests in precious metals certificates and storage receipts, it
receives certificates evidencing ownership of specific amounts of precious
metals bullion, instead of taking physical possession of the bullion represented
by the certificate. The Fund relies on the issuers of such documents to maintain
the underlying precious metal on deposit. A default by any of the issuers could
expose the Fund to loss of the metal on deposit. The Fund will purchase
certificates from institutions where the certificate is 100% backed by physical
precious metals in the possession of the institutions and enter into such
transactions only with banks, brokers, dealers and clearinghouses which have
assets of over $1 billion and, in the Portfolio Adviser's opinion, have a high
degree of creditworthiness. The creditworthiness of the issuers will be
monitored by the Portfolio Adviser on an ongoing basis.

The Fund will not invest in coins. The Fund may purchase contracts for forward
delivery of physical precious metals. Forward contracts for precious metals are
contracts between the Fund and institutions dealing in precious metals for the
future receipt or delivery of metals at a price fixed at the time of the
transaction. While some of the Fund's investments may earn interest or
dividends, the Fund is not designed for investors seeking income. The Fund's
investment strategy calls for different approaches to the precious metals
markets in different economic and investment conditions.

As Precious Metals Securities have historically out-performed the price of the
physical metals during periods of generally rising precious metals prices, the
Fund will ordinarily tend to emphasize precious metals securities over physical
precious metals investments during such periods. However, to the extent that the
current behavior of precious metals markets does not conform to historical
patterns at any given time, investments of the Fund will be placed in those
markets believed by the Portfolio Adviser to have the most promising potential
for appreciation. Conversely, during periods of stable or falling precious
metals prices, physical precious metals have generally held their value better
than precious metals securities. Therefore, during those periods, the Fund will
tend to emphasize investments in physical precious metals investments. As the
Fund can invest in all four precious metals: gold, silver, platinum and
palladium, the Portfolio Adviser will attempt to capitalize on price
differentials in the metals markets. Although the Portfolio Adviser believes
that prices of gold, silver, platinum or palladium generally tend to move in the
same direction at the same time, with gold often setting the pace, experience
has proven that this is not always the case. The Fund, therefore, may emphasize
some metals over others when the Portfolio Adviser believes it is advisable to
do so. There is no assurance that the Portfolio Adviser's forecasts of precious
metals prices and the resulting allocation of the Fund's assets among precious
metals or between Precious Metals Securities and Physical Precious Metals
Investments will always be correct.

When the Portfolio Adviser believes that precious metals prices may suffer
declines, it may protect against market risk by increasing the Fund's cash
position. Under normal conditions, the Fund will have at least 65% of its total
assets invested in Precious Metals Securities and Physical Precious Metals
Investments. Under other circumstances, the Fund may invest up to 100% of its
assets in short-term instruments, including commercial paper, bank certificates
of deposit, bankers' acceptances and securities of the U.S. government and its
agencies and instrumentalities as well as in cash and cash equivalents
denominated in foreign currency.

The Portfolio Adviser believes that precious metals and securities of precious
metals related companies continue to offer excellent prospects for capital
appreciation and protection of your purchasing power, during any economic
environment, and especially during periods of inflation, as well as periods of
political and economic instability. The market for precious metals is worldwide;
therefore, precious metals prices are subject to many political, social and
economic influences, often resulting in high volatility. See "Risk Factors and
Special Considerations--Precious Metals and Precious Metals Securities" for
further details.

As physical precious metals earn no income, appreciation in the market price of
gold and other precious metals is the sole manner in which the Fund is able to
realize gains on these investments. Furthermore, the Fund encounters storage and
transaction costs in connection with its ownership of physical precious metals
which are higher than those attendant to the purchase, holding and disposition
of more traditional types of investments.

The Portfolio Adviser believes that physical precious metals are readily
marketable, and thus would not be subject to the Fund's limitation on investing
in illiquid securities described under "Certain Investment Strategies and
Policies--Illiquid Securities."

The production and marketing of gold and precious metals may be affected by the
action of certain governments and changes in existing governments. For example,
the mining of gold is highly concentrated in a few countries. Economic and
political conditions prevailing in these countries may have a direct effect on
the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the Fund will invest will be located within the United States and Canada. For a
further discussion on this subject, including certain risk considerations and
limitations regarding investments in South African issuers, see "Investment
Techniques and Associated Risks--Precious Metals and Precious Metals
Securities."

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND

The investment objective of the Fund is to provide a high level of current
income consistent with preservation of capital by investing primarily in
short-term investment grade debt securities. The Fund's Portfolio Adviser is
OFFITBANK. The Fund is designed for investors seeking higher yields than are
available from money market funds, but who also want more price stability than
is offered by longer-term bond funds. Under normal market conditions, the Fund
will invest at least 80% of its assets in a broad range of U.S. debt securities
of all types. The Fund may invest up to 20% of the value of its assets in
securities of foreign issuers denominated in foreign currency and not publicly
traded in the United States.

Under normal market conditions, at least 65% of the value of the Fund's assets
will be invested in investment-grade bonds, which are considered to be those
rated at least Baa by Moody's or at least BBB by Standard & Poor's or, if
unrated, deemed to be of comparable quality by the Portfolio Adviser. The Fund
may invest less than 35% of its assets in lower-quality debt securities if the
Portfolio Adviser deems that such securities present attractive investment
opportunities. The Fund will not invest in debt securities rated lower than Caa
by Moody's and CCC by Standard & Poor's, or, if unrated, of comparable quality
in the Portfolio Adviser's opinion. Debt securities rated Baa by Moody's and BBB
by Standard & Poor's are considered investment grade obligations which lack
outstanding investment characteristics and may have speculative characteristics
as well. Debt securities rated Caa by Moody's and CCC by Standard & Poor's are
considered to have predominantly speculative characteristics with respect to
capacity to pay interest and repay principal and to be of poor standing. See
"Risk Factors-- Lower Quality Debt Securities" for a discussion of certain
risks, and Appendix A.

Although it is intended that the average maturity of the Fund's portfolio will
be three years or less, the Fund retains the flexibility to increase the average
maturity to up to five years in times when abnormal market conditions warrant
temporary measures. Accordingly, the Fund's average maturity may vary, based on
the Portfolio Adviser's analysis of interest rate trends and other data. In
general, the Fund's average maturity will tend to be shorter when the Portfolio
Adviser expects interest rates to rise and longer when it expects interest rates
to decline. The Fund may invest in individual securities with terms to maturity
of greater than five years if the Fund's portfolio contains sufficient
short-term securities so that the weighted average maturity complies with the
above-stated policy. As the useful life of individual pools of assets underlying
certain obligations in which the Fund may invest may at times be of a shorter
duration than the stated maturity of the obligation itself, the Fund may
consider the useful life of such underlying assets as the maturity of the
obligation owned by the Fund.

Under normal market conditions, the Fund does not expect to have a substantial
portion of its assets invested in money market instruments. However, when the
Portfolio Adviser determines that adverse market conditions exist, the Fund may
adopt a temporary defensive posture and hold cash or invest its entire portfolio
in money market instruments. In addition, during times of international
political or economic uncertainty, most or all of the Fund's investments may be
made in the U.S. and denominated in U.S. dollars. To the extent the Fund is so
invested, the Fund's investment objective may not be achieved.

The Fund will invest in bonds, notes, mortgage securities, asset-backed
securities, government and government agency obligations, zero coupon
securities and convertible securities, and short-term obligations such as
banker's acceptances, certificates of deposit, repurchase agreements and
commercial paper, in any proportion that the Portfolio Adviser determines is
appropriate and in the best interest of shareholders. The Fund may invest in
U.S. government securities and in options, futures contracts and repurchase
transactions with respect to such securities. See "Additional Investment
Information."

The Fund may invest up to 20% of its assets in international securities
consisting of debt obligations and other fixed-income securities, in each case
denominated in non-U.S. currencies or composite currencies, including: debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (described below);
debt obligations of the U.S. government issued in non-dollar securities; and
debt obligations and other fixed-income securities of foreign and U.S. corporate
issuers (non-dollar denominated).

When investing in international securities, the Fund is not limited to
purchasing debt securities rated at the time of purchase by Moody's or Standard
& Poor's. However, the Fund is limited to the extent that it may not invest more
than 34.9% of its assets in lower quality debt securities. In making
international securities investments, the Portfolio Adviser may consider, among
other things, the relative growth and inflation rates of different countries.
The Portfolio Adviser may also consider expected changes in foreign currency
exchange rates, including the prospects for central bank intervention, in
determining the anticipated returns of securities denominated in foreign
currencies. The Portfolio Adviser may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.

The Fund may invest, without limitation, in unrated debt securities issued by
foreign governments, their agencies and instrumentalities, where the foreign
government, its agency or instrumentality is rated less than Baa by Moody's or
less than BBB by Standard & Poor's, provided, however, that the Portfolio
Adviser has determined through its own credit analysis that the credit
characteristics of any such unrated security are equivalent to those of a
security rated at least Baa by Moody's or BBB by Standard & Poor's. To the
extent that the Portfolio Adviser has not made any such determination, such
unrated debt securities will be deemed to have the rating assigned by Moody's or
Standard & Poor's to the governmental entity. To the extent that such securities
are deemed to be rated less than Baa by

Moody's or less than BBB by Standard & Poor's, investment in such securities
will be subject to the under 35% limitation on investment in lower quality debt
securities.

BLANCHARD FLEXIBLE INCOME FUND

The investment objective of the Fund is to provide high current income while
seeking opportunities for capital appreciation. The Portfolio Adviser for the
Fund is OFFITBANK. The Fund intends to invest in the following fixed income
securities markets:

U.S. GOVERNMENT SECURITIES. This consists of debt obligations of the U.S.
government and its agencies and instrumentalities and related options,
futures contracts and repurchase agreements.

INVESTMENT GRADE FIXED INCOME SECURITIES. This consists of investment grade
fixed income securities, including mortgage related and asset backed
securities.

HIGH YIELD SECURITIES. This consists of higher yielding (and, therefore,
higher risk), lower rated U.S. corporate fixed income securities.

INTERNATIONAL FIXED INCOME SECURITIES. This consists of obligations of foreign
governments, their agencies and instrumentalities and other fixed income
securities denominated in foreign currencies or composite currencies including:
debt obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (see discussion in
"Blanchard Short-Term Flexible Income Fund" above); debt obligations of the U.S.
government issued in non-dollar securities; and debt obligations and other fixed
income securities of foreign and U.S. corporate issuers (non-dollar
denominated). The Fund is not limited to purchasing debt securities rated at the
time of purchase by Moody's or Standard & Poor's.

The Fund may invest in any country where the Portfolio Adviser sees potential
for high income. It presently expects to invest primarily in non-dollar
denominated securities of issuers in the industrialized Western European
countries; in Canada, Japan, Australia and New Zealand; and in Latin America. In
making international fixed income securities investments, the Portfolio Adviser
may consider, among other things, the relative growth and inflation rates of
different countries. The Portfolio Adviser may also consider expected changes in
foreign currency exchange rates, including

the prospects for central bank intervention, in determining the anticipated
returns of securities denominated in foreign currencies. The Portfolio Adviser
may further evaluate, among other things, foreign yield curves and regulatory
and political factors, including the fiscal and monetary policies of such
countries. The Fund may also invest up to 25% of its assets in the fixed income
securities of issuers in emerging market countries. It is the policy of the Fund
not to invest more than 10% of its assets in any one emerging market country,
except that the Fund may invest up to 15% of its assets in fixed income
securities of issuers in Mexico. For additional information on each of these
securities markets see "Additional Investment Information."

The Portfolio Adviser believes that the ability to invest the Fund's assets
among these markets, as opposed to investing in any one, may enable the Fund to
enhance current income and increase opportunities for capital appreciation while
taking risk to principal into consideration. The Fund may invest up to 35% of
its assets in lower quality fixed income securities. There is no limit on the
percentage of Fund assets invested in any of the fixed income markets except for
High Yield Securities which is limited to less than 35%, and further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio. At least 65% of the Fund's
total assets generally will be invested in income producing securities; however,
the Fund expects that substantially all of its total assets will be invested in
income-producing securities, together with certain futures, options and foreign
currency contracts and other investments described below. When the Portfolio
Adviser determines that adverse market conditions exist, the Fund may adopt a
temporary defensive posture and hold cash or invest its entire portfolio in
money market instruments. In addition, during times of international political
or economic uncertainty, most or all of the Fund's investments may be made in
the U.S. and denominated in U.S. dollars. For a complete discussion of the types
of investments in which the Fund will invest see "Additional Investment
Information."

BLANCHARD FLEXIBLE TAX-FREE BOND FUND

The Fund's investment objective is to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The Fund will invest at least 65% of its assets in municipal bonds,
except when maintaining a temporary defensive position. The Fund's Portfolio
Adviser is The United States Trust Company of New York.

The Fund invests in municipal obligations which are determined by the Portfolio
Adviser to present minimal credit risks. As a matter of fundamental policy,
except during temporary defensive periods, the Fund will maintain at least 80%
of its assets in obligations exempt from federal income tax, including the
alternative minimum tax. (This policy may not be changed without the vote of the
holders of a majority of the Fund's outstanding shares.) However, from time to
time on a temporary defensive basis due to market conditions, the Fund may hold
uninvested cash reserves or invest in taxable obligations in such proportions
as, in the opinion of the Portfolio Adviser, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Interest
income from certain short-term holdings may be taxable to shareholders as
ordinary income.

The municipal obligations purchased by the Fund will consist of: (1) municipal
bonds rated "A" or better by Moody's or by Standard & Poor's or, in certain
instances, municipal bonds with lower ratings if they are deemed by the
Portfolio Adviser to be comparable to A-rated issues; (2) municipal notes rated
"MIG-2" or better ("VMIG-2" or better in the case of variable rate notes) by
Moody's or "SP-2" or better by Standard & Poor's and (3) municipal commercial
paper rated "Prime-2" or better by Moody's or "A-2" (collectively, "Municipal
Obligations"). If not rated, securities purchased by the

Fund will be of comparable quality to the above ratings as determined by the
Portfolio Adviser under the supervision of the Board Members. A discussion of
Moody's and Standard & Poor's rating categories is contained in Appendix A. The
Fund may purchase and sell municipal bond index and interest rate futures
contracts as a hedge against changes in market condition.

The Fund may also invest in securities issued by money market funds which are
investment companies that invest in high-quality, short-term securities and that
determine their net asset value per share based on the amortized cost or
penny-rounding method. Such securities will be acquired by the Fund within the
limits prescribed by the Investment Company Act of 1940 ("1940 Act"). By
investing in shares of money market funds, the Fund pays a portion of the
operating and management expenses of such money market funds, as well as its own
operating and management expenses. Investors should consider the tax
consequences of an investment by the Fund in money market funds distributing
taxable income. However, it is a policy of the Fund to maximize the percentage
of distributions to shareholders that are not subject to Federal income taxes.

MANAGEMENT OF THE FUNDS
- -------------------------------------------------------------------------------

BOARD OF TRUSTEES/DIRECTORS. The Board of Trustees of Blanchard Funds and the
Board of Directors of BPMF (the "Boards" or the "Board Members") are responsible
for managing the business affairs of the Funds and for exercising all of the
powers of the Funds except those reserved for the shareholders. The Executive
Committee of the Boards handles the Boards' responsibilities between meetings of
the Boards.

MANAGER. VCM is responsible for managing the Funds and overseeing the investment
of their assets, subject at all times to the supervision of the Board Members.
In addition, VCM selects, monitors and evaluates the Portfolio Advisers. VCM
will review the Portfolio Advisers' performance records periodically, and will
make changes if necessary, subject to Board Member and shareholder approval.

MANAGEMENT FEES. VCM receives an annual management fee at annual rates equal
to percentages of the relevant Fund's average net assets as follows:

BGGF and BPMF--1.00% of the Fund's first $150 million of average daily net
assets, .875% of the Fund's average daily net assets in excess of $150 million
but not exceeding $300 million and .75% of the Fund's average daily net assets
in excess of $300 million. BFIF--.75%; BSTFIF--.75%; BFTFBF--.75%. These fees
are higher than the fees paid by most investment companies because of the
complexity of managing these types of Funds.

The portion of the fee based upon the average daily net assets of the Fund shall
be accrued daily at the rate of 1/365th of the applicable percentage applied to
the daily net assets of the Fund.

The management contract provides for the voluntary waiver of expenses by VCM
from time to time. VCM can terminate this voluntary waiver of expenses at any
time with respect to a Fund at its sole discretion.

VCM'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, bank holding company which has provided
investment management services since 1956. On July 21, 1997, Signet Banking
Corporation entered into a definitive Agreement and Plan of Reorganization
whereby Signet Banking Corporation would be acquired by First Union Corporation,
a bank holding

company headquartered in Charlotte, North Carolina. VCM, which is a registered
investment adviser, manages, in addition to the Funds, The Virtus Funds and
three fixed income common trust funds.

PORTFOLIO ADVISORY SERVICES
- -------------------------------------------------------------------------------

THE PORTFOLIO ADVISERS

To provide portfolio advisory services for the Funds, VCM has entered into
sub-advisory agreements with the Portfolio Advisers set forth below. The
Portfolio Advisers have extensive experience in investing and managing large
private and institutional accounts. Under the terms of each sub-advisory
agreement, the Portfolio Adviser has discretion to purchase and sell securities
for that Fund, except as limited by such Fund's investment objective, policies
and restrictions. Although each Portfolio Adviser's activities are subject to
general oversight by VCM and the Board Members, selection of specific securities
in which the Fund may invest are made by the Portfolio Adviser.

BLANCHARD GLOBAL GROWTH FUND

Mellon Capital Management Corporation is the Portfolio Adviser to the Fund. MCM
was established in 1983, and provides investment advisory services to investment
companies, pension plans, foundations, endowments and other institutions located
both in the U.S. and abroad. As of September 30, 1996, MCM had over $46.4
billion of assets under management. MCM, a wholly owned indirect subsidiary of
Mellon Bank Corporation, is located at 595 Market Street, Suite 3000, San
Francisco, California 94105.

The Fund's portfolio manager is Charles J. Jacklin. Mr. Jacklin has performed
this duty since May 1996. Mr. Jacklin manages and develops global asset
allocation strategies, and develops and implements MCM's value-added
investment strategies. Prior to joining MCM, he served on the finance
faculties of the Stanford University and University of Chicago Schools of
Business. Mr. Jacklin has also served as Senior Staff Economist for Financial
Markets and Banking for the President's Council of Economic Advisers, and had
primary responsibility for all matters related to financial markets and
banking. He has published a number of articles on finance and investment in
academic research journals, and is an associate editor for the Review of
Quantitative Finance and Accounting. Mr. Jacklin holds a Ph.D. in Finance from
Stanford University.

THE SUB-ADVISORY CONTRACT. The Sub-Advisory Contract provides that MCM shall pay
all expenses incurred by it and its staff in connection with the performance of
its services under the Sub-Advisory Contract, including the payment of salaries
of all officers and employees who are employed by it. VCM will pay MCM an annual
fee not to exceed .375% of the Fund's average daily net assets up to $100
million; .35% on net assets between $100 million and $150 million; and .325% on
net assets in excess of $150 million.

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND BLANCHARD FLEXIBLE INCOME FUND

VCM has retained OFFITBANK, 520 Madison Avenue, New York, New York 10022 to
provide portfolio advisory services to the Funds. OFFITBANK, a New York State
chartered trust bank, is the continuation of the business of Offit Associates,
Inc., a registered investment adviser founded in December, 1982. The firm
converted to a trust bank in July, 1990. The core business of OFFITBANK is
portfolio management for institutions, non-profit organizations and wealthy
family groups. OFFITBANK specializes in fixed income management and offers its
clients a complete range of fixed income investments in capital markets
throughout the world. As of July 31, 1997, OFFITBANK had in excess of $8 billion
in assets under management. Jack D. Burks, Managing Director of OFFITBANK, has
over 10 years of experience in Fixed Income Portfolio Management and is
responsible for the day-to-day management of the Funds' portfolios.

THE SUB-ADVISORY AGREEMENTS. The sub-advisory agreements between VCM and
OFFITBANK provide for the payment by VCM to OFFITBANK of a monthly fee at the
annual rate of .30% of the first $25 million of each Fund's average daily net
assets; .25% of the next $25 million of each Fund's average daily net assets;
and .20% of each Fund's average daily net assets in excess of $50 million.

BLANCHARD FLEXIBLE TAX-FREE BOND FUND

VCM has retained The United States Trust Company of New York ("U.S. Trust") to
provide portfolio advisory services to the Fund. U.S. Trust, a New York State
chartered bank and trust company established in 1853, managed in excess of $58
billion in assets as of July 31, 1997. U.S. Trust is a financial services
company that specializes in asset management, private banking, fiduciary and
securities services. Kenneth J. McAlley, an executive vice president of U.S.
Trust, has been actively engaged in municipal obligation portfolio management
with U.S. Trust for over 10 years and has been responsible for the Fund's
day-to-day investment decisions since the Fund's commencement of operations in
July of 1993. Mr. McAlley is a nationally recognized expert in municipal bond
investment strategy and has been favorably profiled in publications such as
Barrons, Forbes and Financial World.

THE SUB-ADVISORY AGREEMENT. Pursuant to the sub-advisory agreement between VCM
and U.S. Trust, VCM has agreed to pay U.S. Trust a monthly fee at the annual
rate of .20% of the Fund's average daily net assets.

BLANCHARD PRECIOUS METALS FUND, INC.

VCM has retained Cavelti Capital Management, Ltd., of Toronto, Canada to provide
portfolio advisory services to the Fund. Cavelti Capital Mangement, Ltd. is a
Canadian money management firm specializing in bullion and precious metals
mining shares and is a registered investment adviser with the SEC. Peter C.
Cavelti, the company's President, has extensive investment experience in the
field of precious metals and the firm's clients include government agencies,
financial institutions, mining companies and Canadian closed-end funds. Kevin
MacLean, Senior Portfolio Manager of Cavelti Capital Management, Ltd., also
serves as a portfolio manager for the Fund. Mr. MacLean has been actively
engaged in precious metals portfolio management with Cavelti for over 8 years.

THE SUB-ADVISORY AGREEMENT. Pursuant to the sub-advisory agreement between VCM
and Cavelti Capital Management Ltd., VCM has agreed to pay Cavelti Capital
Management Ltd. monthly compensation of the sum of the amounts determined by
applying the following annual rates to the Fund's aggregate daily net assets:
.30% of the Fund's net assets up to the first $150 million; .2625% of the Fund's
net assets in excess of $150 million but less than $300 million; and .255% of
the Fund's net assets in excess of $300 million.

HOW TO INVEST
- -------------------------------------------------------------------------------

You may purchase shares of any Fund from Federated Securities Corp., the Funds'
principal Distributor. You may also purchase shares from broker-dealers who have
entered into a dealer agreement with the Distributor at net asset value, which
is determined as of the close of trading

(normally 4:00 p.m., Eastern time) on the New York Stock Exchange. If your order
is received after the above time, your shares will be purchased at the net asset
value on the next business day. Each Fund's net asset value per share is
determined by dividing the value of that Fund's net assets by the total number
of its shares outstanding. Each Fund determines the net asset value of its
shares on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in its securities to affect
materially its net asset value per share.

For all Funds the minimum initial investment requirement is $3,000 and the
minimum initial investment requirement for qualified pension plans (IRAs,
Keoghs, etc.) is $2,000. The minimum investment requirement for additional
investments in all of the Funds is at least $200 per investment. (The foregoing
minimum investment requirements may be modified or waived at any time at our
discretion.)

PURCHASES BY MAIL

To purchase shares of a Fund by mail, simply send a completed Application
(included with this Prospectus or obtainable from the Fund) to The Blanchard
Group of Funds, c/o Signet Financial Services, Inc., P.O. Box 26301, Richmond VA
23260, together with a check payable to the individual 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,
third party checks are acceptable for subsequent investments, 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
which may take up to 7 calendar days.

Orders by mail are considered received after payment by check is converted into
federal funds. This is generally the next business day after Signet receives the
check.

PURCHASES BY WIRE. Call Investor Services at 1-800-829-3863 to receive wiring
instructions.

AUTOMATIC INVESTMENT PLANS. Regular monthly purchases of shares may be made by
direct deposit of Social Security and certain other government checks into your
account. Fund shares may be purchased at regular intervals selected by you by
automatic transferral of funds from a bank checking account that you may
designate. All such purchases require a minimum of $100 per transaction. Call
1-800-829-3863 for information and forms required to establish these Plans.

BY TELEPHONE. This service allows you to purchase additional shares quickly and
conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, Blanchard will automatically debit your
predesignated bank account for the desired amount. To establish the telephone
purchase option on your new account, you must complete the 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 15 calendar days after the form is
processed.

GENERAL INFORMATION

All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares unless
we receive written notice from you, at least 30 days prior to the record day
of such distribution, requesting that your dividends and distributions be
distributed to you in cash. See "Tax Matters."

We reserve the right to suspend the offering of any Fund shares for a period of
time. We also reserve the right to reject any purchase order.

No share certificates will be issued for shares unless requested in writing. In
order to facilitate redemptions and transfers, most shareholders elect not to
receive certificates. Shares are held in unissued form by the Transfer Agent.
Shares for which certificates have been issued cannot be redeemed, unless the
certificates are received together with the redemption request in proper form.
Share certificates are not issued for fractional shares.

INVESTOR SERVICES
- -------------------------------------------------------------------------------

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.

AUTOMATIC WITHDRAWAL PLAN

If you purchase $10,000 or more of Fund shares, you may establish an Automatic
Withdrawal Plan to authorize a specified dollar amount to be paid periodically
to a designated payee. Under this Plan, all income dividends and capital gains
distributions will be reinvested in shares in your account at the applicable
payment dates' closing net asset value.

Your specified withdrawal payments are made monthly or quarterly in any amount
you choose, but not less than $100 per month or $300 quarterly. Please note that
any redemptions of your shares, which may result in a gain or loss for tax
purposes, may involve the use of principal, and may eventually use up all of the
shares in your account. Such payments do not provide a guaranteed annuity and
may be terminated for any shareholder by a Fund if, due to transfer or
redemption of shares, the value of the account drops below a minimum amount
deemed acceptable from time-to-time by the Fund. 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.

EXCHANGE PRIVILEGE

You may exchange your Fund shares for shares of another Fund in the Blanchard
Group of Funds or for Investment Shares of any Virtus Fund at net asset value.
In addition, you may exchange your Fund Shares for shares of Federated Emerging
Market Fund at net asset value. No fees are charged in connection with any such
exchange. Before making an exchange, you should read the Prospectus concerning
the participating Fund into which your exchange is being made.

To request an exchange by telephone, simply call 1-800-829-3863, prior to 4:00
p.m., Eastern time. Exchanges can be made in this manner only if you have not
opted out of the Telephone Exchange Privilege, as described in the New Account
Application accompanying this Prospectus and only if your account registration
has not changed within the last 30 days.

It is the Funds' policy to mail to you at your address of record, within five
business days after any telephone call transaction, a written confirmation
statement of the transaction. All calls will be recorded for your protection. As
a result of the Funds' policy, neither a Fund nor Signet will be responsible for
any claims, losses or expenses for acting on telephone instructions that they
reasonably

believe to be genuine. Since you may bear the risk of loss in the event of an
unauthorized telephone transaction, you should verify the accuracy of telephone
transactions immediately upon receipt of your confirmation statement.

Exchanges can only be made between accounts with identical account registration
and in states where shares of the other Funds are qualified for sale. We do not
place any limit on the number of exchanges that may be made and charge no fee
for affecting an exchange. The dollar amount of an exchange must meet the
initial investment requirement of the Fund into which the exchange is being
made. All subsequent exchanges into that Fund must be at least $1,000. We may
modify or suspend the Exchange Privilege at any time upon 60 days' written
notice.

Any exchange of shares is, in effect, a redemption of shares in one Fund and a
purchase of shares of the other fund. You should consider the possible tax
effects of an exchange. To prevent excessive trading between Funds to the
disadvantage of other shareholders, we reserve the right to modify or terminate
this privilege with respect to any shareholder.

CHECK-WRITING PRIVILEGE

If you are a shareholder of Blanchard Flexible Income Fund or Blanchard Short
Term Flexible Income Fund, you may elect a service which allows you to write an
unlimited number of checks in any amount of $250 or more which will clear
through the Transfer Agent. There is no charge for this service for regular
checks; special business style checkbooks are assessed a $60 check printing fee.
If the amount of your check is less than $250, the check will be cleared but you
will be assessed a $10 charge. If the check exceeds the value of the shares in
your account, your check will be returned and a $10 fee deducted from your
account. You may not use the Check-Writing Privilege to close out your account
as you will not be able to ascertain the exact account balance of your account
on the date your check clears. To close out your account completely, you should
use the telephone or mail redemption procedures described below. Stop orders may
be placed on checks for a fee of $10. For further information on this service,
please call Investors' Services at 1-800- 829-3863.

The payee of a check may cash or deposit it in a bank; however, checks cannot be
presented in person at a branch office of the Transfer Agent for cash. When a
check is presented to the Transfer Agent for payment, it will cause the Fund to
redeem a sufficient number of shares to cover the amount of the check. You will
continue to earn daily income until the check is presented to the Transfer Agent
for payment.

A COMPLETED NEW ACCOUNT APPLICATION OR SHAREHOLDER PRIVILEGE FORM MUST BE
RECEIVED BY SIGNET BEFORE THE THESE PRIVILEGES MAY BE USED.

HOW TO REDEEM
- -------------------------------------------------------------------------------

You may redeem your shares on any business day at the next determined net asset
value calculated after your redemption request has been accepted by Signet as
described below.

BY TELEPHONE. You may redeem your shares by telephone by calling 1-800-829-
3863, prior to 4:00 p.m., Eastern time. All calls will be recorded. Redemptions
of Fund shares can be made in this manner only after you have executed and filed
with Signet the telephone redemption authorization form which may be obtained
from your Fund or Signet.

You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate. Should
you wish to review these instructions, simply complete and file a new telephone
redemption authorization form. There is no charge for this service. As long as
the identification procedures described above are followed, neither your Fund
nor Signet will be responsible for any claims, losses or expenses for acting on
telephone instructions that they reasonably believe to be genuine. See "Investor
Services--Exchange Privilege" for additional information with respect to losses
resulting from unauthorized telephone transactions.

You may also request, by placing a call to the applicable telephone number set
forth above, redemption proceeds to be wired directly to the bank account that
you have designated on the authorization form. The minimum amount that may be
redeemed in this manner is $1,000. A check for proceeds of less than $1,000 will
be mailed to your address of record. The Funds do not impose a charge for this
service. However, the proceeds of a wire redemption may be subject to the usual
and customary charges imposed by Signet for the wiring of funds. In addition,
your designated bank may also impose a service charge.

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, c/o Signet Financial Services, Inc., P.O. Box 26301,
Richmond VA 23260. Where share certificates have been issued, the certificates
should be sent by registered or certified mail with the redemption request.
Signatures on redemption requests for amounts in excess of $25,000 and share
certificates submitted for redemption must be accompanied by signature
guarantees from any eligible guarantor institution approved by Signet 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 Signet pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
Signet 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
Signet 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 Signet. However, we may delay the forwarding of redemption
proceeds on shares which were recently purchased until the purchase check has
cleared, which may take up to 7 calendar days or more. We may suspend the right
of redemption

when the New York Stock Exchange is closed or when trading on the Exchange is
restricted, and under certain extraordinary circumstances in accordance with the
rules of the SEC. Due to the relatively high cost of handling small investments,
we reserve the right upon 60 days' written notice to redeem, at net asset value,
the shares of any shareholder whose account has a value of less than $1,000,
other than as a result of a decline in the net asset value per share. We do not
presently contemplate making such involuntary redemptions and will not redeem
any shares held in tax-sheltered retirement plans in this category. We also
reserve the right upon notice to shareholders to charge a fee for any services
provided herein that are currently free of charge.

DISTRIBUTION OF SHARES OF THE FUNDS
- -------------------------------------------------------------------------------

Federated Securities Corp. is the principal distributor for shares of the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

DISTRIBUTION PLAN. According to the provisions of a distribution plan adopted
pursuant to Investment Company Act Rule 12b-1, the Distributor may select
brokers and dealers to provide distribution and administrative services as to
shares of the Funds. The Distributor may also select administrators (including
financial institutions, fiduciaries, custodians for public funds and investment
advisers) to provide administrative services. Administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as each Fund reasonably requests for its shares.

Brokers, dealers, and administrators will receive fees based upon shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the Boards,
provided that for any period the total amount of fees representing an expense to
the Trust or the Company shall not exceed an annual rate of .25% of the average
daily net assets of shares of BFIF, BSTFIF and BFTFBF and .75% of the average
daily net assets of shares of BGGF and BPMF held in the accounts during the
period for which the brokers, dealers, and administrators provide services. Any
fees paid by the Distributor with respect to shares of a Fund pursuant to the
distribution plan will be reimbursed by the Trust or the Company from the assets
of the shares of that Fund.

The Distributor will, periodically, uniformly offer to pay cash or promotional
incentives in the form of trips to sales seminars at luxury resorts, tickets or
other items to all dealers selling shares of the Funds. Such payments will be
predicated upon the amount of shares of the Funds that are sold by the dealer.
Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of a Fund.

ADMINISTRATIVE ARRANGEMENTS. The Distributor may pay financial institutions a
fee based upon the average net asset value of shares of their customers invested
in the Funds for providing administrative services. This fee, if paid, will be
reimbursed by VCM and not the Funds.

GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is deemed
to prohibit depository institutions from acting in the administrative capacities
described above or should Congress relax current restrictions on depository
institutions, the Boards will consider appropriate changes in the administrative
services.

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of Federated
Investors, provides the Funds with certain administrative personnel and services
necessary to operate each Fund. Such services include shareholder servicing and
certain legal and accounting services. Federated Services Company provides these
at an annual rate as specified below:

<TABLE>
<CAPTION>
AVERAGE COMBINED AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE TRUST/CORPORATION
ADMINISTRATIVE FEE AND THE VIRTUS FUNDS
------------------ -----------------------------------
<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $75,000
per Fund. Federated Services Company may voluntarily waive a portion of its fee.

BROKERAGE TRANSACTIONS. Subject to the supervision of the Board Members and VCM,
decisions to buy and sell specific securities for a Fund are made by its
Portfolio Adviser. The Portfolio Advisers are authorized, subject to most
favorable price and execution, to place portfolio transactions with brokerage
firms that provide assistance in the distribution of Fund shares and/or supply
research. The Board Members have also authorized the Funds to allocate brokerage
to the Portfolio Advisers or an affiliated broker-dealer as well as to use the
Distributor, on an agency basis, or affiliates thereof, to effect portfolio
transactions which are executed on United States and foreign stock exchanges or
which are traded in the over-the-counter market. The Funds have adopted certain
procedures incorporating the standards of Rule 17e-1 of the 1940 Act which
require that the commissions paid to a Portfolio Adviser or the Distributor or
to affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee, or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." From time to time, a Fund may purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by that Fund. Transactions are allocated to
various dealers selected by VCM or the Portfolio Advisers primarily on the basis
of prompt execution of orders at the most favorable prices. Transactions may be
allocated based on the sale of Fund shares. The Funds have determined that the
foregoing arrangements are in the best interest of the Funds' shareholders. See
"Portfolio Transactions" in each Fund's Statement of Additional Information for
further information.

TAX MATTERS
- -------------------------------------------------------------------------------

Each Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), including the requirements with respect to
diversification of assets, distribution of income and sources of income. It

is each Fund's policy to distribute to its shareholders all of their investment
income (net of expenses) and any capital gains (net of capital losses) in
accordance with the timing requirements imposed by the Code, so that each Fund
will satisfy the distribution requirement of Subchapter M and not be subject to
Federal income taxes or the 4% excise tax. If a Fund fails to satisfy any of the
Code requirements for qualification as a regulated investment company, it will
be taxed at regular corporate tax rates on all of its taxable income (including
any capital gains) without any deduction for distributions to shareholders, and
distributions to you will be taxable as ordinary dividends (even if derived from
the Fund's net long-term capital gains) to the extent of the Fund's current and
accumulated earnings and profits.

Distributions by a Fund of the excess, if any, of its net long-term capital gain
over its net short-term capital loss that are designated as capital gain
dividends are taxable to shareholders as long-term capital gains, regardless of
the length of time a shareholder has held his shares. Distributions by a Fund of
its net investment income and the excess, if any, of its net short-term capital
gain over its net long-term capital loss are taxable to shareholders as ordinary
income. Depending on a Fund's investments, part or all of such ordinary income
dividends could be treated as: (1) dividends attributable to interest from
obligations of the United States Government ("U.S. Government Interest
Dividends") that would be exempt from state and local taxes; (2) dividends
attributable to qualifying dividends ("Qualifying Dividends") that for corporate
shareholders would qualify for the 70% dividends-received deduction; or (3)
dividends attributable to municipal obligations that would be excluded from
regular federal tax and partially exempt from state and local tax ("Exempt
Interest Dividends").

A portion of such dividends from the Blanchard Precious Metals Fund, Inc. and
Blanchard Global Growth Fund may be Qualifying Dividends. However, this portion
cannot exceed the aggregate amount of Qualifying Dividends from domestic
corporations received by such Funds during the year, and substantially less than
100% of the ordinary income dividends paid by such Funds may qualify for the
deduction.

Distributions by the Blanchard Flexible Tax-Free Bond Fund of its tax-exempt
interest income (net of expenses) that are designated as Exempt Interest
Dividends should be excluded from gross income for federal income tax purposes.
However, you are required to report the receipt of Exempt Interest Dividends,
together with other tax-exempt interest, on your federal income tax return. In
addition, Exempt Interest Dividends may be subject to the federal alternative
minimum tax and to state and local income tax, and will be taken into account in
determining the portion, if any, of Social Security benefits received which must
be included in gross income for federal income tax purposes.

Investment income that may be received by the Blanchard Global Growth Fund,
Blanchard Precious Metals Fund, Inc., Blanchard Flexible Income Fund, and
Blanchard Short-Term Flexible Income Fund from sources within foreign countries
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which entitle such Funds
to a reduced rate of, or exemption from, taxes on such income. It is impossible
to determine the effective rate of foreign tax in advance since the amount of a
Fund's total assets to be invested in various countries is not known. If more
than 50% of the value of a Fund's total assets at the close of its taxable year
consists of stock or securities of foreign corporations, such Fund may elect to
"pass through" to its shareholders the amount of foreign taxes paid by the Fund.
If the Fund so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Fund, and would be treated as having paid his pro rata share
of such

foreign taxes and, therefore, be allowed to either deduct such amount in
computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax.

Distributions to you will be treated in the same manner for federal income tax
purposes whether you elect to receive them in cash or reinvest them in
additional shares. In general, you take distributions into account in the year
in which they are made. However, you are required to treat certain distributions
made during January as having been paid by a Fund and received by you on
December 31 of the preceding year. A statement setting forth the federal income
tax status (i.e., U.S. Government Interest Dividends, Qualifying Dividends,
Exempt Interest Dividends, or net capital gain dividends) of all distributions
made (or deemed made) during the year will be sent to you promptly after the end
of each year. If you purchase shares of a Fund just prior to the record date,
you will be taxed on the entire amount of the dividend received, even though the
net asset value per share on the date of such purchase may have reflected the
amount of such dividend.

Upon the sale or redemption of shares of a Fund, you will recognize gain or loss
in an amount equal to the difference between the proceeds of the sale or
redemption and your adjusted tax basis in the shares. Any loss realized upon a
taxable disposition of shares within six months from the date of their purchase
will be disallowed to the extent of any exempt-interest dividends received on
the shares and, to the extent not disallowed, will be treated as long-term
capital loss to the extent of any capital gain dividends received on such
shares. All or a portion of any loss realized upon a taxable disposition of
shares of a Fund may be disallowed if other shares of the Fund are purchased
within thirty days before or after such disposition.

If you are a non-resident alien or foreign entity shareholder, ordinary income
dividends paid to you generally will be subject to United States withholding at
a rate of 30% (or a lower rate under an applicable treaty). If you are a
non-United States shareholder, we urge you to consult your own tax advisor
concerning the applicability of United States withholding tax.

Under the back-up withholding rules of the Code, you may be subject to 31%
withholding of federal income tax on ordinary income dividends, capital gain
dividends, and redemption payments made by the Funds. In order to avoid this
back-up withholding, you must provide the Fund with a correct taxpayer
identification number (which, if you are an individual, is usually your Social
Security number), and certify that you are a corporation or otherwise exempt
from or not subject to back-up withholding.

The foregoing discussion of federal income tax consequences is based on tax laws
and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds that is
contained in the Funds' Statements of Additional Information. In addition, you
should consult with your own tax advisor as to the tax consequences of
investments in the Funds.

PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------

Advertisements and communications to investors regarding the Funds may cite
certain performance and ranking information and may make performance comparisons
to other Funds or to relevant indices, as described below. In addition, the
Funds' Portfolio Advisers and other outside analysts may,

from time to time, report on the market outlook for their investments as well as
comment on the historical reasons for these investments including as a hedge
against inflation. The Funds' performance may be calculated both in terms of
total return and on the basis of current yield over any period of time and may
include a computation of a Fund's distribution rate.

TOTAL RETURN. Cumulative total return data is computed by considering all
elements of return, including reinvestment of dividends and capital gains
distribution, over a stated period of time. Cumulative total return figures are
not annualized and represent the aggregate percentage or dollar value change
over the period in question.

Average annual return will be quoted for at least the one, five and ten year
periods ending on a recent calendar quarter (or if such periods have not yet
elapsed, at the end of a shorter period corresponding to the life of a Fund for
performance purposes). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question.

YIELD INFORMATION. The term "yield" refers to the income generated by an
investment over a one-month or 30-day period. This income is computed by
dividing the net investment income per share earned during such period by the
maximum public offering price per share on the last day of the period, and then
annualizing such 30-day (or one month) yield in accordance with a formula
prescribed by the SEC which provides for compounding on a semi-annual basis. The
Funds may also quote tax-equivalent yield, which shows the taxable yield that an
investor would have to earn before taxes to equal a Fund's tax-free yield. The
tax-equivalent yield is calculated by dividing a Fund's tax-exempt yield by the
result of one minus any combination of the stated federal, state, or city tax
rate. If only a portion of a Fund's income is tax-exempt, only that portion is
adjusted in the calculation.

DISTRIBUTION RATE. The Funds may also quote distribution rates and/or effective
distribution rates in sales literature or other shareholder communications. A
Fund's distribution rate is computed by dividing the most recent monthly
distribution per share annualized by dividing the distribution rate by the ratio
used to annualize the distribution and reinvesting the resulting amount for a
full year on the basis of such ratio. The effective distribution rate will be
higher than the distribution rate because of the compounding effect of the
assumed reinvestment. A Fund's distribution rate may differ from its yield
because the distribution rate may contain net investment income and other items
of income (such as returns of capital), while yield reflects only earned
interest and dividend items of income.

COMPARATIVE RESULTS. From time to time in advertisements or sales material, a
Fund may discuss its performance rating and may be compared to the performance
of other mutual funds or mutual fund indices as published by widely recognized
independent mutual fund reporting services such as Lipper Analytical Services,
Inc., CDA and Morningstar, Inc. A Fund may also discuss the past performance and
ranking of its Portfolio Adviser and compare its performance to various
investment indices. The Funds may use performance information as reported in
publications of general interest, national, financial and industry publications
such as Forbes or Money Magazine and various investment newsletters such as
Donoghue's Money Letter. In addition, the Funds may compare their total return
to the total return of indices of U.S. markets or world markets, to that of
other mutual funds, individual country indices, or other recognized indices.

From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Funds Magazine. We may also compare the

historical returns on various investments, performance indices of those
investments or economic indicators. In addition, the Funds may reprint articles
about a Fund and provide them to prospective shareholders. The Distributor may
also make available economic, financial and investment reports to shareholders
and prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparisons
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments. Advertising and other promotional literature may include
charts, graphs and other illustrations using a Fund's returns, or returns in
general, that demonstrate basic investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment. In addition, a
Fund can compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills. Advertising and sales
literature for a Fund may include discussions of economic, financial and
political developments and their effect on the securities market. Such
discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $3.5 trillion to the more than 6,000 funds available.

Performance information will vary from time to time and past results are not
necessarily representative of future results. You should remember that a Fund's
performance is a function of portfolio management in selecting the type and
quality of securities in which a Fund may invest, and is affected by operating,
distribution and marketing expenses.

ADDITIONAL INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------------------

BLANCHARD FUNDS

Blanchard Funds (the "Trust") is a Massachusetts business trust organized on
January 24, 1986 which currently consists of six series. All of the series are
non-diversified series of the Trust. Under Massachusetts law, the Trust and its
series are generally not required to hold annual or special shareholder
meetings. However, special meetings of shareholders may be held for such
purposes as electing trustees, changing fundamental policies, approving an
investment management/advisory agreement or approving a distribution and
marketing plan, if any, and, at the request of the shareholders, to replace
trustees. Shareholders holding 10% or more of the Trust's outstanding shares may
call a special meeting of shareholders. Shareholders may remove trustees from
office whenever not less than two-thirds of the outstanding shares either
present a written declaration to the Transfer Agent or vote at a meeting called
for this purpose. In certain circumstances, shareholders shall be

given access to a list of the names and addresses of all other shareholders, the
number of shareholders and the cost of mailing a request to them.

BLANCHARD PRECIOUS METALS FUND, INC.

BPMF is a non-diversified investment company organized as a Maryland corporation
on June 1, 1987. As such, no annual or special meetings of Fund shareholders
will be held except as may be required by the Maryland General Corporation Law
or the 1940 Act, or as the Board of Directors of the Fund may determine.

A director of the Fund generally may be removed by the holders of not less than
a majority of the Fund's outstanding shares. In addition, the directors of the
Fund will promptly call a meeting of shareholders for any purpose or purposes,
including to vote on whether to remove any director(s) when requested to do so
in writing by record holders of not less than 10% of the outstanding shares of
the Fund. Finally, in certain circumstances, shareholders shall be given access
to a list of the names and addresses of all other shareholders or be informed by
the Fund of the number of shareholders and the cost of mailing their request.

ALL FUNDS

Shares of each series of the Trust represent shares of beneficial interest.
Shares of BPMF represent shares of common stock. Each share has equal rights
with respect to voting matters of that series or of BPMF. In the event of
dissolution or liquidation of a series or of BPMF, holders of shares will
receive pro rata, subject to the rights of creditors, the proceeds of the sale
of the assets less its liabilities. There are no preemptive or conversion rights
applicable to the shares of a Fund. Shares of a Fund, when issued, will be fully
paid, non-assessable and transferable. The Board Members may create additional
series of shares without shareholder approval. BPMF and each series of the Trust
is individually responsible only for its own expenses and operating costs and
incurs no liability with respect to the expenses and costs of any other series
or for BPMF, other than those which affect the Blanchard Group of Funds as a
group and are allocated among the series and/or BPMF based upon their relative
average net assets during the year. There is a remote possibility that one Fund
might become liable for any misstatement in the Prospectus about another Fund.

This Prospectus omits certain information contained in the registration
statement as filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. Each Fund's Statement of Additional
Information included in this registration statement may be obtained without
charge from your Fund.

No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statements of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by a Fund. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.

The Code of Ethics of the Investment Adviser and the Funds prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Code of Ethics of both the Funds and
Investment Adviser is that their operations be carried out for the exclusive
benefit of the Funds' shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.

INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, 2500 One PPG Place, Pittsburgh,
Pennsylvania 15222-5401 has been appointed the independent accountants for the
Funds.

CUSTODIAN. Signet Trust Company, Richmond, Virginia is custodian for the
securities and cash of the Funds. Under the Custodian Agreement, Signet Trust
Company holds the Funds' portfolio securities in safekeeping and keeps all
necessary records and documents relating to its duties.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Shareholder Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the Funds and
dividend disbursing agent for the Funds.

SHAREHOLDER INQUIRIES. Shareholder inquiries concerning the status of an account
or information concerning the Funds should be directed to Signet Financial
Services, Inc., P.O. Box 26301, Richmond VA 23260, or by calling 1-
800-829-3863.

ADDITIONAL INVESTMENT INFORMATION
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MUNICIPAL OBLIGATIONS (BFTFBF)

The two principal classifications of Municipal Obligations which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities, or in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the Fund are in most cases revenue
currencies and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity revenue bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.

The Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special-purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligation from current
revenues, it may draw on a reserve fund the restoration of which is a moral
commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Fund.

The Fund may also purchase custodial receipts evidencing the right to receive
either the principal amount or the periodic interest payments or both with
respect to specific underlying Municipal Obligations ("Stripped Municipal
Obligations"). In a typical custodial receipt arrangement, an issuer or a third
party owner of Municipal Obligation deposits such obligations with a custodian
in exchange for two classes of custodial receipts. The two classes have
different characteristics, but, in each case, payments on the two classes are
based on payments received on the underlying Municipal Obligations. One class
has the characteristics of a typical auction mechanism. This class' interest
rate generally is expected to be below the coupon rate of the underlying
Municipal Obligations and interest rate adjustments. The second class bears
interest at a rate that exceeds the interest rate typically borne by a security
of comparable quality and maturity; this rate also is adjusted, but in this case
inversely to changes in the rate of interest of the first class. If the interest
rate on the first class exceeds the coupon rate of the underlying Municipal
Obligations, its interest rate will exceed the rate paid on the second class. In
no event will the aggregate interest paid with respect to the two classes exceed
the interest paid by the underlying Municipal Obligations. The value of the
second class and similar

securities should be expected to fluctuate more than the value of a Municipal
Obligation of comparable quality and maturity and their purchase by the Fund
should increase the volatility of its net assets value and, thus, its price per
share. These custodial receipts are sold in private placements. The Fund also
may purchase directly from issuers, and not in a private placement, Municipal
Obligations having the same characteristics as the custodial receipts. The Fund
intends to purchase Stripped Municipal Obligations only when the yield thereon
will be exempt from Federal income tax to the same extent as interest on the
underlying Municipal Obligations. Stripped Municipal Obligations are considered
illiquid securities subject to the 10% limit described in "Investment
Limitations" in the Statement of Additional Information. The Fund may purchase
and sell municipal bond index and interest rate future contracts as a hedge
against changes in market condition.

RISKS. Municipal bond prices are interest rate sensitive, which means that their
value varies inversely with the market interest rates. Thus, if market interest
rates have increased from the time a bond was purchased, the bond, if sold,
might be sold at a price less than its cost. Similarly, if market interest rates
have declined from the time a bond was purchased, the bond, if sold, might be
sold at a price greater than its cost. (In either instance, if the bond was held
to maturity, no loss or gain normally would be realized as a result of interim
market fluctuations.)

U.S. GOVERNMENT SECURITIES (BSTFIF, BFIF, BGGF)

The term "U.S. Government Securities" refers to debt securities denominated in
U.S. dollars issued or guaranteed by the U.S. government, by various of its
agencies, or by various instrumentalities established or sponsored by the U.S.
government. Certain of these obligations including U.S. Treasury bills, notes
and bonds, mortgage participation certificates guaranteed by the Government
National Mortgage Association ("GNMA") and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government Securities issued or guaranteed by Federal agencies or
government sponsored enterprises are not supported by the full faith and credit
of the United States. These securities include obligations supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association bonds. When
purchasing securities in the U.S. government market, the Portfolio Advisers may
take full advantage of the entire range of maturities of U.S. Government
Securities and may adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of relative yields of
securities of different maturities and its expectations of future changes in
interest rates. To the extent that a Fund invests in the mortgage market, the
Portfolio Advisers usually will evaluate, among other things, relevant economic,
environmental and security-specific variables such as housing starts, coupon and
age trends. To determine relative value among markets the Portfolio Advisers may
use tools such as yield/duration curves, break-even prepayment rate analysis and
holding-period-return scenario testing.

A Fund may seek to increase its current income by writing covered call or put
options with respect to some or all of the U.S. Government Securities held in
its portfolio. In addition, a Fund may at times, through the writing and
purchase of options on U.S. Government Securities, and the purchase and sale of
futures contracts and related options with respect to U.S. Government
Securities, seek to reduce fluctuations in net asset value by hedging against a
decline in the value of U.S. Government Securities owned by that Fund or an
increase in the price of such securities which such Fund plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities

and futures and related options are not considered U.S. Government Securities;
accordingly, they have a different set of risks and features. These practices
and related risks are described in each Fund's Statement of Additional
Information.

U.S. Government Securities are considered among the most creditworthy of fixed
income investments. Because of this added safety, the yields available from U.S.
Government Securities are generally lower than the yields available from
corporate debt securities. The value of U.S. Government Securities (like those
of fixed income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding long
term U.S. Government Securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities and the Funds expect that their portfolios of U.S. Government
Securities will be weighted towards the longer maturities at least to the extent
that they have written call options thereon. Although changes in the value of
U.S. Government Securities will not affect investment income from those
securities, they will affect a Fund's net asset value.

INVESTMENT GRADE FIXED INCOME SECURITIES (BSTFIF, BFIF, BGGF)

The Funds may invest in investment grade U.S. fixed income securities. Such
investments may include mortgage related securities that are not U.S. Government
Securities, asset backed securities and fixed income securities rated Baa or
higher by Moody's or BBB by Standard & Poor's. Fixed income securities rated Baa
by Moody's or BBB by Standard & Poor's are considered investment grade
obligations which lack outstanding investment characteristics and may have
speculative characteristics as well. See Appendix A for the descriptions of
these rating categories.

MORTGAGE RELATED SECURITIES. Mortgage related securities issued by financial
institutions (or separate trusts or affiliates of such institutions), even where
backed by U.S. Government Securities, are not considered U.S. Government
Securities. The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes in market yields will affect the value
of these securities as the price of fixed income securities generally increases
when interest rates decline and decreases when interest rates rise. Prices of
longer term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of principal on mortgage pass-through securities may make it
difficult to lock in interest rates for a fixed period of time. To the extent
that mortgage securities are purchased at prices that differ from par, these
prepayments (which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
Treasury securities of the same average life. For more information on
mortgage-related securities, see "Investment Objective and Policies" in each
Fund's Statement of Additional Information.

ASSET-BACKED SECURITIES. In general, asset-backed securities in which a Fund may
invest are issued as debt securities by special purpose corporations. These
securities represent an undivided ownership interest in a pool of installment
sales contracts and installment loans collateralized by, among other things,
credit card receivables and automobiles. The Funds will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The Funds anticipate that a
substantial portion of the asset-

backed securities in which they invest will consist of the debt obligations of
such special purpose corporations. Asset-backed securities, in general, are of a
shorter maturity (usually five years) than most conventional mortgage-backed
securities and historically have been less likely to experience substantial
prepayments. Furthermore, the effect of prepayments on securities that have
shorter maturities, such as asset-backed securities, is much smaller than the
effect of prepayments on securities having longer maturities, such as
mortgage-backed securities. The yield characteristics of asset-backed securities
differ from more traditional debt securities in that interest and principal
payments are paid more frequently, usually monthly, and principal may be prepaid
at any time. As a result, if a Fund purchases an asset-backed security at a
discount, similar to conventional mortgage-backed securities, a prepayment rate
that is faster than expected will increase yield to maturity, while a prepayment
rate that is slower than expected will reduce yield to maturity. Conversely, if
a Fund purchases an asset-backed security at a premium, faster than expected
prepayments will reduce, while slower than expected prepayments will increase,
yield to maturity. Prepayments may result from a number of factors, including
trade-ins and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit, life and disability insurance policies. The rate
of prepayments on asset-backed securities may also be influenced by a variety of
economic and social factors, including general measures of consumer confidence;
accordingly, from time to time, substantial amounts of prepayment may be
available for reinvestment by a Fund and will be subject to the prevailing
interest rates at the time of prepayment.

Asset-backed securities often contain elements of credit support to lessen the
effect of the potential failure by obligors to make timely payments on
underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installments on
loans which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The Funds will not pay any additional fees for such credit support.
However, the existence of credit support may increase the market price of the
security. For more information on asset-backed securities, see "Investment
Objective and Policies" in each Fund's Statement of Additional Information.

HIGH YIELD/HIGHER-RISK SECURITIES (BSTFIF, BFIF)

Lower rated fixed income securities, including debt securities, convertible
securities and preferred stock and unrated corporate fixed income securities,
commonly referred to as "junk bonds," are considered speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated fixed income securities.

Convertible securities are bonds, debentures, notes, preferred stock or other
securities which may be converted or exchanged by the holder into shares of the
underlying common stock at a stated exchange ratio. A convertible security may
also be subject to redemption by the issuer but only after a date and under
certain circumstances (including a specified price) established on issue.

Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indices
of U.S. Treasury Securities. A Fund may continue to hold

securities obtained as a result of the conversion of convertible securities held
by such Fund when the Portfolio Adviser believes retaining such securities is
consistent with the Fund's investment objective.

Differing yields on fixed income securities of the same maturity are a function
of several factors, including the relative financial strength of the issuers.
Higher yields are generally available from securities in the lower categories of
recognized rating agencies, i.e., Ba or lower by Moody's or BB or lower by
Standard & Poor's. A Fund may invest in any security which is rated by Moody's
or Standard & Poor's, or in any unrated security which the Portfolio Advisers
determine is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristic of the lower categories, are set forth in Appendix A.

Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Although the Funds' Portfolio Advisers
will consider security ratings when making investment decisions in the High
Yield Market, they will perform their own investment analysis and will not rely
principally on the ratings assigned by the rating services. A Portfolio
Adviser's analysis generally may include, among other things, consideration of
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset and
earnings prospects.

CERTAIN INVESTMENT STRATEGIES AND POLICIES
- -------------------------------------------------------------------------------

OPTIONS AND FUTURES TRANSACTIONS (BSTFIF, BFIF, BPMF, BGGF)

GENERAL. The successful use of these investment techniques depends on the
ability of Fund management to forecast interest rate and currency exchange rate
movements correctly. Should interest or exchange rates move in an unexpected
manner, a Fund may not achieve the anticipated benefits of futures contracts,
options or forward contracts or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and forward contracts,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. In addition, the correlation between movements in the
prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses. A Fund's ability to dispose of its positions in futures
contracts, options and forward contracts will depend on the availability of
liquid markets in such instruments. Markets in options and futures with respect
to a number of fixed income securities and currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of futures contracts, options and forward
contracts. If a secondary market does not exist with respect to an option
purchased or written by a Fund over-the-counter, it might not be possible to
effect a closing transaction in the option (i.e., dispose of the option) with
the result that (i) an option purchased by the Fund would have to be exercised
in order for the Fund to realize any profit and (ii) the Fund may not be able to
sell currencies or portfolio securities

covering an option written by the Fund until the option expires or it delivers
the underlying futures contract or currency upon exercise. Therefore, no
assurance can be given that the Funds will be able to utilize these instruments
effectively for the purposes set forth above. The selection of futures and
option strategies requires skills different from those needed to select
portfolio securities; however, the Portfolio Advisers do have experience in the
use of futures and options. Furthermore, a Fund's ability to engage in options
and futures transactions may be limited by tax considerations. See "Tax Matters"
in each Fund's Statement of Additional Information.

OPTIONS ON PORTFOLIO SECURITIES. (BSTFIF, BFIF, BGGF) A Fund, in seeking to
generate high current income, may write covered call options on certain of its
portfolio securities at such time and from time to time as Fund management shall
determine to be appropriate and consistent with the investment objective of the
Fund. A covered call option means that the Fund owns the security on which the
option is written. Generally, the Funds expect that options written by them will
be traded on recognized securities exchanges. In certain instances, however, a
Fund may purchase and sell options in the over-the-counter market ("OTC
Options"). A Fund's ability to close option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Fund. In addition,
the staff of the SEC has taken the position that OTC Options and the assets used
as "cover" should be treated as illiquid securities. There is no fixed limit on
the percentage of a Fund's assets upon which options may be written.

The Funds will receive a premium (less any commissions) from the writing of such
contracts, and it is believed that the total return to the Funds can be
increased through such premiums consistent with each Fund's investment
objective. The writing of option contracts is a highly specialized activity
which involves investment techniques and risks different from those ordinarily
associated with investment companies, although the Funds believe that the
writing of covered call options listed on an exchange or traded in the
over-the-counter market, where the Fund owns the underlying security, tends to
reduce such risks. The writer forgoes the opportunity to profit from an increase
in market price of the underlying security above the exercise price so long as
the option remains open. See each Fund's Statement of Additional Information for
more information.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (BSTFIF, BFTFBF, BFIF, BGGF)
A Fund may enter into contracts for the purchase or sale for future delivery of
interest rate instruments, fixed-income securities, foreign currencies, or
contracts based on financial indices including any index of U.S. Government
Securities, foreign government securities or corporate debt securities ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities or foreign currencies called for by the contract at a specified price
on a specified date. A "purchase" of a futures contract means the incurring of a
contractual obligation to acquire the securities or foreign currencies called
for by the contract at a specified price on a specified date. Options on futures
contracts to be written or purchased by a Fund will be traded on U.S. or foreign
exchanges or over-the-counter. See "Additional Risks of Futures Contracts and
Related Options, Forward Foreign Currency Exchange Contracts and Options on
Foreign Currencies" below and in each Fund's Statement of Additional Information
for further discussion of the use, risks and costs of futures contracts and
options on futures contracts.

Although most futures contracts call for making or taking delivery of the
underlying securities, these obligations are typically cancelled or closed out
before the scheduled settlement date. The closing is accomplished by purchasing
(or selling) an identical futures contract to offset a short (or long) position.

Such an offsetting transaction cancels the contractual obligations established
by the original futures transaction. Other financial futures contracts call for
cash settlements rather than delivery of securities.

If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the Funds will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities transaction, but may not always
or completely do so.

In contrast to the purchase or sale of a security, the full purchase price of
the futures contract is not paid or received by a Fund upon its purchase or
sale. Instead, the Funds will deposit in a segregated custodial account an
amount of cash or U.S. Treasury bills equal to approximately 5% of the value of
the contract. This amount is known as initial margin. The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments to and from the
broker, called variation margin, will be made on a daily basis as the price of
the underlying security fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as "mark to the market."
For example, when a Fund has purchased a futures contract and the price of the
underlying security has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying security has declined, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker. At any time prior to expiration of the futures contract, a Fund may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to that Fund, and the Fund realizes a loss or gain. No
assurance can be given that the Funds will be able to take an opposite position.

The Funds will not (i) enter into any futures contracts or options on futures
contracts if immediately thereafter the aggregate of margin deposits on all the
outstanding futures contracts of a Fund and premiums paid on outstanding options
on futures contracts would exceed 5% of the market value of the total assets of
the Fund, or (ii) enter into any futures contracts or options on futures
contracts if the aggregate of the market value of the outstanding futures
contracts of a Fund and the market value of the currencies and futures contracts
subject to outstanding options written by the Fund would exceed 50% of the
market value of the total assets of that Fund.

OPTIONS ON FOREIGN CURRENCIES. (BSTFIF, BFIF, BGGF) The Funds may purchase and
write put and call options on foreign currencies to increase a Fund's gross
income and for the purpose of protecting against declines in the U.S. dollar
value of foreign currency denominated portfolio securities and against increases
in the U.S. dollar cost of such securities to be acquired. As in the case of
other kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on

a foreign currency may constitute an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to a Fund's
position, it may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by a
Fund are traded on U.S. and foreign exchanges or over-the-counter. There is no
specific percentage limitation on a Fund's investments in options on foreign
currencies. See each Fund's Statement of Additional Information for further
discussion on the use, risks and costs of options on foreign currencies.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (BSTFIF, BFIF, BGGF) The Funds will
purchase or sell forward foreign currency exchange contracts ("forward
contracts") as part of their portfolio investment strategy. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. A Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security ("transaction hedge"). Additionally, for example, when a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward sale contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against foreign currency, it
may enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount ("position hedge"). In this situation, a Fund may, in the
alternative, enter into a forward contract to sell a different foreign currency
for a fixed U.S. dollar amount where the Fund believes that the U.S. dollar
value of the currency to be sold pursuant to the forward contract will fall
whenever there is a decline in the U.S. dollar value of the currency in which
portfolio securities of the Fund are denominated ("cross-hedge"). The Funds'
custodian will place cash not available for investment or U.S. Government
Securities or other high quality debt securities in a separate account of a Fund
having a value equal to the aggregate amount of that Fund's commitments under
forward contracts entered into with respect to position hedges and crosshedges.
If the value of the securities placed in a separate account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
separate account, a Fund may purchase a call option permitting the Fund to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price or a Fund may purchase a
put option permitting the Fund to sell the amount of foreign currency subject to
a forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
Pursuant to the sub-advisory agreements, the Portfolio Advisers, where permitted
by law, will purchase and sell foreign exchange in the interbank dealer market
for a fee on behalf of a Fund, subject to certain procedures and reporting
requirements adopted by the Board Members.

ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. The market prices
of futures contracts may be affected by certain factors. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the securities and futures
markets. Second, from the point of view of speculators, the deposit requirements
in the futures market are less onerous than margin requirements in the

securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.

In addition, futures contracts in which the Funds may invest may be subject to
commodity exchange imposed limitations on fluctuations in futures contract
prices during a single day. Such regulations are referred to as "daily price
fluctuation limits" or "daily limits." During a single trading day no trades may
be executed at prices beyond the daily limit. Once the price of a futures
contract has increased or decreased by an amount equal to the daily limit,
positions in those futures cannot be taken or liquidated unless both a buyer and
seller are willing to effect trades at or within the limit. Daily limits, or
regulatory intervention in the commodity markets, could prevent a Fund from
promptly liquidating unfavorable positions and adversely affect operations and
profitability.

Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may exist, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.

The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of such options must be
made exclusively through the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.

In addition, futures contracts and related options and forward contracts and
options on foreign currencies may be traded on foreign exchanges, to the extent
permitted by the CFTC. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (a) other
complex foreign political and economic factors, (b) lesser availability than in
the United States of data on which to make trading decisions, (c) delays in a
Fund's ability to act upon economic events occurring in foreign

markets during nonbusiness hours in the United States, (d) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (e) lesser trading volume.

OTHER INVESTMENT POLICIES

REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. Under a
repurchase agreement, a Fund acquires a debt instrument for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
that Fund's money is invested. The Funds' repurchase agreements will at all
times be fully collateralized in an amount at least equal to the purchase price
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily, and as the value of instruments declines,
the Funds will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, a Fund may
incur a loss. If such a defaulting seller were to become insolvent and subject
to liquidation or reorganization under applicable bankruptcy or other laws,
disposition of the underlying securities could involve certain costs or delays
pending court action. Finally, it is not certain whether the Funds would be
entitled, as against a claim of the seller or its receiver, trustee in
bankruptcy or creditors, to retain the underlying securities. Repurchase
agreements are considered by the staff of the SEC to be loans by a Fund.

LENDING OF PORTFOLIO SECURITIES. (BSTFIF, BFTFBF, BFIF) In order to generate
additional income, each Fund may lend its portfolio securities in an amount up
to 33 1/3% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities not affiliated with
Sheffield. The borrower at all times during the loan must maintain cash or cash
equivalent collateral or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the securities loaned. During
the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities, and the Fund may invest the cash
collateral and earn additional income, or it may receive an agreed-upon amount
of interest income from the borrower who has delivered equivalent collateral or
a letter of credit. As with other extensions of credit, there are risks of delay
in recovery or even loss of rights in the collateral should the borrower of any
loaned securities fail financially.

WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS. (BFTFBF) The Fund
may purchase eligible securities on a "when issued" basis and may purchase or
sell securities on a "forward commitment" basis. The Fund does not intend to
engage in "when issued" purchases and forward commitments for speculative
purposes, but only in furtherance of its investment objective. The Fund will
establish a segregated account with its custodian bank in which it will maintain
cash or other high quality debt securities determined daily to be equal in value
to the commitments for "when-issued" securities.

In addition, the Fund may acquire "stand-by commitments" with respect to
Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the Fund's option, specified Municipal Obligations at a
specified price. The Fund will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the Fund
would be valued at zero in determining the Fund's net asset value.

MONEY MARKET INSTRUMENTS. (BFTFBF, BPMF, BGGF, BFIF, BSTFIF) Money market
instruments include, but are not limited to, the following instruments:
government securities; commercial paper; bank certificates of deposit and
bankers' acceptances; and repurchase agreements related to any of the foregoing.
A Fund will only purchase commercial paper if it is rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by Standard & Poor's or, if not rated, is considered by
Fund management to be of equivalent quality.

Under a defensive strategy, BSTFIF and BFIF may concentrate their investments in
securities issued by banks. Such investments may include certificates of
deposit, time deposits, bankers' acceptances, and obligations issued by bank
holding companies, as well as repurchase agreements entered into with banks.

ILLIQUID SECURITIES. (BSTFIF, BFIF, BGGF, BFTFBF, BPMF) The Funds will not
invest in illiquid securities if immediately after such investment more than 10%
of a Fund's total assets (taken at market value) would be invested in such
securities. See each Fund's Statement of Additional Information. For this
purpose, illiquid securities include (a) securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed illiquid for purposes of this limitation.

Rule 144A under the Securities Act of 1933 allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act of 1933 applicable to resales of certain
securities to qualified institutional buyers. The Portfolio Advisers anticipate
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

The Portfolio Adviser will monitor the liquidity of restricted securities in
each Fund's portfolio under the supervision of the Board Members. In reaching
liquidity decisions, the Portfolio Advisers will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wanting to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).

NON-DIVERSIFICATION. All of the Funds' portfolios are "non-diversified" which
means the Funds are not limited in the proportion of assets that may be invested
in the securities of a single issuer.

However, each Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Code, which will relieve the
Funds of any liability for Federal income tax to the extent its earnings are
distributed to shareholders. See "Tax Matters." To so qualify, among other
requirements, each Fund will limit its investments so that, at the close of each
fiscal quarter, (i) not more than 25% of the market value of a Fund's total
assets will be invested in the securities of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value will be invested in the securities of a single issuer and a Fund
will not own more

than 10% of the outstanding voting securities of a single issuer. For purposes
of the Funds' requirements to maintain diversification for tax purposes, the
issuer of a loan participation will be the underlying borrower. In cases where a
Fund does not have recourse directly against the borrower, both the borrower and
each agent bank and co-lender interposed between the Fund and the borrower will
be deemed issuers of the loan participation for tax diversification purposes. A
Fund's investments in U.S. Government Securities are not subject to these
limitations. Since the Funds may invest in a smaller number of individual
issuers than diversified investment companies, an investment in the Funds may,
under certain circumstances, present greater risks to an investor than an
investment in a diversified company. PORTFOLIO TURNOVER. The Funds may engage in
active short-term trading to benefit from yield disparities among different
issues of securities, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. Such trading will increase a Fund's rate
of turnover and the possible incidence of short-term capital gain taxable as
ordinary income. VCM anticipates that the annual turnover in each Fund will not
be in excess of 200%. An annual turnover rate of 200% occurs, for example, when
the dollar equivalent of all of the securities in a Fund's portfolio are
replaced twice in a period of one year. A high rate of portfolio turnover
involves correspondingly greater expenses than a lower rate, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities, which expenses must be borne by
that Fund and its shareholders. High portfolio turnover rates also may result in
the realization of substantial net short-term capital gains. In order to
continue to qualify as a regulated investment company for Federal tax purposes,
less than 30% of the annual gross income of a Fund must be derived from the sale
of securities held by the Fund for less than three months. See "Tax Matters."

RISK FACTORS AND SPECIAL CONSIDERATIONS

FOREIGN INVESTMENTS. (BSTFIF, BFIF, BGGF) Foreign investments involve certain
risks that are not present in domestic securities. Because the Funds intend to
purchase securities denominated in foreign currencies, a change in the value of
any such currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of a Fund's assets and a Fund's income available for
distribution. In addition, although a portion of a Fund's investment income may
be received or realized in such currencies, the Code requires that each Fund
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate of any such currency declines after the Fund's income has been earned and
translated into U.S. dollars but before payment, a Fund could be required to
liquidate securities to make such distributions. Similarly, if an exchange rate
depreciates between the time a Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount in any such currency of such expenses at the time
they were incurred. Under the Code, changes in an exchange rate which occur
between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time a
Fund actually collects such receivables or pays such liabilities will result in
foreign exchange gains or losses that increase or decrease distributable taxable
net investment income. Similarly, dispositions of certain debt securities (by
sale, at maturity or otherwise) at a U.S. dollar amount which is higher or lower
than the Fund's original U.S. dollar cost may result in foreign exchange gains
or losses, which will increase or decrease distributable taxable net investment
income.

The values of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Funds will invest only

in securities denominated in foreign currencies that are fully exchangeable into
U.S. dollars without legal restriction at the time of investment, there is no
assurance that currency controls will not be imposed subsequently. In addition,
the values of foreign fixed-income investments will fluctuate in response to
changes in U.S. and foreign interest rates.

There may be less information publicly available about a foreign issuer than
about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.

In addition, with respect to certain foreign countries, there is a possibility
of expropriation of assets, confiscatory taxation, political or financial
instability and diplomatic developments which could adversely affect the value
of investments in those countries. The Portfolio Advisers do not expect to
invest the Funds' assets in countries where they believe such events are likely
to occur.

Income received by a Fund from sources within foreign countries may be reduced
by withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. The Portfolio Advisers will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by a Fund will reduce its net income
available for distribution to shareholders.

Trading volume in emerging country securities markets is substantially less than
in the United States. Further, securities of some emerging country issuers are
less liquid and more volatile than securities of comparable U.S. issuers.
Commissions for trading on emerging country stock exchanges are generally higher
than commissions for trading on U.S. exchanges, although the Funds will endeavor
to achieve the most favorable net results on their portfolio transactions and
may, in certain instances, be able to purchase portfolio investments on other
stock exchanges where commissions are negotiable.

Issuers in emerging countries are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. issuers. Consequently, there
may be less publicly available information about an emerging country issuer than
about a U.S. issuer. Further, there is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed issuers than in the
United States.

The Funds may invest in unlisted emerging country debt obligations and other
fixed-income securities, including investments in new and early stage issuers,
which may involve a high degree of business and financial risk that can result
in substantial losses. Because of the absence of any trading market for these
investments, a Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on these sales couId
be less than those originally paid by the Fund. Further, issuers

whose securities are not publicly traded may not be subject to public disclosure
and other investor protection requirements applicable to publicly traded
securities.

The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are dependent upon international
trade and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.

With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of a Fund's investments in those countries. In addition, it may be difficult to
obtain and enforce a judgment in a court outside of the United States.

From time to time, BGGF may invest in Eastern Europe as investment opportunities
emerge in those markets, if the Portfolio Adviser deems it prudent in light of
then existing social, economic and political conditions. Investing in the
securities of issuers in Eastern Europe involves certain additional
considerations not usually associated with investing in securities of issuers in
more developed capital markets, including the following: (i) political and
economic considerations, such as greater risks of expropriation and
nationalization and less social, political and economic stability; (ii) the
small size of the markets for such securities, the low or nonexistent volume of
trading, the lack of liquidity and price volatility; (iii) restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; and (iv) the absence of developed legal structures governing private
and foreign investments and private property. Applicable accounting and
financial reporting standards in Eastern Europe may be substantially different
from U.S. accounting standards and, in certain Eastern European countries, no
reporting standards may exist. Consequently, substantially less information is
available to investors in Eastern Europe, and the information that is available
may not be conceptually comparable to, or prepared on the same basis as, that
available in more developed capital markets, which may make it difficult to
assess the financial status of particular companies. Upon the accession to power
of Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
There can be no assurance that the Fund's investments in Eastern Europe, if any,
would not also be appropriated, nationalized or otherwise confiscated, in which
case the Fund would lose its entire investment in the country involved. In
addition, any change in the leadership or policies of Eastern European countries
may halt the expansion of or reverse the liberalization of foreign investment
policies now occurring.

PRECIOUS METALS AND PRECIOUS METALS SECURITIES. (BPMF, BGGF) Investment in
securities of precious metals mining, exploration and processing companies
involves certain risks. Selective investment in such securities, however, may
offer a greater return than shares of domestic industrial issuers. The market
action of such securities has tended to move against, or independently of, the
market trend of industrial securities; therefore, the addition of securities of
companies involved in precious metals operations to an investor's portfolio may
increase the return and may reduce overall

fluctuations in portfolio value. Thus, an investment in a Fund should be
considered part of an overall investment program rather than as a complete
investment program in itself.

Prices of precious metals mining securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals. This
is due to the fact that the costs of mining precious metals remain relatively
fixed, so that an increase or decrease in the price of precious metals has a
direct and greater than proportional effect on the profitability of precious
metals mining companies. Investments tied to precious metals characteristically
involve high risk because of precious metals' price volatility. The price of
precious metals is affected by factors such as cyclical economic conditions,
political events and monetary policies of various countries (see "Investment
Objective and Policies--Additional Information Regarding Precious Metals and
Precious Metals Securities" in each Fund's Statement of Additional Information
for historic price information on gold bullion). During periods of rising
precious metals prices, investments in Precious Metals Securities will tend to
be emphasized with respect to a Fund.

The mining of gold is highly concentrated in a few countries. Currently, the
five largest producers of gold are the Republic of South Africa, certain
republics of the former Soviet Union, Canada, the United States and Australia.
Economic and political conditions prevailing in these countries may have a
direct effect on the production and marketing of newly produced gold and sales
of central bank gold holdings. At any given time, a substantial portion of the
investments of a Fund may be concentrated in one or a few foreign countries. See
"Investment Objective and Policies--Additional Information Regarding Precious
Metals and Precious Metals Securities" in each Fund's Statement of Additional
Information for further details on this subject.

RISK FACTORS-LOWER RATED FIXED INCOME SECURITIES. (BSTFIF) Lower quality fixed
income securities generally produce a higher current yield than do fixed income
securities of higher ratings. However, these fixed income securities are
considered speculative because they involve greater price volatility and risk
than do higher rated fixed income securities, and yields on these fixed income
securities will tend to fluctuate over time. Although the market value of all
fixed income securities varies as a result of changes in prevailing interest
rates (e.g., when interest rates rise, the market value of fixed income
securities can be expected to decline), values of lower rated fixed income
securities tend to react differently than the values of higher rated fixed
income securities. The prices of lower rated fixed income securities are less
sensitive to changes in interest rates than higher rated fixed income
securities. Conversely, lower rated fixed income securities also involve a
greater risk of default by the issuer in the payment of principal and income and
are more sensitive to economic downturns and recessions than higher rated fixed
income securities. The financial stress resulting from an economic downturn
could have a greater negative effect on the ability of issuers of lower rated
fixed income securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other fixed income securities
in a Fund's portfolio, the net asset value of that Fund will be negatively
affected. Moreover, as the market for lower rated fixed income securities is a
relatively new one, a severe economic downturn might increase the number of
defaults, thereby adversely affecting the value of all outstanding lower rated
fixed income securities and disrupting the market for such securities. Fixed
income securities purchased by the Fund as part of an initial underwriting
present an additional risk due to their lack of market history. These risks are
exacerbated with respect to fixed income securities rated Caa or lower by

Moody's or CCC or lower by Standard & Poor's. Unrated fixed income securities
generally carry the same risks as do lower rated fixed income securities.

Lower quality debt securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
quality debt securities tend to be institutions, rather than individuals, a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower quality debt securities
may not be as liquid as Treasury and investment grade bonds. The ability of the
Fund to sell lower quality debt securities will be adversely affected to the
extent that such securities are thinly traded or illiquid. Moreover, the ability
of the Fund to value lower quality debt securities becomes more difficult, and
judgment plays a greater role in valuation, as there is less reliable, objective
data available with respect to such securities that are thinly traded or
illiquid. Unrated debt securities are not necessarily of lower quality than
rated debt securities, but they may not be attractive to as many buyers.

Because investors may perceive that there are greater risks associated with the
lower quality debt securities of the type in which the Funds may invest, the
yields and prices of such securities may tend to fluctuate more than those for
higher quality debt securities. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the debt securities market than do changes in
higher quality segments of the debt security market, resulting in greater yield
and price volatility. The speculative characteristics of lower rated debt
securities are set forth in Appendix A.

The Fund's Portfolio Adviser believes that the risks of investing in such high
yielding debt securities may be minimized through careful analysis of
prospective issuers. Although the opinions of ratings services such as Moody's
and Standard & Poor's are considered in selecting securities in which the Fund
may invest, the Portfolio Adviser evaluates the safety of the principal and the
interest payments of the security, not their market value risk. Additionally
credit rating agencies may experience slight delays in updating ratings to
reflect current events. The Portfolio Adviser relies, primarily on its own
credit analysis. This may suggest, however, that the achievement of the Fund's
investment objective is more dependent on the Portfolio Adviser's proprietary
credit analysis, than is otherwise the case for a Fund that invests exclusively
in higher quality debt securities. Once the rating of a portfolio security or
the quality determination ascribed by the Portfolio Adviser to an unrated debt
security has been downgraded, the Portfolio Adviser will consider all
circumstances deemed relevant in determining whether to continue to hold the
security.

APPENDIX A
- -------------------------------------------------------------------------------

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S BOND RATINGS:

Investment grade debt securities are those rating categories indicated by an
asterisk (*).

*Aaa: Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

*Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

*A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

*Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATINGS:

Investment grade debt securities are those rating categories indicated by an
asterisk (*).

*AAA: Debt rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.

*AA: Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.

*A: Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

*BBB: Debt rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.

BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.

C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

C1: The rating "C1" is reserved for income bonds on which no interest is being
paid.

D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

NR: Bonds may lack a Standard & Poor's rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.

The Blanchard Group of Funds are available through Signet Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which is compensated for this service.

Investment products are not deposits, obligations of, or guaranteed by any bank.
They are not insured by the FDIC. They involve risk, including the possible loss
of principal invested.

B L A N C H A R D

(2414) 00/01/05/06/07PC0897
G01386-01 (8/97)

STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 31, 1997 (the "Prospectus"), pursuant to which
the Blanchard Flexible Income Fund (the "FUND") is offered. Please retain this
document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page
- -----------------
General Information and History 2
Investment Objective and Policies 2
Investment Restrictions 15
Portfolio Transactions 16
Computation of Net Asset Value 17
Performance Information 18
Additional Purchase and Redemption Information 20
Tax Matters 20
Blanchard Funds Management 25
Management Services 29
The Sub-Advisory Agreement 30
Custodian 31
Administrative Services 31
Purchasing Shares 32
Distribution Plan 32
Description of the FUND 32
Shareholder Reports 33

Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1997

<PAGE>

INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies" and "Certain Investment Strategies and Policies."
The FUND intends to invest in the following fixed income securities
markets:

U.S. Government Securities. This consists of debt obligations of the
U.S. Government and its agencies and instrumentalities and related
options, futures and repurchase agreements. Investment Grade Fixed
Income Securities. This consists of investment grade fixed income
securities, including mortgage related and asset backed securities.
High Yield Securities. This consists of higher yielding (and,
therefore, higher risk), lower rated U.S. corporate fixed income
securities. International Fixed Income Securities. This consists of
obligations of foreign governments, their agencies and
instrumentalities and other fixed income securities denominated in
foreign currencies or composite currencies.

OFFITBANK, the FUND's portfolio adviser, believes that the ability to
invest the FUND's assets among these markets, as opposed to investing in any
one, may enable the FUND to enhance current income and increase opportunities
for capital appreciation while taking risk to principal into consideration. The
Fund may invest up to 35% of its assets in lower quality fixed income
securities. There is no limit on the percentage of FUND assets invested in any
of the fixed income markets except for High Yield Securities which is limited to
35%, and further limited to the extent of any lower quality fixed income
securities held in the International Fixed Income Securities portfolio. See
"Risk Factors - Lower Rated Fixed Income Securities" in the FUND's Prospectus.
At least 65% of the FUND's total assets generally will be invested in
income-producing securities; however, the FUND expects that substantially all of
its total assets will be invested in income-producing securities, together with
certain futures, options and foreign currency contracts and other investments
described below.
The investment objective of providing high current income while seeking
opportunities for capital appreciation is a fundamental policy and may not be
changed without the authorization of the holders of a majority of the
outstanding shares of the FUND, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"). The other investment policies may be changed
with the approval of the FUND's Board of Trustees, except as set forth under
"Investment Restrictions" in this Statement of Additional Information. U.S.
Government Securities
FUND assets invested in this market will be invested exclusively in
U.S. Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. As used in this Prospectus, the
term "U.S. Government Securities" refers to debt securities denominated in U.S.
dollars issued or guaranteed by the U.S. government, by various of its agencies,
or by various instrumentalities established or sponsored by the U.S. government.
Certain of these obligations including U.S. Treasury bills, notes and bonds,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA"), and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
Government Securities issued or guaranteed by federal agencies or government
sponsored enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by the right of
the issuer to

<PAGE>

borrow from the U.S. Treasury, such as obligations of Federal Home Loan Banks,
and obligations supported only by the credit of the instrumentality, such as
Federal National Mortgage Association Bonds. When purchasing securities in the
U.S. Government market, OFFITBANK may take full advantage of the entire range of
maturities of U.S. Government Securities and may adjust the average maturity of
the investments held in the portfolio from time to time, depending on its
assessment of relative yields of securities of different maturities and its
expectations of future changes in interest rates. To the extent that the FUND
invests in the mortgage market, OFFITBANK usually will evaluate, among other
things, relevant economic, environmental and security-specific variables such as
housing starts, coupon and age trends. To determine relative value among markets
OFFITBANK may use tools such as yield/duration curves, break-even prepayment
rate analysis and holding-period-return scenario testing.
The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. Government
Securities held in its portfolio. In addition, the FUND may at times, through
the writing and purchase of options on U.S. Government Securities, and the
purchase and sale of futures contracts and related options with respect to U.S.
Government Securities, seek to reduce fluctuations in net asset value by hedging
against a decline in the value of U.S. Government Securities owned by the FUND
or an increase in the price of such Securities which the FUND plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities and futures and related
options are not considered U.S. Government Securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described in "Certain Investment Strategies and Policies" in the FUND's
Prospectus and in "Investment Objective and Policies" in this Statement of
Additional Information.
Description of Certain U.S. Government Mortgage-Related Securities
GNMA Certificates
Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban
Development. GNMA's principal programs involve its guarantees of privately
issued securities backed by pools of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the FUND will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.

<PAGE>

Yield Characteristics of GNMA Certificates. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common type
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount, rather than
at par.

2. After issuance, Certificates usually trade in the secondary
market at a premium or discount.
3. Interest is paid monthly rather
than semi-annually as is the case for traditional bonds. Monthly
compounding has the effect of raising the effective yield earned on
GNMA Certificates.
4. The actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool
underlying the Certificate. If mortgagors prepay their mortgages, the
principal returned to Certificate holders may be reinvested at higher
or lower rates.

In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. FNMA
Securities
The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States. FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in conventional
residential mortgages. The FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"): mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.

<PAGE>

Special Considerations
U.S. Government Securities are considered among the most creditworthy
of fixed income investments. Because of this added safety, the yields available
from U.S. Government Securities are generally lower than the yields available
from corporate debt securities. The values of U.S. Government Securities (like
those of fixed income securities generally) will change as interest rates
fluctuate. During periods of falling U.S. interest rates, the values of
outstanding long term U.S. Government Securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the FUND expects that its portfolio of
U.S. Government Securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although changes
in the value of U.S. Government securities will not affect investment income
from those securities, they will affect the FUND's net asset value. Investment
Grade Fixed Income Securities

The FUND may invest in other investment grade U.S. fixed income
securities. Such investments may include mortgage related securities that are
not U.S. Government Securities, asset backed securities and fixed income
securities rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"). Fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade obligations which lack outstanding investment characteristics
and may have speculative characteristics as well. See Appendix A in the FUND's
Prospectus for the rating securities descriptions of these rating categories.

Mortgage Related Securities
Mortgage-related securities issued by financial institutions (or
separate trusts or affiliates of such institutions), even where backed by U.S.
Government securities, are not considered U.S.
Government Securities.
The mortgage pass-through market is marked by high liquidity and credit
quality. The primary risk that exists for mortgage pass-through securities is
interest rate risk. Changes in market yields will affect the value of these
securities as the price of fixed income securities generally increases when
interest rates decline and decreases when interest rates rise. Prices of longer
term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of principal on mortgage pass-through securities may make it
difficult to lock in interest rates for a fixed period of time. To the extent
that mortgage securities are purchased at prices that differ from par, these
prepayments (which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
treasury securities of the same average life. Collateralized Mortgage
Obligations
Collateralized mortgage obligations are debt obligations issued
generally by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates, the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.

<PAGE>

Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure collateralized mortgage
obligations may be guaranteed by GNMA, FHLMC or FNMA, the collateralized
mortgage obligations represent obligations solely of their issuers and are not
insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency or
instrumentality, or by any other person or entity. The issuers of collateralized
mortgage obligations typically have no significant assets other than those
pledged as collateral for the obligations. Asset Backed Securities
In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. The FUND will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The FUND anticipates that a
substantial portion of the asset backed securities in which it invests will
consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually
five years) than most conventional mortgage-backed securities and historically
have been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
asset-backed securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as mortgage-backed securities. The
yield characteristics of asset-backed securities differ from more traditional
debt securities in that interest and principal payments are paid more
frequently, usually monthly, and principal may be prepaid at any time. As a
result, if the FUND purchases an asset-backed security at a discount, similar to
conventional mortgage-backed securities, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium, faster
than expected prepayments will reduce, while slower than expected prepayments
will increase, yield to maturity. Prepayments may result from a number of
factors, including trade-ins and liquidations due to default, as well as the
receipt of proceeds from physical damage, credit, life and disability insurance
policies. The rate of prepayments on asset-backed securities may also be
influenced by a variety of economic and social factors, including general
measures of consumer confidence; accordingly, from time to time, substantial
amounts of prepayments may be available for reinvestment by the FUND and will be
subject to the prevailing interest rates at the time of prepayment.
Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely payments
on underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installment loans
which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The FUND will not pay any additional fees for such credit support.
However, the existence of credit support may increase the market price of the
security.
As with Mortgage-Related Securities, Asset-Backed Securities are often
backed by a pool of assets representing the obligations of a number of different
parties and use similar credit enhancement techniques.
Asset-Backed Securities do not have the benefit of the same security
interest in the related collateral as do Mortgage-Related Securities. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
perfected security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.

<PAGE>

High Yield Securities
The FUND may invest up to (but not including) 35% (further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio) of its assets in higher
yielding (and, therefore, higher risk), lower rated U.S. corporate fixed income
securities, including debt securities, (commonly referred to as "junk bonds")
convertible securities and preferred stocks and unrated corporate fixed income
securities. Investments in high-yield securities entail greater risks than those
involved in higher-rated securities.
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. The FUND may continue to hold securities obtained as a
result of the conversion of convertible securities held by the FUND when
OFFITBANK believes retaining such securities is consistent with the FUND's
investment objective.
Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. The FUND may invest in any security which is rated
by Moody's or by Standard & Poor's, or in any unrated security which OFFITBANK
determines is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the time
of rating. The medium to lower-rated securities in which the FUND may invest
tend to offer higher yields than higher-rated securities with the same
maturities because the historical financial condition of the issuers of such
securities may not be as strong as that of other issuers. The rating assigned to
any particular security, however, is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. Although OFFITBANK will consider security ratings when
making investment decisions in the High Yield market, it will perform its own
investment analysis and will not rely principally on the ratings assigned by the
rating services. OFFITBANK's analysis generally may include, among other things,
consideration of the issuer's experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules, and its
responsiveness to changes in business conditions and interest rates. It also
considers relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects. High Yield Securities - Risk
Factors. High Yield Securities are subject to certain risks that may not be
present with investments in higher grade securities. See the FUND's Prospectus
for more information. Effect of Interest Rate and Economic Changes. The prices
of High Yield Securities tend to be less sensitive to interest rate changes than
higher-rated investments, but may be more sensitive to adverse economic changes
or individual corporate developments. Periods of economic uncertainty and
changes generally result in increased volatility in the market prices and yields
of High Yield Securities and thus in the FUND's net asset value. A strong
economic downturn or a substantial period of rising interest rates could
severely affect the market for High Yield Securities. In these circumstances,
highly leveraged companies might have greater difficulty in making principal and
interest payments, meeting projected business goals, and obtaining additional
financing. Thus, there could be a higher incidence of default. This would affect
the value of such securities and thus the FUND's net asset value. Further, if
the issuer of a security owned by the FUND defaults, the FUND might incur
additional expenses to seek recovery. The High Yield Securities Market. The
market for High Yield Securities has expanded in recent years and is relatively
new. This expanded market has not yet completely weathered an economic downturn.
A further economic downturn or an increase in interest rates could have a
negative effect on the High Yield Securities market and on the market value of
the High Yield Securities held by the FUND, as well as on the ability of the
issuers of such securities to repay principal and interest on their borrowings.

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Credit Ratings. The credit ratings issued by credit rating services may not
fully reflect the true risks of an investment. For example, credit ratings
typically evaluate the safety of principal and interest payments, not market
value risk, of High Yield Securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Liquidity and
Valuation. Lower-rated bonds are typically traded among a smaller number of
broker-dealers than in a broad secondary market. Purchasers of High Yield
Securities tend to be institutions, rather than individuals, which is a factor
that further limits the secondary market. To the extent that no established
retail secondary market exists, many High Yield Securities may not be as liquid
as higher-grade bonds. A less active and thinner market for High Yield
Securities than that available for higher quality securities may result in more
volatile valuations of the FUND's holding and more difficulty in executing
trades at favorable prices during unsettled market conditions.
The ability of the FUND to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective information
available and thus the responsibility of the FUND's Board of Trustees to value
High Yield Securities becomes more difficult, with judgment playing a greater
role. Further, adverse publicity about the economy or a particular issuer may
adversely affect the public's perception of the value, and thus liquidity, of a
High Yield Security, whether or not such perceptions are based on a fundamental
analysis. Legislation. Provisions of the Revenue Reconciliation Act of 1989
limit a corporate issuer's deduction for a portion of the original issue
discount on "high yield discount" obligations (including certain pay-in-kind
securities). This limitation could have a materially adverse impact on the
market for certain High Yield Securities. In addition, the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 requires savings
associations to divest their holdings of High Yield Securities before July 1,
1994. This requirement also could have a materially adverse impact on the market
for High Yield Securities. From time to time, legislators and regulators have
proposed other legislation that would limit the use of high yield debt
securities in leveraged buyouts, mergers and acquisitions. It is not certain
whether such proposals, which also could adversely affect High Yield Securities,
will be enacted into law. International Fixed Income Securities
FUND assets invested in International Fixed Income Securities will be
invested in debt obligations and other fixed income securities, in each case
denominated in non-U.S. currencies or composite currencies including:
debt obligations issued or guaranteed by foreign national, provincial,
state, municipal or other governments with taxing authority or by their agencies
or instrumentalities;

debt obligations of supranational entities (described below);

debt obligations of the U.S. Government issued in non-dollar
securities; and
debt obligations and other fixed income securities of foreign and U.S.
corporate issuers (non-dollar denominated).

When investing in International Fixed Income Securities, the FUND is
not limited to purchasing debt securities rated at the time of purchase by
Moody's or Standard & Poor's. However, the FUND is limited to the extent that it
may not invest more than 35% of its assets in all lower quality fixed income
securities held by the FUND (by aggregating the value of all such securities
held in the High Yield Securities and the International Fixed Income Securities
portfolios). In making international fixed income securities investments,
OFFITBANK may consider, among other things, the relative growth and inflation
rates of different countries. OFFITBANK may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. OFFITBANK may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar denominated
securities of issuers in the industrialized Western European countries; in
Canada, Japan, Australia and New Zealand; and in Latin America. The FUND may
also invest up to 15% of its assets in the fixed income securities of issuers in
emerging market countries. See the FUND's Prospectus for more information.

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The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to making additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. Risk Factors
See "Risk Factors - Lower Rated Fixed Income Securities" and Appendix A
in the FUND's Prospectus for more information concerning the risks of
investing in lower quality fixed income securities. Foreign investments
involve certain risks that are not present in domestic securities.
Because the FUND intends to purchase securities denominated in foreign
currencies, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the FUND's assets and the FUND's income available for
distribution. In addition, although a portion of the FUND's investment income
may be received or realized in such currencies, the Internal Revenue Code of
1986 (the "Code") requires that the FUND compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such currency declines
after the FUND's income has been earned and translated into U.S. dollars but
before payment, the FUND could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate depreciates between the
time the FUND incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the equivalent
amount in any such currency of such expenses at the time they were incurred.
Under the Code, changes in an exchange rate which occur between the time the
FUND accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the FUND actually
collects such receivables or pays such liabilities will result in foreign
exchange gains or losses that increase or decrease distributable net investment
income. Similarly, dispositions of certain debt securities (by sale, at maturity
or otherwise) at a U.S. dollar amount which is higher or lower than the FUND's
original U.S. dollar cost may result in foreign exchange gains or losses, which
will increase or decrease distributable net investment income.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. OFFITBANK does not expect to invest
the FUND's assets in countries where it believes such events are likely to
occur.
Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by the FUND will reduce its net income
available for distribution to shareholders.

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The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. However, the FUND intends to
conduct its operations so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which
will relieve the FUND of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Distributions and Taxes." To so
qualify, among other requirements, the FUND will limit its investments so that,
at the close of each calendar quarter, (i) not more than 25% of the market value
of the FUND's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the FUND will not own more than 10% of the
outstanding voting securities of a single issuer. For purposes of the FUND's
requirements to maintain diversification for tax purposes, the issuer of a loan
participation will be the underlying borrower. In cases where the FUND does not
have recourse directly against the borrower, both the borrower and each agent
bank and co-lender interposed between the FUND and the borrower will be deemed
issuers of the loan participation for tax diversification purposes. The FUND's
investments in U.S. Government Securities are not subject to these limitations.
Since the FUND as a non-diversified investment company may invest in a smaller
number of individual issuers than a diversified investment company, an
investment in the FUND may, under certain circumstances, present greater risk to
an investor than an investment in a diversified company. Futures Contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a specified
price, date, time and place. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND's total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 1% to 10% of the contract amount (this
amount is subject to change by the exchange on which the contract is traded and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the FUND upon termination of the futures contract, assuming
all contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the FUND fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the price of the currency or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
At any time prior to the expiration of a futures contract, the FUND may elect to
close the position by taking an opposite position, which will operate to
terminate the FUND's existing position in the contract.

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There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
FUND intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting the FUND to substantial losses. In such event, and in the event
of adverse price movements, the FUND would be required to make daily cash
payments of variation margin. Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, and may enter
into closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND. Options on Foreign
Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures contracts
on foreign currencies, or forward contracts, will be utilized.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with its Custodian or with a designated
sub-custodian. As a writer of a covered put option, the FUND incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election

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(certain listed and over-the-counter put options written by the FUND will be
exercisable by the purchaser only on a specific date). A put is "covered" if, at
all times, the FUND maintains, in a segregated account maintained on its behalf
at the FUND's custodian, cash, U.S. Government securities or other high grade
obligations in an amount equal to at least the exercise price of the option, at
all times during the option period. Similarly, a short put position could be
covered by the FUND by its purchase of a put option on the same security
(currency) as the underlying security of the written option, where the exercise
price of the purchased option is equal to or more than the exercise price of the
put written or less than the exercise price of the put written if the marked to
market difference is maintained by the FUND in cash, U.S. Government securities
or other high grade debt obligations which the FUND holds in a segregated
account maintained at its custodian. Forward Currency Contracts
The FUND may engage in currency exchange transactions as a portfolio
management technique. The FUND will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or sell
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year. Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, the FUND may purchase and sell options in the over-the-counter market
("OTC Options"). A call option gives the purchaser of the option the right to
buy the underlying security from the writer at the exercise price at any time
prior to the expiration of the contract, regardless of the market price of the
security during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter options and the assets used
as cover for written over-the-counter options are illiquid securities. The FUND
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may enter
into OTC Option contracts and those standards, as modified from time to time,
will be implemented and monitored by the Manager. Under these special
arrangements, the FUND will enter into contracts with primary and non-primary
dealers which provide that the FUND has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary and non-primary dealers, the
formula will generally be based on a multiple of the premium received by the
FUND for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, and with
respect to OTC Options written with primary dealers only, the FUND will treat as
illiquid that amount of the "cover" assets equal to the amount by which the
formula price for the repurchase of the option is greater than the amount by
which the market value of the security subject to the option exceeds the
exercise price of the option (the amount by which the option is "in-the-money").
Although each agreement will provide that the FUND's repurchase price shall be
determined in good faith (and that it shall not exceed the maximum determined
pursuant to the formula) the formula price will not necessarily reflect the
market value of the option written, therefore, the FUND might pay more to
repurchase the OTC Option contract than the FUND would pay to close out a
similar exchange traded option.

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In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
Additional Risks of Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, future contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Pursuant to the sub-advisory agreement, OFFITBANK, where permitted by
law, will purchase and sell foreign exchange in the interbank dealer market for
a fee on behalf of the FUND, subject to certain
procedures and reporting requirements adopted by the Board of Trustees.
Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the

<PAGE>

Investment Company Act of 1940, as amended (the "1940 Act"), collateralized by
the underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement,
OFFITBANK will carefully consider the creditworthiness of the seller. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss. Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or OFFITBANK. The
borrower at all times during the loan must maintain with the FUND cash or cash
equivalent collateral or provide to the FUND an irrevocable letter of credit
equal in value at all times to at least 100% of the value of the securities
loaned. During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. Loans are subject to termination at the option
of the FUND or the borrower at any time. The FUND may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.

<PAGE>

The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, has the
following restrictions: (a) with respect to 50% of the FUND's total
assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of
the U.S. Government, its agencies and instrumentalities) and (b) with
respect to the other 50% of the FUND's total assets, the FUND may not
invest more than 25% of the market value of its total assets in a
single issuer (except the securities of the U.S. Government, its
agencies and instrumentalities).
These two restrictions, hypothetically, could give rise to the FUND
having securities of as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it would
own more than 10% of any class or of the outstanding voting securities
of any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any
one industry other than the banking industry (except that this
restriction does not apply to U.S. Government Securities); or (d) more
than 5% of net assets would be invested in warrants or rights.
(Included within that amount, but not to exceed 2% of the value of the
FUND's net assets, may be warrants which are not listed on the New York
or American Stock Exchanges.) 3. The FUND may borrow money from a bank
solely for temporary or emergency purposes (but not in an amount equal
to more than 20% of the market value of its total assets). This does
not preclude the FUND from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities. The FUND will not purchase additional securities while the
amount of any borrowings is in excess of 5% of the market value of its
total assets. 4. The FUND will not make loans of money or securities
except (i) through repurchase agreements, (ii) through loan
participations, and (iii) through the lending of its portfolio
securities as described in "Lending of Portfolio Securities" in the
Prospectus and in this Statement. 5. The FUND may not invest more than
5% of its total assets in the securities of other investment companies
or purchase more than 3% of any other investment company's voting
securities, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. 6. The FUND may not pledge,
mortgage or hypothecate its assets, except that to secure borrowings
permitted by Restriction 3 above. The FUND may pledge securities having
a value at the time of pledge not exceeding 10% of the market value of
the FUND's total assets.

<PAGE>

7. The FUND may not buy any securities or other property on margin
(except for such short term credits as are necessary for the clearance
of transactions) or engage in short sales. 8. The FUND may not invest
in companies for the purpose of exercising control or management. 9.
The FUND may not underwrite securities issued by others except to the
extent that the FUND may be deemed an underwriter when purchasing or
selling portfolio securities. 10. The FUND may not purchase or retain
securities of any issuer (other than the shares of the FUND) if to the
FUND's knowledge, those officers and Trustees of the FUND and the
officers and directors of VCM or OFFITBANK, who individually own
beneficially more than 1/2 of 1% of the outstanding securities of such
issuer, together own beneficially more than 5% of such outstanding
securities. 11. The FUND may not purchase or sell real property
(including limited partnership interests, but excluding readily
marketable interests in real estate investment trusts or readily
marketable securities of companies which invest in real estate). 12.
The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases. 13. The FUND may not
issue senior securities. In order to permit the sale of shares of the
FUND in certain states, the FUND may make commitments more restrictive
than the restrictions described above. Should the FUND determine that
any such
commitment is no longer in the best interests of the FUND and its shareholders
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and OFFITBANK. In selecting such brokers or dealers, OFFITBANK will consider
various relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character of the
markets for the security to be purchased or sold, the execution efficiency,
settlement capability, financial condition of the broker-dealer firm, the
broker-dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to OFFITBANK for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to OFFITBANK. Such allocation shall be
in such amounts as VCM or OFFITBANK shall determine and OFFITBANK shall report
regularly to VCM who will in turn report to the Trustees on the allocation of
brokerage for such services.
The receipt of research from broker-dealers may be useful to OFFITBANK
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of OFFITBANK's other clients may be useful to OFFITBANK in
carrying out its obligations to the FUND. The receipt of such research may not
reduce OFFITBANK's normal independent research activities.

<PAGE>

OFFITBANK is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and OFFITBANK or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market. Any profits resulting from portfolio
transactions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are also
shareholders of VCM. The Investment Advisory Contract does not provide for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between VCM and OFFITBANK does not provide for any reduction in the
advisory fees as a result of profits resulting from portfolio transactions
effected through OFFITBANK or an affiliated brokerage firm.

The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to OFFITBANK or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.

Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of OFFITBANK. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.

For the period from May 1, 1996 through September 30, 1996 and for the
fiscal years ended April 30, 1996 and 1995, the FUND's annual rates of portfolio
turnover were approximately 87%, 431% and 455%, respectively.

COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will be
closed on New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determining Market Value of Securities
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser or sub-adviser,
is used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.

<PAGE>

Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing options positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and asked prices. Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset value,
the FUND values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates are determined when such rates
are made available to the FUND at times prior to the close of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into U.
S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000 T =
average annual total return n = number of years
(1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
period from May 1, 1996 through September 30, 1996 was 3.95%. For the fiscal
year ended April 30, 1996 and since inception (November 2, 1992 through
September 30, 1996) the FUND's aggregate annualized total rates of return were
8.06% and 6.68%, respectively.

<PAGE>

The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee which was in effect from November 2, 1992 to December,
1994 from the initial value invested. The FUND will, however, disclose the pro
rata share of the account opening fee and will disclose that the performance
data does not reflect such non-recurring charge and that inclusion of such
charge would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:

YIELD 2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.

The FUND's yield as of September 30, 1996, based on a 30-day period,
was 6.65%.

<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Qualification as a Regulated Investment Company

In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). For purposes of these calculations,
gross income includes tax-exempt income. However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND

<PAGE>

from disposing of investments at a loss, since the recognition of a loss before
the expiration of the three-month holding period is disregarded for this
purpose. Interest (including original issue discount) received for this purpose
by the FUND at maturity or upon the disposition of a security held for less than
three months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain Test.
However, income attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.

<PAGE>

Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss, or any net foreign currency loss
incurred after October 31 as if they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
year, at least 50% of the value of the FUND's assets must consist of cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the FUND has not
invested more than 5% of the value of the FUND's total assets in securities of
such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) unless it has
made a taxable year election, exclude foreign currency gains and losses incurred
after October 31 of any year in determining the amount of ordinary taxable
income for the current calendar year (and, instead, include such gains and
losses in determining ordinary taxable income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.

<PAGE>

Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, its pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid its pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against Federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income its pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Shareholders should consult their own tax advisors concerning the
application of the foreign tax credit to them.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid by January 31 of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient." Sale or Redemption of
Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.

<PAGE>

Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross income resulting from the FUND's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. Federal income tax on gains realized on the sale of shares of
the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.

<PAGE>

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and present
positions with Blanchard Funds, and principal occupations.

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Trustee of the Fund; Chairman of the Board,
Children's
Hospital of
Pittsburgh
formerly, Senior
Partner, Ernst &
Young LLP;
Director, MED 3000
Group, Inc.;
Director, Member
of Executive
Committee,
University of
Pittsburgh;
Director or
Trustee of the
Funds.
.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; President, Investment
Birthdate: June 23, 1937 Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors;
Partner or Trustee in private real estate
ventures in Southwest Florida; formerly,
President, Naples Property Management, Inc. and
Northgate Village Development Corporation;
Director or Trustee of the Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank,
N.A., and PNC Bank Corp. and Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Attorney-at-law; Director,
Birthdate: May 18, 1922 The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.

<PAGE>

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Professor of Medicine,
Birthdate: October 11, 1932 University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors,
University of Pittsburgh Medical Center;
formerly, Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore
Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller Ament Henny & Kochuba
205 Ross Street Trustee of the Fund; Attorney of Counsel,Miller,
Pittsburgh, PA Ament, Henny & Kochuba; Director, Eat'N Park
Birthdate: June 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Director or
Trustee of the Funds. .
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
Birthdate: October 22, 1930 Vice Chairman, Treasurer, and Trustee,
Federated Investors; Vice President, Federated
Advisers, Federated Management, Federated
Research, Federated Research Corp., Federated
Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director,
Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or
Director of some of the Funds; President,
Executive Vice President and Treasurer of some
of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL Trustee of the Fund; Consultant; Former State
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and
Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA Trustee of the Fund; Chairman, Meritcare, Inc.;
Birthdate: October 6, 1926 Director, Eat'N Park Restaurants, Inc.; Retired
from the law firm of Miller, Ament, Henny &
Kochuba; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
Duquesne University
Pittsburgh, PA Trustee of the Fund; President, Law Professor,
Birthdate: December 20, 1932 Duquesne University; Consulting Partner,
Mollica & Murray; Director or Trustee of the
Funds.

<PAGE>

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Professor, International
Birthdate: September 14, 1925 Politics; Management Consultant; Trustee,
Carnegie Endowment for International Peace,
RAND Corporation, Online Computer Library
Center, Inc., National Defense University, and
U.S. Space Foundation; President Emeritus,
University of Pittsburgh; Founding Chairman;
National Advisory Council
for Environmental Policy and Technology,
Federal Emergency Management Advisory Board and
Czech Management Center, Prague; Director or
Trustee of the Funds. .
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Public
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning;
Director or Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA Executive Vice President of the Fund; President
Birthdate: April 11, 1949 and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research:; President and Director, Federated
Research Corp. and Federated Global Research
Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company, and Federated Shareholder Services;
Director, Federated Services Company; President
or Executive Vice President of the Funds;
Director or Trustee of some of the
Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Trustee of the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA Executive Vice President, and Secretary
Birthdate: October 26, 1938 of the Fund; Executive Vice President,
Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated
Management, and Federated
Research; Director, Federated Research Corp.
and Federated Global Research Corp.; Trustee,
Federated Shareholder Services Company;
Director, Federated Services Company; President
and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive
Vice President and Secretary of the Funds;
Treasurer of some of the Funds.

<PAGE>

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA Vice President of the Fund; Executive Vice
Birthdate: May 17, 1923 President and Trustee, Federated
Investors,
Chairman and
Director,
Federated
Securities Corp.;
President or Vice
President of some
of the Funds;
Director or
Trustee of some of
the Funds.

* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Wesmark Funds; and
World Investment Series, Inc.
Fund Ownership
As of August 1, 1997, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of August 1, 1997, no shareholder
owned 5% or more of the outstanding shares of the FUND.

<PAGE>

Officers and Trustees Compensation
<S> <C> <C>

- -------------------------------------- ------------------------------------- -------------------------------------
NAME, POSITION AGGREGATE COMPENSATION FROM TOTAL COMPENSATION PAID TO TRUSTEES
WITH THE TRUST THE TRUST FROM THE FUND AND FUND COMPLEX*
- -------------------------------------- ------------------------------------- -------------------------------------
- -------------------------------------- ------------------------------------- -------------------------------------
John F. Donahue, Chairman and Trustee $0 $0 for the Fund Complex
Thomas G. Bigley, Trustee $1,384 $3,563 for the Fund Complex
John T. Conroy, Jr., Trustee $1,510 $3,888 for the Fund Complex
William J. Copeland, Trustee $1,510 $3,888 for the Fund Complex
James E. Dowd, Trustee $1,510 $3,888 for the Fund Complex
Lawrence D. Ellis, M.D., Trustee $1,384 $3,563 for the Fund Complex
Edward L. Flaherty, Jr., Trustee $1,510 $3,888 for the Fund Complex
Edward C. Gonzales, President and $0 $0 for the Fund Complex
Trustee
Peter E. Madden, Trustee $1,384 $3,563 for the Fund Complex
Gregory F. Meyer, Trustee $1,384 $3,563 for the Fund Complex
John E. Murray, Jr., J.D., S.J.D., $1,384 $3,563 for the Fund Complex
Trustee
Wesley W. Posvar, Trustee $1,384 $3,563 for the Fund Complex
Marjorie P. Smuts $1,384 $3,563 for the Fund Complex
Trustee
</TABLE>

MANAGEMENT SERVICES
Manager to the Trust

The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.

The manager shall not be liable to the Trust, a Fund, or any shareholder of
any of the Funds for any losses that may be sustained in the purchase, holding,
or sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
Management Fees

<PAGE>

THE SUB-ADVISORY AGREEMENT
OFFITBANK furnishes investment advisory services to the FUND pursuant
to a Sub-Advisory Agreement between VCM and OFFITBANK. Pursuant to the
Sub-Advisory Agreement, OFFITBANK supervises the investment and reinvestment of
the cash, securities or other properties comprising the FUND's portfolio,
subject at all times to the direction of VCM and the policies and control of the
Trust's Board of Trustees. OFFITBANK gives the FUND the benefit of its best
judgment, efforts and facilities in rendering its services as Sub-Adviser.
In carrying out its obligations, OFFITBANK:
(a) uses the same skill and care in providing such service as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities; (b) obtains and evaluates pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally or the
FUND's portfolio and whether concerning the individual issuers whose securities
are included in the FUND's portfolio or the activities in which the issuers
engage, or with respect to securities which it considers desirable for inclusion
in the FUND's portfolio; (c) determines which issuers and securities shall be
represented in the FUND's portfolio and regularly reports thereon to the Trust's
Board of Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give instructions
to the custodian and/or sub-custodian of the FUND appointed by the Trust's Board
of Trustees, as to deliveries of securities, transfers of currencies and
payments of cash for the account of the FUND, in relation to the matters
contemplated by this Agreement; and (f) takes, on behalf of the FUND, all
actions which appear to the Trust and VCM necessary to carry into effect such
purchase and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the FUND and the
prompt reporting to VCM of such purchases and sales.
OFFITBANK is responsible for decisions to buy and sell securities for
the FUND's portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. OFFITBANK's primary consideration in effecting a security
transaction will be execution at the most favorable price. In selecting a
broker-dealer to execute each particular transaction, OFFITBANK will take the
following into consideration: the best net price available, the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the FUND on a continuing
basis. Accordingly, the price to the FUND in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Trustees may determine,
OFFITBANK shall not be deemed to have acted unlawfully or to have breached any
duty created under the Sub-Advisory Agreement or otherwise solely by reason of
its having caused the FUND to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if OFFITBANK
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to such policies
as the Board of Trustees may determine, OFFITBANK will purchase and sell foreign
currency and futures contracts and other securities for the FUND. OFFITBANK is
further authorized to allocate the orders placed by it on behalf of the FUND to
any affiliated broker-dealer of the FUND or to such brokers and dealers who also
provide research or statistical material, or other services to the FUND, VCM or
OFFITBANK. Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the Board
of Trustees of the Trust indicating the brokers to whom such allocations have
been made and the basis therefor.
Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by OFFITBANK
on behalf of the FUND pursuant thereto, is at all times subject to any
directives of the Board of Trustees of the Trust. VCM provides OFFITBANK with
written notice of all such directives, so long as the Sub-Advisory Agreement
remains in effect.
Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at its
expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.

<PAGE>

Pursuant to the Sub-Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, OFFITBANK may perform services on
behalf of the FUND which are not required by the Sub-Advisory Agreement. Such
services will be performed on behalf of the FUND and OFFITBANK's cost in
rendering such services may be billed monthly to VCM, subject to examination by
VCM's independent accountants. Payment or assumption by OFFITBANK of any FUND
expense that OFFITBANK is not required to pay or assume under the Sub-Advisory
Agreement shall not relieve VCM or OFFITBANK of any of their obligations to the
FUND or obligate OFFITBANK to pay or assume any similar FUND expense on any
subsequent occasions.
Pursuant to the Sub-Advisory Agreement, for the services to be rendered
and the facilities furnished hereunder, VCM pays OFFITBANK a monthly fee at the
annual rate of .30% of the FUND's first $25 million of average daily net assets;
plus .25% of the FUND's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the FUND's average daily net assets in
excess of $50 million. Compensation under the Sub-Advisory Agreement is
calculated and accrued daily and the amounts of the daily accruals are paid
monthly.

The fee paid to OFFITBANK by VCM for the period from May 1, 1996
through September 30, 1996 was $178,414. The fee paid to OFFITBANK by the prior
manager and by VCM for the fiscal year ended April 30, 1996 was $516,503. The
fees paid to OFFITBANK by the prior manager for the fiscal year ended April 30,
1995 and 1994, were $763,516 and $1,100,253. The compensation paid to OFFITBANK
will not be reduced by the amount of brokerage commissions received by OFFITBANK
or its affiliated broker-dealer pursuant to Section 17(e)(2) of the 1940 Act.

Pursuant to the Sub-Advisory Agreement, OFFITBANK agrees that it will
not render advisory or sub-advisory services to any other similar publicly
offered no-load or low-load open-end investment company registered with the SEC
while the Sub-Advisory Agreement is in effect.
The Sub-Advisory Agreement was approved by the then Trustees on March
24, 1995. The Sub-Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from year to
year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a majority of
the FUND's outstanding voting securities (as defined in Section 2(a)(42) of the
1940 Act), and (b) by the affirmative vote of a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons of a party to
the Sub-Advisory Agreement (other than as a Trustee of the Trust), by votes cast
in person at a meeting specifically called for such purpose.
The Sub-Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60) days' written notice
to the other party. The Sub-Advisory Agreement automatically terminates: (a) in
the event of its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Contract between the FUND and VCM shall terminate.
CUSTODIAN

Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
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 from May 1, 1996 through
September 30, 1996 and for the fiscal year ended April 30, 1996, Federated
Administrative Services earned $77,731 and $190,752, respectively, in
administrative services fees. For the fiscal years ended April 30, 1995 and
1994, the administrative services fees were included as part of the Management
fee.

<PAGE>

PURCHASING SHARES

Shares of the Fund are sold at their net asset value without a sales charge
on days the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Fund is explained in the prospectus under "Investing in
Shares."

DISTRIBUTION PLAN

The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the FUND's
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Fund; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the period from May 1, 1996 through September 30, 1996 and for the fiscal
year ended April 30, 1996, the Fund accrued payments under the Plan amounting to
$203,367 and $598,379, respectively.

Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the Fund with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the Trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.

<PAGE>

Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS

Shareholders will receive reports semi-annually showing the investments of
the FUND and other information. In addition, shareholders will receive annual
financial statements audited by the FUND's independent accountants.

The financial statements for the period from May 1, 1996 through
September 30, 1996 and for the semi-annual reporting period ended April 30,
1997, are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1996 and the Semi-Annual Report dated May 31, 1997. A copy of the
Annual Report and Semi-Annual Report for the Fund may be obtained without charge
by contacting Signet Financial Services, Inc. at 1-800-829-3863.

Cusip 093212306
G01386-11

STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 31, 1997 (the "Prospectus"), pursuant to which
the Blanchard Flexible Tax-Free Bond Fund (the "FUND") is offered. Please retain
this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

General Information and History ..2
Investment Objective and Policies ..2
Securities in Which the FUND May Invest ..3
Investment Restrictions ..8
Portfolio Transactions 9
Computation of Net Asset Value 10
Performance Information 11
Additional Purchase and Redemption Information 13
Tax Matters 13
Blanchard Funds Management 18
Management Services 22
Portfolio Management Services 23
Custodian 23
Administrative Services 24
Distribution Plan 24
Description of the FUND 24
Shareholder Reports 25
Appendix A - Description of Bond Ratings A-26

Manager
Virtus Capital Management, Inc.
Portfolio Adviser
United States Trust Company of New York
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1997

<PAGE>

GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND is a "no-load" fund which seeks to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The FUND invests primarily in obligations of varying maturities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest from which, in the opinion of
bond counsel for the issuer, is exempt from Federal income tax ("Municipal
Obligations"). There is no assurance that the FUND will achieve its investment
objective. This objective is a fundamental policy and may not be changed except
by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Securities in Which the Fund May
Invest" and "Other Investment Information."
The FUND's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the preservation
of principal. The FUND will invest at least 65% of its assets in Municipal
Obligations, except when maintaining a temporary defensive position.
The FUND invests in Municipal Obligations which are determined by U.S.
Trust to present minimal credit risks. As a matter of fundamental policy, except
during temporary defensive periods, the FUND will maintain at least 80% of its
assets in tax-exempt obligations. (This policy may not be changed without the
vote of the holders of a majority of the FUND's outstanding shares.) However,
from time to time on a temporary defensive basis due to market conditions, the
FUND may hold uninvested cash reserves or invest in taxable obligations in such
proportions as, in the opinion of U.S. Trust, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the FUND invest in taxable obligations, it would purchase: (i) obligations of
the U.S. Treasury; (ii) obligations of agencies and instrumentalities of the
U.S. Government; (iii) money market instruments, such as certificates of
deposit, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instruments;
(v) municipal bond index futures and interest rate futures contracts; or (vi)
securities issued by other investment companies that invest in high quality,
short-term securities. Interest income from certain short-term holdings may be
taxable to shareholders as ordinary income.
In seeking to achieve its investment objective, the FUND may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest on
which is treated as a specific tax preference item under the Federal alternative
minimum tax. Investments in such securities, however, will not exceed, under
normal market conditions, 20% of the FUND's total assets when added together
with any taxable investments held by the FUND.

The Municipal Obligations purchased by the FUND will consist of: (1)
municipal bonds rated "A" or better by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Ratings Group ("S&P") or, in certain
instances, municipal bonds with lower ratings if they are deemed by U.S. Trust
to be comparable to A-rated issues; (2) municipal notes rated "MIG-2" or better
("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or
better by S&P; and (3) municipal commercial paper rated "Prime-2" or better by
Moody's or "A-2" or better by S&P. If not rated, securities purchased by the
FUND will be of comparable quality to the above ratings as determined by U.S.
Trust under the supervision of the FUND's Board of Trustees. A discussion of
Moody's and S&P's rating categories is contained in Appendix A.

<PAGE>

Although the FUND does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by U.S. Trust. To the extent that
the FUND's assets are concentrated in Municipal Obligations payable from
revenues on similar projects, the FUND will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the FUND's
assets were not so concentrated.
SECURITIES IN WHICH THE FUND MAY INVEST
Municipal Obligations. The two principal classifications of Municipal
Obligations which may be held by the FUND are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
FUND are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity revenue bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
The FUND's portfolio may also include "moral obligation" securities,
which are normally issued by special-purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund the restoration of which is
a moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the FUND.
The FUND may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments
("stripped") or both with respect to specific underlying Municipal Obligations.
In general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from Federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The FUNDs intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
Federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the 10% limit described in "Investment Limitations" in the Statement
of Additional Information.
Futures Contracts. The FUND may purchase and sell municipal bond index
and interest rate futures contracts as a hedge against changes in market
conditions. A municipal bond index assigns values daily to the municipal bonds
included in the index based on the independent assessment of dealer-to-dealer
municipal bond brokers. A municipal bond index futures contract represents a
firm commitment by which two parties agree to take or make a delivery of an
amount equal to a specified dollar amount times the difference between the
municipal bond index value on the last trading date of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the underlying securities in the index is made.
The FUND may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to the municipal bond index futures
contracts except that, instead of a municipal bond index, the "underlying
commodity" is represented by various types of fixed-income securities.
The FUND will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which it holds or intends to purchase where the transactions are intended to
reduce risks inherent in the management of the FUND. The FUND may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the Securities and Exchange Commission ("SEC").

<PAGE>

When investing in futures contracts, the FUND must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the FUND takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When the FUND takes
a short position in a futures contract, the FUND must maintain a segregated
account containing cash and/or certain liquid assets equal to the market value
of the securities underlying such contract, less any margin or deposit, which
must be at least equal to the market price at which the short position was
established.
Transactions by the FUND in futures contracts may subject the FUND to a
number of risks. Successful use of futures by the FUND is subject to the ability
of U.S. Trust to anticipate correctly movements in the direction of the market.
In addition, there may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts and movements in the
price of the instruments being hedged. Further, there is no assurance that a
liquid market will exist for any particular futures contract at any particular
time. Consequently, the FUND may realize a loss on a futures transaction that is
not offset by a favorable movement in the price of securities which it holds or
intends to purchase, or it may be unable to close a futures position in the
event of adverse price movements. Any income from investments in futures
contracts will be taxable income of the FUND.
Money Market Instruments. Money market instruments that may be
purchased by the FUND in accordance with its investment objectives and policies
stated above include, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings association or savings bank which is insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. Investments in time
deposits are limited to no more than 5% of the value of the FUND's total assets
at time of purchase.
Investments by the FUND in commercial paper will consist of issues that
are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
the FUND may acquire unrated commercial paper that is determined by U.S. Trust
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by the FUND.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by the FUND, the FUND may, from time to time as specified
in the instrument, demand payment of the principal of the instrument or may
resell the instrument to a third party. The absence of an active secondary
market, however, could make it difficult for the FUND to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
that the FUND is not entitled to exercise its demand rights, and the FUND could,
for this or other reasons, suffer a loss with respect to such instrument.
Repurchase Agreements. As stated above, the FUND may agree to purchase
portfolio securities subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). The FUND will
enter into repurchase agreements only with financial institutions such as banks
or broker/dealers which are deemed to be creditworthy by U.S. Trust under
guidelines approved by the FUND's Board of Trustees. The FUND will not enter
into repurchase agreements with U.S. Trust or its affiliates. Repurchase
agreements maturing in more than seven days will be considered illiquid
securities subject to the 10% limit described in "Investment Restrictions."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose the
FUND to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
the repurchase agreements will be taxable.

<PAGE>

Investment Company Securities. The FUND may also invest in securities
issued by other investment companies that invest in high-quality, short-term
securities and that determine their net asset value per share based on the
amortized cost or penny-rounding method. In addition to the advisory fees and
other expenses the FUND bears directly in connection with its own operations, as
a shareholder of another investment company, the FUND would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the FUND's shareholders would indirectly bear the expenses of the FUND and
the other investment company, some or all of which would be duplicative. Such
securities will be acquired by the FUND within the limits prescribed by the
Investment Company Act of 1940 (the "1940 Act").
When-Issued and Forward Transactions and Stand-By Commitments. The FUND
may purchase eligible securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by the FUND to purchase or sell particular securities with payment
and delivery taking place in the future, beyond the normal settlement date, at a
stated price and yield. Securities purchased on a "forward commitment" or "when
issued" basis are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. It is expected that forward
commitments and "when-issued" purchases will not exceed 25% of the value of the
FUND's total assets absent unusual market conditions, and that the length of
such commitments will not exceed 45 days. The FUND does not intend to engage in
"when-issued" purchases and forward commitments for speculative purposes, but
only in furtherance of its investment objectives.
In addition, the FUND may acquire "stand-by commitments" with respect
to Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the FUND's option, specified Municipal Obligations at a
specified price. The FUND will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the FUND
would be valued at zero in determining the FUND's net asset value. Risk Factors:
Futures contracts. The FUND may enter into contracts for the purchase
or sale for future delivery of municipal bond indices or fixed-income securities
which otherwise meet the FUND's investment policies, to the extent permitted by
the Commodity Futures Trading Commission (the "CFTC"). U.S. futures contracts
have been designed by exchanges which have been designated "contract markets" by
the CFTC, and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of contract markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make a delivery of an amount equal to a
specified dollar amount times the difference between the municipal bond index
value on the last trading date of the contract and the price at which the
futures contract is originally struck. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specific, interest rate-sensitive financial instrument
(debt security) at a specified price, date, time and place.
The FUND will not use leverage when it enters into long futures or
options contracts. For each such long position the FUND will deposit cash or
cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the FUND upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in

<PAGE>

the margin account if the FUND fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the currency or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a futures contract, the FUND may elect to close the
position by taking an opposite position, which will operate to terminate the
FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No secondary
market for such contracts exists. Although the FUND intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that an active market will exist for the contracts at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit. It is possible that futures contract prices could
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting the FUND to substantial losses. In such event, and in the event of
adverse price movements, the FUND would be required to make daily cash payments
of variation margin.
Repurchase Agreements. The FUND may enter into repurchase agreements.
Under a repurchase agreement, the FUND acquires a debt instrument for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the FUND to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate effective for the period
of time during which the FUND's money is invested. The FUND's risk is limited to
the ability of the seller to pay the agreed-upon sum upon the delivery date.
When the FUND enters into a repurchase agreement, it obtains collateral having a
value at least equal to the amount of the purchase price. Repurchase agreements
can be considered loans, as defined by the 1940 Act, collateralized by the
underlying securities. The return on the collateral may be more or less than
that from the repurchase agreement. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest earned. In evaluating whether to enter into a repurchase agreement, the
Portfolio Adviser will carefully consider the creditworthiness of the seller. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the FUND may incur a loss. Lending of Portfolio Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or the Portfolio
Adviser. The borrower at all times during the loan must maintain with the FUND
cash or cash equivalent collateral or provide to the FUND an irrevocable letter
of credit equal in value at all times to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the FUND any dividends or interest paid on such securities, and
the FUND may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The FUND may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.

<PAGE>

Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. The staff of the SEC defines an illiquid security as any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the company has valued the instrument.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).

<PAGE>

INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, at the
close of each quarter of the FUND's taxable year, has the following
restrictions: (a) with respect to 50% of the FUND's total assets, the
FUND may not invest more than 5% of its total assets, at market value,
in the securities of one issuer (except the securities of the U.S.
Government, its agencies and instrumentalities) and (b) with respect to
the other 50% of the FUND's total assets, the FUND may not invest more
than 25% of the market value of its total assets in a single issuer
(except the securities of the U.S. Government, its agencies and
instrumentalities). These two restrictions, hypothetically, could give
rise to the FUND having securities, other than U.S. Government
securities, of as few as twelve issuers. 2. The FUND will not purchase
a security if, as a result: (a) it would own more than 10% of any class
or of the outstanding voting securities of any single company; (b) more
than 5% of its total assets would be invested in the securities of
companies (including predecessors) that have been in continuous
operation for less than 3 years; (c) more than 25% of its total assets
would be concentrated in companies within any one industry (except that
this restriction does not apply to U.S. Government securities); or (d)
more than 5% of net assets would be invested in warrants or rights.
(Included within that amount, but not to exceed 2% of the value of the
FUND's net assets, may be warrants which are not listed on the New York
or American Stock Exchanges.) 3. The FUND may borrow money from a bank
solely for temporary or emergency purposes (but not in an amount equal
to more than 20% of the market value of its total assets). This does
not preclude the FUND from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities. The FUND will not purchase additional securities while the
amount of any borrowings is in excess of 5% of the market value of its
total assets. 4. The FUND will not make loans of money or securities
except (i) through repurchase agreements, (ii) through loan
participations, and (iii) through the lending of its portfolio
securities as described in the Prospectus and in this Statement of
Additional Information. 5. The FUND may not invest more than 10% of its
total assets in the securities of other investment companies or
purchase more than 3% of any other investment company's voting
securities, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. 6. The FUND may not pledge,
mortgage or hypothecate its assets, except that to secure borrowings
permitted by Restriction 3 above, the FUND may pledge securities having
a value at the time of pledge not exceeding 10% of the market value of
the FUND's total assets. Collateral arrangements with respect to the
FUND's permissible futures transactions, including initial and
variation margin, are not considered to be a pledge of assets for
purposes of this restriction. 7. The FUND may not buy any securities or
other property on margin (except for the deposit of initial or
variation margin in connection with hedging and risk management
transactions and for such short term credits as are necessary for the
clearance of transactions) or engage in short sales. 8. The FUND may
not invest in companies for the purpose of exercising control or
management.

<PAGE>

9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing
or selling portfolio securities. 10. The FUND may not purchase or
retain securities of any issuer (other than the shares of the FUND) if
to the FUND's knowledge, those officers and Trustees of the FUND and
the officers and directors of VCM or the Portfolio Adviser who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of
such outstanding securities. 11. The FUND may not purchase or sell real
property (including limited partnership interests, but excluding
readily marketable securities of companies which invest in real
estate). 12. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs or leases. 13. The FUND may
not issue senior securities. In order to permit the sale of shares of
the FUND in certain states, the FUND may make commitments more
restrictive than the restrictions described above. Should the FUND
determine that any such
commitment is no longer in the best interests of the FUND and its shareholders
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Adviser subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and the Portfolio Adviser. In selecting such brokers or dealers, the Portfolio
Adviser will consider various relevant factors, including, but not limited to
the best net price available, the size and type of the transaction, the nature
and character of the markets for the security to be purchased or sold, the
execution efficiency, settlement capability, financial condition of the
broker-dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to the Portfolio Adviser for the
FUND's use, which in the opinion of the Trustees, are reasonable and necessary
to the FUND's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to the FUND or to the Portfolio Adviser. Such
allocation shall be in such amounts as VCM or the Portfolio Adviser shall
determine and the Portfolio Adviser shall report regularly to VCM who will in
turn report to the Trustees on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to the
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of the Portfolio Adviser's other clients may be
useful to the Portfolio Adviser in carrying out its obligations to the FUND. The
receipt of such research may not reduce the Portfolio Adviser's normal
independent research activities.

<PAGE>

The Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. ("the Distributor"), and the Portfolio Adviser
or an affiliated broker-dealer on an agency basis, to effect a substantial
amount of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result of
FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory Contract
does not provide for any reduction in the management fee as a result of profits
resulting from brokerage commissions effected through the Distributor. In
addition, the Sub-Advisory Agreement between VCM and the Portfolio Adviser does
not provide for any reduction in the advisory fees as a result of profits
resulting from portfolio transactions effected through the Portfolio Adviser or
an affiliated brokerage firm.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to the Portfolio Adviser or an affiliated
broker-dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." The Rule and the procedures also contain review requirements
and require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.
It may happen that the same security will be held by other clients of
VCM or of the Portfolio Adviser. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.

For the period from May 1, 1996 through September 30, 1996 and for the
fiscal years ended April 30, 1996 and 1995, the FUND's annual rates of portfolio
turnover were approximately 25%, 275% and 170%, respectively.

<PAGE>

Determining Market Value of Securities
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that
security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000 T =
average annual total return n = number of years
(1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or 10
year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

<PAGE>

The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
period from May 1, 1996 through September 30, 1996 was 5.02%. For the fiscal
year ended April 30, 1996 and since inception (August 12, 1993 through September
30, 1996) the FUND's aggregate annualized total rates of return were 6.86% and
7.01%, respectively.

The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. and Morningstar, Inc., or similar
independent services or financial publications, the FUND calculates its
aggregate total return for the specified periods of time by assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial net asset value of the investment from the ending net asset value and by
dividing the remainder by the beginning net asset value. The FUND does not, for
these purposes, deduct the pro rata share of the account opening fee, which was
in effect from August, 1993 to 1994, from the initial value invested. The FUND
will, however, disclose the pro rata share of the account opening fee and will
disclose that the performance data does not reflect such non-recurring charge
and that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under the Commission's rules.
In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:

YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.

<PAGE>

Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.

For the 30-day period ended September 30, 1996 the FUND's yield was
4.70%.

<PAGE>

In addition to satisfying the Distribution Requirement, a regulated
investment company with investment objectives, policies and restrictions similar
to the FUND must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities and other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock or securities (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized or
unrealized losses on offsetting positions) from the sale or other disposition of
stock, or securities or foreign currencies (or options, futures or forward
contracts thereon) held for less than three months (the "Short-Short Gain
Test"). Because of the Short-Short Gain Test, the FUND may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. At September 30,1996, the FUND
had a net capital loss carryover of $639,759, which is available through the
year 2003 to offset future capital gains.

In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation.
Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures contracts)
will be subject to special tax treatment as "Section 1256 contracts." Section
1256 contracts are treated as if they are sold for their fair market value on
the last business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contract have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any gain or
loss recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is taken into account for the taxable year together with any
other gain or loss that was previously recognized upon the termination of
Section 1256 contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
contracts) is

<PAGE>

generally treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The FUND may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service has held in several private rulings and Treasury Regulations now
provide that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, or any net long-term capital loss incurred after October 31 as if
they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders. Excise Tax
on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.

<PAGE>

FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient." Sale or Redemption of
Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.

<PAGE>

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and present
positions with Blanchard Funds, and principal occupations.
<S> <C>
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman and
Birthdate: July 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport Research,
Ltd.; Chief Executive Officer and Director or Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Trust.

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Trustee of the Fund; Chairman of the Board,
Children's
Hospital of
Pittsburgh
formerly, Senior
Partner, Ernst &
Young LLP;
Director, MED 3000
Group, Inc.;
Director, Member
of Executive
Committee,
University of
Pittsburgh;
Director or
Trustee of the
Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; President, Investment
Birthdate: June 23, 1937 Properties Corporation; Senior Vice-President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples Property Management, Inc. and Northgate
Village Development Corporation; Director or Trustee of the
Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.; formerly, Vice Chairman and Director,
PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.

<PAGE>

James E. Dowd
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Attorney-at-law; Director, The
Birthdate: May 18, 1922 Emerging Germany Fund, Inc.; Director or Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Professor of Medicine,
Birthdate: October 11, 1932 University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center
- Downtown; Member, Board of Directors, University of Pittsburgh
Medical Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller Ament Henny & Kochuba
205 Ross Street Trustee of the Fund; Attorney of Counsel, Miller,
Pittsburgh, PA Ament, Henny & Kochuba; Director, Eat'N Park
Birthdate: June 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds. .
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
Birthdate: October 22, 1930 Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President, Federated
Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some
of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL Trustee of the Fund; Consultant; Former State
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts; formerly, President,
State Street Bank and Trust Company and State Street Boston Corporation;
Director or Trustee of the Funds.

<PAGE>

Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA Trustee of the Fund; Chairman, Meritcare, Inc.;
Birthdate: October 6, 1926 Director, Eat'N Park Restaurants, Inc.; Retired from the law firm of
Miller, Ament, Henny & Kochuba; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
Duquesne University
Pittsburgh, PA Trustee of the Fund; President, Law Professor,
Birthdate: December 20, 1932 Duquesne University; Consulting Partner, Mollica & Murray; Director or
Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Professor, International
Birthdate: September 14, 1925 Politics; Management Consultant; Trustee, Carnegie Endowment for International
Peace, RAND Corporation, Online Computer Library Center, Inc.,
National Defense University, and U.S. Space Foundation; President Emeritus, University
of Pittsburgh; Founding Chairman; National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory Board and
Czech Management Center, Prague; Director or Trustee of the
Funds. .
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Public
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning; Director or Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA Executive Vice President of the Fund; President
Birthdate: April 11, 1949 and Trustee, Federated Investors, Federated Advisers, Federated Management, and
Federated Research:; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Shareholder Services Company, and Federated
Shareholder Services; Director, Federated Services Company; President or Executive
Vice President of the Funds; Director or Trustee of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the Trust.

<PAGE>

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA Executive Vice President, and Secretary
Birthdate: October 26, 1938 of the Fund; Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director,
Federated Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President
and Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA Vice President of the Fund; Executive Vice
Birthdate: May 17, 1923 President and Trustee, Federated
Investors,
Chairman and
Director,
Federated
Securities Corp.;
President or Vice
President of some
of the Funds;
Director or
Trustee of some of
the Funds.
</TABLE>

<PAGE>

Fund Ownership
As of August 1, 1997, Officers and Trustees own less than 1% of the outstanding
shares of each Fund.
To the best knowledge of the FUND, as of August 1, 1997, the following
shareholders owned 5% or more of the outstanding shares of the FUND: Stephens
Inc., Little Rock, AR, for the exclusive benefit of its customers, owned
approximately 461,129 shares (10.63%) and William J. Harnett, Waldorf, MD owned
approximately 340,573 shares (7.85%).

Officers and Trustees Compensation
<TABLE>
<CAPTION>

MANAGEMENT SERVICES
Manager to the Trust

The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Trust.

<PAGE>

Management Fees

For its services, VCM receives an annual management fee as described in
the prospectus. For the period from May 1, 1996 through September 30, 1996, the
FUND's investment management fee paid to VCM was $71,788, all of which was
voluntarily waived. For the fiscal year ended April 30, 1996, the FUND's
investment management fee paid to the prior manager and to VCM was $132,013 and
$30,642, respectively, all of which was voluntary waived. For the fiscal years
ended April 30, 1995, the FUND's investment management fee paid to the prior
manager were $127,835, all of which was voluntarily waived. For the perio dfrom
August 12, 1993 (commencement of operations) to April 30, 1994, the FUND's
investment management fee paid to the prior manager was $89,180, all of which
was voluntarily waived.
PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement which became effective on July 12,
1995, (the "Sub-Advisory Agreement") between VCM and United States Trust Company
of New York ("U.S. Trust"), VCM has delegated to U.S. Trust the authority and
responsibility to make and execute decisions for the FUND within the framework
of the FUND's investment policies, subject to review by VCM and the Board of
Trustees of the FUND. Under the terms of the Sub-Advisory Agreement, U.S. Trust
has discretion to purchase and sell securities, except as limited by the FUND's
investment objective, policies and restrictions.
The Sub-Advisory Agreement provides for the payment to U.S. Trust, by
VCM, of monthly compensation based on the FUND's average daily net assets for
providing investment advice to the FUND and managing the investment of assets of
the FUND. For the services to be rendered, VCM shall pay U.S. Trust a monthly
fee at the annual rate of 0.20% of the FUND's average daily net assets. For the
period from May 1, 1996 through September 30, 1996, the aggregate amount paid to
U.S. Trust by VCM was $19,145. For the fiscal year ended April 30, 1996, the
aggregate amount paid to U.S. Trust and prior sub-adviser by VCM and the prior
manager was $42,605. For the fiscal year ended April 30, 1995 and the period
from August 12, 1993 (commencement of operations) to April 30, 1994, the
aggregate amounts paid to the prior sub-adviser by the prior manager were
$34,662 and $9,758, respectively.
The Sub-Advisory Agreement dated July 12, 1995 was approved by the
FUND's Board of Trustees and the FUND's shareholders. The Sub-Advisory Agreement
provides that it may be terminated without penalty by either the FUND or U.S.
Trust at any time by the giving of 60 days' written notice to the other and
terminates automatically in the event of "assignment", as defined in the
Investment Company Act. The Sub-Advisory Agreement provides that, unless sooner
terminated, it shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by either the Board of
Trustees of the FUND or by a vote of the majority of the outstanding voting
securities of the FUND, provided, that in either event, such continuance is also
approved by the vote of the majority of the Trustees who are not parties cast in
person at a meeting called for the purpose of voting on such approval.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.

<PAGE>

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 from May 1, 1996 through
September 30, 1996 and for the fiscal year ended April 30, 1996, Federated
Administrative Services earned $31,438 and $31,841, respectively, in
administrative services fees of which $22,290 and $0 were voluntarily waived.
For the fiscal years ended April 30, 1995 and 1994, the administrative services
fees were included as part of the Management fee.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the period from May 1, 1996 through September 30, 1996, the FUND accrued
payments under the Plan amounting to $23,929, all of which was voluntarily
waived. For the fiscal year ended April 30,1996 the FUND accrued payments under
the Plan amounting to $54,218, all of which was voluntarily waived.

<PAGE>

The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive
annual financial statements audited by the FUND's
independent accountants.

<PAGE>

- -------------------------------------------------------------------------------
31
- -------------------------------------------------------------------------------
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Aaa: Bonds which are rated Aaa judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in the generic
rating classifications Aa and A in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated Prime-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-26

<PAGE>

Description of Standard and Poor's Corporation's
Bond Ratings:
AAA: Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest;
and repay principal and differ from the higher rated issues
only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
Plus (+) or Minus (-): The ratings AA and A may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
Notes with Respect to All Ratings:
Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal that are similar to the risks of
lower-rated bonds. The Fund is dependent on Fund management's judgment, analysis
and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.

Cusip 093212603
G01386-13
A-27

STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD GLOBAL GROWTH FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 31, 1997 (the "Prospectus"), pursuant to which
Blanchard Global Growth Fund (the "FUND") is offered. Please retain this
document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

Investment Objective and Policies 2
Investment Restrictions 13
Portfolio Transactions 15
Computation of Net Asset Value 16
Performance Information 17
Additional Purchase and Redemption Information 18
Tax Matters 18
Blanchard Funds Management 24
Management Services 28
Portfolio Management Services 28
Custodian 29
Administrative Services 29
Distribution Plan 29
Description of the FUND 30
Shareholder Reports 31
Appendix A A-32

Manager
Virtus Capital Management, Inc.
Portfolio Adviser
Mellon Capital Management Corporation
Distributor
Federated Securities Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1997

<PAGE>

INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the FUND are set forth in the FUND's
Prospectus which refers to the following investment strategies and additional
information:
Options and Futures Strategies
Through the writing and purchase of options and the purchase and sale
of stock index futures contracts, interest rate futures contracts, foreign
currency futures contracts and related options on such futures contracts, Virtus
Capital Management, Inc. ("VCM") may at times seek to hedge against a decline in
the value of securities included in the FUND's portfolio or an increase in the
price of securities which it plans to purchase for the FUND or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce the FUND's current
return.
The ability of the FUND to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices, U.S.
Government securities and foreign currencies are relatively new and still
developing. Although a FUND will not enter into an option or futures position
unless a liquid secondary market exists for such option or futures contract is
believed by FUND management to exist. There is no assurance that the FUND will
be able to effect closing transactions at any particular time or at an
acceptable price. Reasons for the absence of a liquid secondary market on an
Exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; (v) the facilities
of an Exchange or the Options Clearing Corporation ("OCC") may not at all times
be adequate to handle current trading volume; or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market thereon would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC as
a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Low initial margin deposits made upon the opening of a futures position
and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent the FUND
purchases or sells futures contracts and options on futures contracts and
purchases and writes options on securities and securities indexes for hedging
purposes, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in the
value of securities held by the FUND or decreases in the prices of securities
the FUND intends to acquire. It is impossible to predict the amount of trading
interest that may exist in various types of options or futures. Therefore, no
assurance can be given that the FUND will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, the FUND's ability to
engage in options and futures transactions may be limited by tax considerations.
Although the FUND will only engage in options and futures transactions for
limited purposes, it will involve certain risks which are described in the
Prospectus. The FUND will not engage in options and futures transactions for
leveraging purposes. Writing Covered Options on Securities
The FUND may write covered call options and covered put options on
optionable securities (stocks, bonds, foreign exchange, related futures, options
and options on futures) of the types in which it is permitted to invest in
seeking to attain its objective. Call options written by the FUND give the
holder the right to buy the underlying securities from the FUND at a stated
exercise price; put options give the holder the right to sell the underlying
security to the FUND at a stated price.

<PAGE>

The FUND may write only covered options, which means that, so long as
the FUND is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the FUND will
maintain, in a segregated account, cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities or will hold a purchased put option with a higher strike price than
the put written. The FUND may also write combinations of covered puts and calls
on the same underlying security.
The FUND will receive a premium from writing a put or call option,
which increases the FUND's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the FUND
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the FUND assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its market value at the
time it is exercised resulting in a potential capital loss if the purchase price
is greater than the underlying securities current market value minus the amount
of the premium received, unless the security subsequently appreciates in value.
The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The FUND will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option. In
the case of a put option, any loss so incurred may be partially or entirely
offset by the premium received from a simultaneous or subsequent sale of a
different put option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by unrealized appreciation of the underlying security owned
by the FUND.
Options written by the FUND will normally have expiration dates not
more than one year from the date written. The exercise price of the options may
be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. The FUND may engage in buy-and-write
transactions in which the FUND simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, the FUND's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
FUND for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, the FUND's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and the FUND may or may not realize a loss.
To the extent that a secondary market is available on the Exchanges,
the covered call option writer may liquidate his position prior to the
assignment of an exercise notice by entering a closing purchase transaction for
an option of the same series as the option previously written. The cost of such
a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.

<PAGE>

Purchasing Put and Call Options on Securities
The FUND may purchase put options to protect its portfolio holdings in
an underlying security against a decline in market value. Such hedge protection
is provided during the life of the put option since the FUND, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the FUND will reduce any
profit it might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
The FUND may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the FUND, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the FUND will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Purchase and Sale of Options and Futures on Stock Indices
The FUND may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices. Options are also traded in certain industry or market segment indices
such as the Oil Index, the Computer Technology Index and the Transportation
Index.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If Mellon Capital Management Corporation ("MCM"), the FUND's portfolio
adviser, expects general stock market prices to rise, they might purchase a call
option on a stock index or a futures contract on that index as a hedge against
an increase in prices on particular equity securities they want ultimately to
buy. If in fact the stock index does rise, the price of the particular equity
securities intended to be bought may also increase, but that increase would be
offset in part by the increase in the value of the FUND's index option or
futures contract resulting from the increase in the index. If, on the other
hand, MCM expects general stock market prices to decline, the value of some or
all of the equity securities in the FUND's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the FUND's position in put options acquired as a hedge against a potential
decline. Purchase and Sale of Interest Rate Futures
The FUND may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.

<PAGE>

The FUND may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The FUND
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
FUND will purchase securities upon termination of the futures contract.
The FUND may sell U.S. dollar and non-U.S. dollar interest rate futures
contracts in anticipation of an increase in the general level of interest rates.
Generally, as interest rates rise, the market value of the fixed income
securities held by the FUND will fall, thus reducing the net asset value of the
FUND. This interest rate risk can be reduced without employing futures as a
hedge by selling long-term fixed income securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the FUND in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of the FUND's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the FUND's investments which are being
hedged. While the FUND will incur commission expenses in entering and closing
out futures positions (which is done by taking an opposite position from the one
originally entered into, which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures Contracts
The FUND may purchase and write call and put options on stock index and
interest rate futures contracts. The FUND may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing and selling the underlying futures. For example, the FUND may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the FUND intends to purchase. Purchase and Sale of Currency Futures
Contracts and Related Options
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, the FUND may buy or sell foreign currencies or may deal in forward
currency contracts. The FUND may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, the FUND may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, the FUND may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the FUND intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the FUND
will be covered.
A currency futures contract sale creates an obligation by the FUND, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the FUND, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.

<PAGE>

The FUND will write (sell) only covered put and call options on
currency futures. This means that the FUND will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The FUND will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the FUND in cash, Treasury
bills, or other high-grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high-grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times the
number of options written by the FUND. In the case of put options on currency
futures written by the FUND, the FUND will hold the aggregate exercise price in
cash, Treasury bills, or other high-grade short-term obligations in a segregated
account with its custodian, or own put options on currency futures or short
currency futures, with the difference, if any, between the market value of the
put written and the market value of the puts purchased or the currency futures
sold maintained by the FUND in cash, Treasury bills or other high-grade
short-term obligations in a segregated account with its custodian. If at the
close of business on any day the market value of the put options purchased or
the currency futures sold by the FUND falls below 100% of the market value of
the put options written by the FUND, the FUND will so segregate an amount of
cash, Treasury bills or other high-grade short-term obligations equal in value
to the difference.
If other methods of providing appropriate cover are developed, the FUND
reserves the right to employ them to the extent consistent with
applicable regulatory and exchange requirements. In connection with
transactions in stock index options, stock index futures, interest rate
futures, foreign currency futures and related options on such futures,
the FUND will be required to deposit
as "initial margin" an amount of cash and short-term U.S. Government securities
generally equal to from 5% to 10% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin")
are made to and from the broker to reflect changes in the value of the futures
contract.
Options on Foreign Currencies
The FUND may purchase and write options on foreign currencies to
enhance investment performance and for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward contracts,
will be utilized as described above. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the FUND may purchase put options on the foreign currency.
If the value of the currency does decline, the FUND will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the FUND may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the FUND deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the FUND could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Also, where the FUND anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.

<PAGE>

Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the FUND
could write a put option on the relevant currency which, if the currency moves
in the manner projected, will expire unexercised and allow the FUND to hedge
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the FUND would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the FUND also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian, which acts as the FUND's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the FUND has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
or the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the FUND in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated account
with its custodian or with a designated sub-custodian. Mortgage and Asset-Backed
Securities
Subject to the approval of the Board of Trustees of the FUND, the FUND
may invest in foreign mortgage-backed and asset-backed securities. The FUND will
only purchase mortgage-backed and asset-backed securities which, in its opinion,
equate generally to U.S. standards of "investment grade" obligations.
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including pass-through securities and collateralized mortgage
obligations. The yield and credit characteristics of mortgage-backed securities
differ in a number of respects from traditional debt securities.
Asset-backed securities have similar structural characteristics to
mortgage-backed securities. However, the underlying assets are not mortgage
loans or interests in mortgage loans but include assets
such as motor vehicle installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from revolving
credit (credit card) agreement.
Repurchase Agreements
Repurchase agreements are transactions by which the FUND purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven days) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed upon resale price and marked-to-market daily) of the underlying
security. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the FUND in
connection with bankruptcy proceedings) it is the policy of the FUND to limit
repurchase agreements to those member banks of the Federal Reserve System and
primary dealers in U.S. Government securities who are believed by the FUND's
Trustees to present minimum credit risk. Repurchase agreements maturing in more
than seven days are considered, for the purposes of the FUND's investment
restrictions, to be illiquid securities. No more than 10% of the FUND's net
assets may be held in illiquid securities (see "Investment Restrictions").

<PAGE>

Forward Foreign Currency Exchange Contracts
The value of the assets of the Foreign Securities, Precious Metals
Securities and Bullion, Emerging Markets and Foreign Fixed Income Securities
investment sectors of the FUND as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the FUND may incur costs in connection with
conversions between various currencies.
The FUND may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the FUND from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The FUND may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when the FUND believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the FUND's securities denominated in such foreign
currency, or when the FUND believes that the U.S. dollar may suffer a
substantial decline against foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation, the FUND may, in the alternative, enter
into a forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where it believes that the U.S. dollar value of the currency to be
sold pursuant to the forward contract will fall whenever there is a decline in
the U.S. dollar value of the currency in which portfolio securities of the
sector are denominated ("cross-hedge"). If the FUND enters into a position
hedging transaction, cash not available for investment or U.S. Government
Securities or other high quality debt securities will be placed in a segregated
account in an amount sufficient to cover the FUND's net liability under such
hedging transactions. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the FUND's commitment
with respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, the FUND may purchase a call
option permitting it to purchase the amount of foreign currency being hedged by
a forward sale contract at a price no higher than the forward contract price or
the FUND may purchase a put option permitting it to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices would
result in lower overall performance for the FUND than if it had not entered into
such contracts.
While the pursuit of foreign currency gain is not a primary objective
of the FUND, the FUND may, from time to time, hold foreign currency to realize
such gains. (These gains constitute non-qualifying income that is subject to the
10% limitation with respect to the "Income Requirements" of Subchapter M of the
Internal Revenue Code of 1986, as amended, which is discussed herein under
"Dividends, Capital Gains Distributions and Tax Matters".)
The FUND will enter into forward foreign currency exchange contracts as
described hereafter. When the FUND enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to establish
the U.S. dollar cost or proceeds. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the FUND will be able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships.
When MCM believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell an amount of foreign currency approximating the value
of some or all of the FUND's portfolio securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and the successful execution of a short-term hedging strategy is
highly uncertain. Under normal circumstances consideration of the prospect for
currency parities will be incorporated into the longer term investment decisions
made with regard to overall strategies. However, the Trustees of the FUND
believe that it is important to have the flexibility to enter into such forward
contracts when MCM determines that the best interests of the FUND will be
served.

<PAGE>

Generally, the FUND will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, the FUND may either sell the portfolio security and make delivery of
the foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the FUND to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the FUND to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the FUND is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the FUND is obligated to
deliver.
If the FUND retains the portfolio security and engages in an offsetting
transaction, the FUND will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the FUND
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the FUND enters into an offsetting contract for
the purchase of the foreign currency, the FUND will realize a gain to the extent
the price of the currency the FUND has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the FUND
will suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.
The FUND's dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, the FUND is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sector Managers. It also should be realized that this method of protecting
the value of the FUND's portfolio securities against the decline in the value of
a currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase. Additional Risks of Futures Contracts and
Related Options, Forward Foreign Currency Exchange Contracts and Options on
Foreign Currencies
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which the FUND may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent the
FUND from promptly liquidating unfavorable positions and adversely affect
operations and profitability.

<PAGE>

Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the FUND to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume. Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

<PAGE>

In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
During the coming year, the FUND may invest up to 10% of its total
assets in restricted securities issued under Section 4(2) of the Securities Act,
which exempts from registration "transactions by an issuer not involving any
public offering". Section 4(2) instruments are restricted in the sense that they
can only be resold through the issuing dealer and only to institutional
investors; they cannot be resold to the general public without registration.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. FUND management anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). Regulatory Matters
In connection with its proposed futures and options transactions, the
FUND has filed with the Commodity Futures Trading commission ("CFTC") a notice
of eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
FUND has represented in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures
contracts or stock indices if as a result the sum of the
initial margin deposits on its existing futures contracts and
related options positions and premiums paid for options on
futures contracts or stock indices would exceed 5% of the
FUND's assets; and
(ii) with respect to each futures contract purchased or long
position in an option contract, the FUND will set aside in a
segregated account cash or cash equivalents in an amount equal
to the market value of such contracts less the initial margin
deposit.
The Staff of Securities and Exchange Commission ("Commission") has
taken the position that the purchase and sale of futures contracts and the
writing of related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section 18
if an investment company:
(i) sells futures contracts to offset expected declines in the
value of the investment company's portfolio securities,
provided the value of such futures contracts does not exceed
the total market value of those securities (plus such
additional amount as may be necessary because of differences
in the volatility factor of the portfolio securities vis a
vis the futures contracts);
(ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by
the investment company's holding of a corresponding long
futures position, by its ownership of portfolio securities
which correlate with the underlying stock index, or
otherwise;

<PAGE>

(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account")
consisting of cash or cash equivalents in an amount equal to
the total market value of such futures contracts less the
initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock indices or
other securities, provided that such options are covered by
the investment company's holding of a corresponding short
futures position, by establishing a cash segregated account
in an amount equal to the value of its obligation under the
option, or otherwise.
The FUND will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the foregoing.
Additional Information Regarding Precious Metals and Precious Metals Securities
The production and marketing of gold and precious metals may be
affected by the action of certain governments and changes in existing
governments. For example, the mining of gold is highly concentrated in a few
countries. In current order of magnitude of production of gold bullion, the five
largest producers of gold are the Republic of South Africa, certain republics of
the former Soviet Union, Canada, Brazil and the United States. Economic and
political conditions prevailing in these countries may have a direct effect on
the production and marketing of newly produced gold and sales of central bank
gold holdings. It is expected that a majority of gold mining companies in which
the FUND will invest will be located within the United States and Canada.
Prices of Precious Metals Securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals. This
is due to the fact that the costs of mining precious metals remain relatively
fixed, so that an increase or decrease in the price of precious metals has a
direct and greater than proportional effect on the profitability of precious
metals mining companies. Investments tied to precious metals characteristically
involve high risk because of precious metals' price volatility. The price of
precious metals is affected by factors such as cyclical economic conditions,
political events and monetary policies of various countries. During periods of
rising precious metals prices, the FUND will tend to emphasize investments in
Precious Metals Securities.
Under South African law, the only authorized sales agent for gold
produced in South Africa is the Reserve Bank of South Africa, which through its
retention policies controls the time and place of any sale of South African
bullion. The South African Ministry of Mines determines gold mining policy.
South Africa depends predominantly on gold sales for the foreign exchange
necessary to finance its imports, and its sales policy is necessarily subject to
national economic and political developments. Investments in Emerging Countries
The Emerging Markets sector of the FUND may invest indirectly in
securities of emerging country issuers through sponsored or unsponsored American
Depository Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other
types of Depository Receipts (which, together with ADRs and GDRs, are
hereinafter referred to as "Depository Receipts"). Depository Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depository Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depository Receipts.
Investing in emerging country securities involves certain
considerations not typically associated with investing in securities of U.S.
companies, including (1) restrictions on foreign investment and on repatriation
of capital invested in emerging countries, (2) currency fluctuations, (3) the
cost of converting foreign currency into U.S. dollars, (4) potential price
volatility and lesser liquidity of shares traded on emerging country securities
markets and (5) political and economic risks, including the risk of
nationalization or expropriation of assets and the risk of war. In addition,
accounting, auditing, financial and other reporting standards in emerging
countries are not equivalent to U.S. standards and, therefore, disclosure of
certain material information may not be made and less information may be
available to investors investing in emerging countries than in the United
States. There is also generally less governmental regulation of the securities
industry in emerging countries than in the United States.

<PAGE>

Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. Interest and dividends paid on securities held by the FUND and
gains from the disposition of such securities may be subject to withholding
taxes imposed by emerging market countries. Historical experience indicates that
the markets of developing countries have been more volatile than the markets of
developed countries; however, securities traded in such markets often have
provided higher rates of return to investors. VCM believes that these
characteristics may be expected to continue in the future. Portfolio Turnover

Generally, the FUND's portfolio turnover rate is not expected to exceed
100%. A 100% portfolio turnover rate would occur if 100% of the securities owned
by the FUND were sold and either repurchased or replaced by it within one year.
However, the FUND may experience a temporary increase in portfolio turnover and
incur some additional transaction costs as a result of the restructuring
approved by the FUND's shareholders on January 15, 1992 as the new portfolio
managers invest FUND assets transferred to their management. The FUND's
portfolio turnover rate is, generally, the percentage computed by dividing the
lesser of FUND's purchases or sales exclusive of short-term securities and
bullion, by the average value of the FUND's total investments exclusive of
short-term securities and bullion. The portfolio turnover rate for the period
from May 1, 1996 through September 30, 1996 was 47%. The portfolio turnover
rates for the fiscal years ended April 30, 1996 and 1995, were 91% and 221%,
respectively. The FUND's portfolio's turnover rate for the fiscal year ended
April 30, 1995 was higher than normal due to volatile foreign markets. High
Portfolio turnover involves correspondingly greater brokerage commissions, other
transaction costs, and a possible increase in short-term capital gains or
losses. Shareholders are taxed on any such net gains at ordinary income rates.
Because any capital gains realized would be distributed to shareholders at
year-end, shareholders should consider the impact of such distributions on their
own tax position.

INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the Investment
Company Act of 1940, as amended) of the outstanding shares of the FUND. As used
in the Prospectus and the Statement of Additional Information, the term
"majority of the outstanding shares" of the FUND means, respectively, the vote
of the lesser of (i) 67% or more of the shares of the FUND present at a meeting,
if the holders of more than 50% of the outstanding shares of the FUND are
present or represented by proxy, or (ii) more than 50% of the outstanding shares
of the FUND. The following are the FUND's investment restrictions set forth in
their entirety.
1. As a non-diversified management investment company, the FUND
has the following restrictions: (a) with respect to 50% of the
FUND's total assets, the FUND may not invest more than 5% of
its total assets, at market value, in the securities of one
issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the
other 50% of the FUND's total assets, the FUND may not invest
more than 25% of the market value of its total assets in a
single issuer (except the securities of the U.S. Government,
its agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having as few as
twelve issuers.
2. The FUND will not purchase a security if, as a result: (a) it
would own more than 10% of any class or of the outstanding
voting securities of any single company; (b) more than 5% of
its total assets would be invested in the securities of
companies (including predecessors) that have been in
continuous operation for less than 3 years; (c) more than 25%
of its total assets would be concentrated in companies within
any one industry as such industries are defined in the SIC/SEC
Industries Code; or (d) more than 5% of total assets would be
invested in warrants or rights.
3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than
10% of the market value of its total assets). The FUND will
not purchase additional securities while borrowing is in
excess of 5% of the market value of its total assets.
4. The FUND will not make loans of money or securities other
than (a) through the purchase of publicly distributed debt
securities in accordance with its investment objective and (b)
through repurchase agreements.

<PAGE>

5. The FUND may not invest more than 5% of its total assets in
the securities of other investment companies or purchase more
than 3% of any other investment company's voting securities.
6. The FUND may not knowingly purchase or otherwise acquire
securities which are subject to legal or contractual
restrictions on resale or for which there is no readily
available market if, as a
result thereof, more than 10% of the net assets of the FUND
(taken at market value) would be invested in such securities, including
repurchase agreements in excess of 7 days. 7. The FUND may not pledge,
mortgage or hypothecate its assets, except that to secure borrowings
permitted by Restriction 3 above, the FUND may pledge securities having
a value at the time of
pledge not exceeding 10% of the market value of the FUND's
total assets.
8. The FUND may not purchase or sell commodity contracts, except
for stock, bond, currency and other financial futures
contracts. (see "Investment Objective and Policies- Forward
Foreign currency
Exchange Contracts").
9. The FUND may not buy or sell any securities or other property
on margin, except for such short term credits as are necessary
for the clearance of transactions, and except for margin
payments in connection with the use of stock, bond, currency
and other financial futures contracts; and the FUND may not
engage in short sales.
10. The FUND may not invest in companies for the purpose of
exercising control or management.
11. The FUND may not underwrite securities issued by others except
to the extent that the FUND may be deemed an underwriter when
purchasing or selling portfolio securities.
12. The FUND may not purchase or retain securities of any issuer
(other than the shares of the FUND) if to the FUND's
knowledge, those officers and Trustees of the FUND and the
officers and directors of VCM, who individually own
beneficially more than
1/2 of 1% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities. 13. The FUND
may not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or
issued by companies or investment trusts which
invest in real estate or interests therein).
14. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs; provided, however, that
if consistent with the objective of the FUND, the FUND may
purchase securities of issuers whose principal business
activities fall within such areas.
15. The FUND may not issue senior securities.
In order to permit the sale of shares of the FUND in certain states,
the FUND may make commitments more restrictive than the restrictions described
above. Should the FUND determine that any such commitment is no longer in the
best interests of the FUND and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved. Pursuant to one such
commitment, the Trust has agreed that the FUND will not: (1) invest in warrants,
valued at the lower of cost or market, in excess of 5% of the value of the
FUND's net assets, and no more than 2% of such value may be warrants which are
not listed on the New York or American Stock Exchanges; and (2) make direct
investments in oil, gas or other mineral leases.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.

<PAGE>

PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by MCM subject to the supervision of VCM and the Trustees
and pursuant to authority contained in the Investment Advisory Contract and the
Sub-Advisory Agreement between the FUND and VCM and VCM and MCM. In selecting
such brokers of dealers, MCM will consider various relevant factors, including,
but not limited to the best net price available, the size and type of the
transaction, the nature and character of the markets for the security to be
purchased or sold, the execution efficiency, settlement capability, financial
condition of the broker-dealer firm, the broker-dealer's execution services
rendered on a continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to MCM for the FUND's use. Those
services may include economic studies, industry studies, security analysis or
reports, sales literature and statistical services furnished either directly to
the FUND or to MCM. Such allocation shall be in such amounts as VCM shall
determine and MCM shall report regularly to VCM who will in turn report to the
Trustees on the allocation of brokerage for such services. The Trustees must
determine that such services are reasonable and necessary to the FUND's normal
operations.
The receipt of research from broker-dealers may be useful to MCM in
rendering investment management services to their other clients, and conversely,
such information provided by brokers or dealers who have executed orders on
behalf of MCMs' other clients may be useful to MCM in carrying out their
obligations to the FUND.
MCM is authorized, subject to its best efforts to obtain best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are authorized
to use Federated Securities Corp. (the "Distributor"), and MCM or its affiliated
broker-dealers on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the Counter market. Any profits resulting from brokerage
commissions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are
shareholders of VCM. The Investment Advisory Contract does not provided for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between VCM and MCM does not provide for any reduction in the advisory
fee as a result of profits resulting from brokerage commissions effected through
MCM or its affiliated brokerage firms.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the Investment Company Act of 1940 (the
"1940 Act") which requires that the commissions paid the Distributor or to MCM
or its affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." The Rule and the procedures also contain
review requirements and require VCM to furnish reports to the Trustees and to
maintain records in connection with such reviews.

Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND. For the period from
May 1, 1996 through September 30, 1996, the FUND incurred brokerage commission
expenses of $43,997 from the purchase and sale of portfolio securities none of
which was paid to Shufro, Rose & Ehrman, a Former Sector Manager of the FUND.
For the years ended April 30, 1996, 1995 and 1994, the FUND incurred brokerage
commission expenses of $166,428, $488,175 and $583,706, respectively, from the
purchase and sale of portfolio securities, of which $40,660, $173,599 and
$121,292, respectively, or approximately 24%, 36% and 21%, respectively, was
paid to Shufro, Rose & Ehrman, a Sector Manager of the FUND, for effecting 10%,
46% and 27%, respectively, of the FUND's aggregate dollar amount of transactions
involving the payment of commissions. Shufro, Rose & Ehrman operates under
standards which would allow it to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker in a commensurate
arms-length transaction which is executed on the New York or

<PAGE>

American Stock Exchanges. Moreover, in effecting portfolio transactions through
Shufro, Rose & Ehrman, the cost of the brokerage commissions to the FUND in some
cases is less than that available from unaffiliated brokers. The reliability of
Shufro, Rose & Ehrman and the value of its expected contribution to the FUND,
viewed either in terms of a particular transaction or the portfolio manager's
overall responsibilities to the FUND, is also taken into consideration in
selecting Shufro, Rose & Ehrman to serve as the FUND's broker.

It may happen that the same security will be held by other clients of
VCM or of the portfolio managers. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts
will be allocated in accordance with a formula considered by VCM to be equitable
to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as the FUND is concerned. In other cases,
however, the ability of the FUND to participate in volume transactions will
produce better executions for the FUND.
COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Years Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determining Market Value of Securities
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that
security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term
obligations with remaining maturities of 60 days or less at
the time of purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing options positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and asked prices. Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset value,
the FUND values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates are determined when such rates
are made available to the FUND at times prior to the close of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into U.
S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.

<PAGE>

PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return basis
combines principal and dividend income changes for the periods shown. Principal
changes are based on the difference between the beginning and closing net asset
values for the period and assume reinvestment of dividends and distributions
paid by the FUND. Dividends and distributions are comprised of net investment
income and net realized capital gains. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according to
the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000 T = average
annual total return n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

The FUND's average annual total rate of return figures, reflecting the
initial investment of $1,000 and reinvestment of all dividends and
distributions, for the period from May 1, 1996 through September 30, 1996 was
1.91%. The FUND's average annual total rate of return figures for the one, five
and ten-year periods ended April 30, 1996 were 19.68%, 8.55% and 8.75%,
respectively.

The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, the FUND calculates its aggregate
total return for the specified periods of time by assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial net asset value
of the investment from the ending net asset value and by dividing the remainder
by the beginning net asset value. The FUND does not, for these purposes, deduct
the pro rata share of the account opening fee, which was in effect until
December, 1994 from the initial value invested. The FUND will, however, disclose
the pro rata share of the account opening fee and will disclose that the
performance data does not reflect such non-recurring charge and that inclusion
of such charge would reduce the performance quoted. Such alternative total
return information will be given no greater prominence in such advertising than
the information prescribed under SEC rules and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as a shareholder of the FUND, however, the FUND does
not presently contemplate making such redemptions and the FUND will not redeem
any shares held in tax-sheltered retirement plans.
The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning. Qualification as a Regulated Investment Company

In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain

<PAGE>

Test will not prevent the FUND from disposing of investments at a loss, since
the recognition of a loss before the expiration of the three-month holding
period is disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of the
Short-Short Gain Test. However, income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the FUND at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the FUND elects otherwise), will
generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The FUND, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the FUND that are
not Section 1256 contracts. The Internal Revenue Service (the "IRS") has held in
several private rulings (and Treasury Regulations now provide) that gains
arising from Section 1256 contracts will be treated for purposes of the
Short-Short Gain Test as being derived from securities held for not less than
three months if the gains arise as a result of a constructive sale under Code
Section 1256.

<PAGE>

The FUND may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the FUND invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing fund (a "QEF") in which event the FUND
will each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
FUND receives distributions of any such ordinary earning or capital gain from
the PFIC. If the FUND does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (i) any gain
recognized by the FUND upon sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the FUND from the
PFIC will be allocated ratably over the FUND's holding period of its interest in
the PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is received
shall be included in the FUND's gross income for such year as ordinary income
(and the distribution of such portion by the FUND to shareholders will be
taxable as an ordinary income dividend, but such portion will not be subject to
tax at the FUND level), (iii) the FUND shall be liable for tax on the portions
of such gain or excess distribution so allocated to prior years in an amount
equal to, for each such prior year, (A) the amount of gain or excess
distribution allocated to such prior year multiplied by the highest corporate
tax rate in effect for such prior year plus (B) interest on the amount
determined under clause (A) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (iv) the
distribution by the FUND to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the FUND
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Under recently proposed Treasury Regulations the FUND can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the FUND's adjusted tax basis
in that share ("mark to market gain"). Such mark to market gain will be included
by the FUND as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and the FUND's holding period with respect to such PFIC stock
commences on the first day of the next taxable year. If the FUND makes such
election in the first taxable year it holds PFIC stock, the FUND will include
ordinary income from any mark to market gain, if any, and will not incur the tax
described in the previous paragraph.

In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward currency
contracts, there does not appear to be any formal or informal authority which
identifies the issuer of such instrument.
If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.

<PAGE>

Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
of the capital gain recognized upon the FUND's disposition of "small business"
stock will be subject to tax.
Ordinary income dividends paid by the FUND with respect to a taxable
year will qualify for the 70% dividends-received deduction generally available
to corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the FUND from domestic corporations for the taxable year.
A dividend received by the FUND will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the FUND has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c) (3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the FUND has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the FUND is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (i) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the FUND or (ii) by application of Code Section 246(b) which in
general limits the dividends-received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends-received deduction
and certain other items).

<PAGE>

Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning after
1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and the
AMT net operating loss deduction) over $2 million. For purposes of the corporate
AMT and the environmental super fund tax (which are discussed above), the
corporate dividends-received deduction is not itself an item of tax preference
that must be added back to taxable income or is otherwise disallowed in
determining a corporation's AMTI. However, corporate shareholders will generally
be required to take the full amount of any dividend received from the FUND into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
FUND may elect to "pass through" to the FUND's shareholders the amount of
foreign taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rate share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
FUND representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the IRS for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the FUND that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."

<PAGE>

Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income. Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate, if any) upon the gross amount of the dividend. Furthermore, such a
foreign shareholder may be subject to U.S. withholding tax at the rate of 30%
(or lower treaty rate) on the gross income resulting from the FUND's election to
treat any foreign taxes paid by it as paid by its shareholders, but may not be
allowed a deduction against this gross income or a credit against this U.S.
withholding tax for the foreign shareholder's pro rata share of such foreign
taxes which it is treated as having been paid. Such a foreign shareholder would
generally be exempt from U.S. federal income tax on gains realized on the sale
of shares of the FUND and capital gain dividends.
If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
FUND will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.

<PAGE>

BLANCHARD FUNDS MANAGEMENT
<TABLE>
<CAPTION>
<S> <C>

Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman and
Birthdate: July 28, 1924 Trustee, Federated Investors, Federated Advisers, Federated Management, and
Federated Research; Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Trust.

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Trustee of the Fund; Chairman of the Board,
Children's
Hospital of
Pittsburgh
formerly, Senior
Partner, Ernst &
Young LLP;
Director, MED 3000
Group, Inc.;
Director, Member
of Executive
Committee,
University of
Pittsburgh;
Director or
Trustee of the
Funds.
.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; President, Investment
Birthdate: June 23, 1937 Properties Corporation; Senior Vice-President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples Property Management, Inc.
and Northgate Village Development Corporation; Director or Trustee of the
Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA Trustee of the Fund; Attorney-at-law; Director, The
Birthdate: May 18, 1922 Emerging Germany Fund, Inc.; Director or Trustee of the Funds.

<PAGE>

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA Trustee of the Fund; Professor of Medicine,
Birthdate: October 11, 1932 University of Pittsburgh; Medical Director, University of Pittsburgh
Medical Center - Downtown; Member, Board of Directors, University of Pittsburgh
Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller Ament Henny & Kochuba
205 Ross Street Trustee of the Fund; Attorney of Counsel, Miller,
Pittsburgh, PA Ament, Henny & Kochuba; Director, Eat'N Park
Birthdate: June 18, 1924 Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds. .
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
Birthdate: October 22, 1930 Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice
President, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of some
of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL Trustee of the Fund; Consultant; Former State
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts; formerly, President,
State Street Bank and Trust Company and State Street Boston Corporation;
Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA Trustee of the Fund; Chairman, Meritcare, Inc.;
Birthdate: October 6, 1926 Director, Eat'N Park Restaurants, Inc.; Retired from the law firm of
Miller, Ament, Henny & Kochuba; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
Duquesne University
Pittsburgh, PA Trustee of the Fund; President, Law Professor,
Birthdate: December 20, 1932 Duquesne University; Consulting Partner, Mollica & Murray; Director or
Trustee of the Funds.

<PAGE>

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Professor, International
Birthdate: September 14, 1925 Politics; Management Consultant; Trustee, Carnegie Endowment for
International Peace, RAND Corporation, Online Computer Library Center, Inc.,
National Defense University, and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman; National Advisory
Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director
or Trustee of the Funds. .
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Public
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA Executive Vice President of the Fund; President
Birthdate: April 11, 1949 and Trustee, Federated Investors, Federated Advisers, Federated Management
and Federated Research:; President and Director, Federated Research,
Corp. and Federated Global Research Corp.; President, Passport Research,
Ltd.; Trustee, Federated Shareholder Services Company, and Federated
Shareholder Services; Director, Federated Services Company; President or
Executive Vice President of the Funds; Director or Trustee of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA Executive Vice President, and Secretary
Birthdate: October 26, 1938 of the Fund; Executive Vice President, Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company; Director,
Federated Services Company; President and Trustee, Federated Shareholder
Services; Director, Federated Securities Corp.; Executive Vice President
and Secretary of the Funds; Treasurer of some of the Funds.

<PAGE>

* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
As referred to in the list of Trustees and Officers, "Funds" includes
the following investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Wesmark Funds; and
World Investment Series, Inc. Fund Ownership As of August 1, 1997, Officers and
Trustees own less than 1% of the outstanding shares of each Fund. To the best
knowledge of the FUND, as of August 1, 1997, no shareholder owned 5% or more of
the outstanding shares of the FUND.

<PAGE>

Officers and Trustees Compensation
<S> <C>

* The total compensation is provided for the Fund Complex, which consists of
the Blanchard Precious Metals Fund, The Virtus Funds, and the Trust. The
information is provided for Blanchard Funds and Blanchard Precious Metals
Fund, Inc. and The Virtus Funds for the fiscal year ended 9/30/96.
MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, FUND investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.

For its services, VCM receives an annual management fee as described in
the prospectus. For the period from May 1, 1996 through September 30, 1996, the
aggregate amount paid or accrued by the FUND to VCM was $291-223. For the fiscal
year ended April 30, 1996, the aggregate amount paid or accrued by the FUND to
VCM and the prior manager was $783,420. For the fiscal years ended April 30,
1995 and 1994, the aggregate amounts paid or accrued by the FUND to the prior
manager were $983,753 and $943,678, respectively.

PORTFOLIO MANAGEMENT SERVICES
Pursuant to a sub-advisory agreement which became effective on May 28,
1996, (the "Sub-Advisory Agreement") between VCM and MCM, VCM has delegated to
MCM the authority and responsibility to make and execute decisions for the FUND
within the framework of the FUND's investment policies, subject to review by VCM
and the Board of Trustees of the FUND. Under the terms of the Sub-Advisory
Agreement, MCM has discretion to purchase and sell securities, except as limited
by the FUND's investment objective, policies and restrictions.

<PAGE>

The Sub-Advisory Agreement provides for the payment to MCM, by VCM, an
annual fee based on the FUND's daily net assets. For a detailed description of
the Sub-Advisory Agreement see "Portfolio Advisory Services" in the FUND's
prospectus.

For the period from May 1, 1996 through September 30, 1996, the
aggregate amount paid by VCM to MCM under the Sub-Advisory Agreement was
$108,872. For the fiscal years ended April 30, 1996, 1995 and 1994, the
aggregate amounts paid by the prior manager to prior Portfolio Managers under
prior Sub-Advisory Agreements were as follows: Shufro Rose & Ehrman- $118,521,
$90,508 $104,023, respectively; Investment Advisers, Inc.- $15,149, $22,423 and
$5,641, respectively; and Cavelti Capital Management, Inc.- $11,507, $11,821 and
$10,556, respectively. For the fiscal years ended April 30, 1996 and 1995, the
aggregate amounts paid to Fiduciary International, Inc. were $140,258 and
$172,222, respectively. For the fiscal years ended April 30, 1996 and 1995, the
aggregate amounts paid to Martin Currie Inc. were $38,798 and $67,098,
respectively. For the fiscal year ended April 30, 1994, the aggregate amount
paid jointly to Fiduciary International, Inc. and Morgan Stanley Asset
Management, Inc. was $257,595. For the fiscal year ended April 30, 1994, the
aggregate amount paid jointly to Martin Currie Inc. and Morgan Stanley Asset
Management, Inc. was $49,870.

The Sub-Advisory Agreement provides that MCM's fee shall be reduced
proportionately based on the ratio of MCM's fee to VCM's fee in the event VCM's
fee is reduced as a result of a state expense limitation.

The Sub-Advisory Agreement, dated December 1, 1995, was approved by the
FUND's Trustees on November 14, 1995 and the FUND's shareholders on May 24,
1996. The Sub-Advisory Agreement provides that it may be terminated without
penalty by either the FUND or the MCM at any time by the giving of 60 days'
written notice to the other and terminates automatically in the event of
"assignment", as defined in the Investment Company Act. The Sub-Advisory
Agreement provides that, unless sooner terminated, it shall continue in effect
for an initial two year period and from year to year thereafter only so long as
such continuance is specifically approved at least annually by either the Board
of Trustees of the FUND or by a vote of the majority of the outstanding voting
securities of the FUND, provided, that in either event, such continuance is also
approved by the vote of the majority of the Trustees who are not parties to the
Sub-Advisory Agreement or "interested persons" of such parties cast in person at
a meeting called for the purpose of voting on such approval.

CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
ADMINISTRATIVE SERVICES

<PAGE>

FUND and its shareholders and (ii) stimulate administrators to render
administrative support services to the FUND and its shareholders. These services
are to be provided by a representative who has knowledge of the shareholders'
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the FUNDs; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as the Trust reasonably requests. For the period
from May 1, 1996 through September 30, 1996, the FUND accrued payments under the
Plan amounting to $218,417. For the fiscal year ended April 30, 1996, the FUND
accrued payments under the Plan amounting to $586,707.

Other benefits which the FUND hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the FUND in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.

DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust". Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.

<PAGE>

SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing
the investments of the FUND and other information. In addition, shareholders
will receive annual financial statements audited by the FUND's independent
accountants.

The financial statements for the period from May 1, 1996 through
September 30, 1996 and for the semi-annual reporting period ended April 30,
1997, are incorporated herein by reference from the FUND's Annual Report dated
September 30, 1996 and the Semi-Annual Report dated May 31, 1997. A copy of the
Annual Report and Semi-Annual Report for the FUND may be obtained without charge
by contacting Signet Financial Services, Inc. at 1-800-829-3863.

<PAGE>

- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------

Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
*A: Bond which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
*Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long
period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category. Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.

<PAGE>

Issuers rated Prime-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Corporation's Bond Ratings: Investment grade
debt securities are those rating categories indicated by an asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. capacity to pay interest and repay principal is
extremely strong.
*AA: Debt rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in
small degree.
*A: Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
*BBB: Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" Rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.

<PAGE>

CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "C" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating.
The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
C1: The rating "C1" is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative
degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with
this designation is strong. However, the relative degree of safety is not as
high as for issues designated "A-1".
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.

Cusip 093265106
G01386-09

STATEMENT OF ADDITIONAL INFORMATION
BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated August 31, 1997 (the "Prospectus"), pursuant to which
the Blanchard Short-Term Flexible Income Fund (the "FUND") is offered. Please
retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

General Information and History 2
Investment Objective and Policies 2
Securities in Which the FUND May Invest 2
Investment Restrictions 15
Portfolio Transactions 17
Computation of Net Asset Value 18
Performance Information 19
Additional Purchase and Redemption Information 20
Tax Matters 21
Blanchard Funds Management 25
Management Services 30
The Sub-Advisory Agreement 30
Custodian 32
Administrative Services 32
Distribution Plan 32
Description of the FUND 33
Shareholder Reports 33

Manager
Virtus Capital Management, Inc.
Sub-Adviser
OFFITBANK
Distributor
Federated Services Corp.
Custodian
Signet Trust Company
Transfer Agent
Federated Shareholder Services Company
Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1997

<PAGE>

GENERAL INFORMATION AND HISTORY
As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was organized
under the name "Blanchard Strategic Growth Fund" (the "Trust"). The trustees of
the Trust approved the change in the name of the Trust on December 4, 1990. The
FUND's investment objective is to provide a high level of current income
consistent with preservation of capital by investing primarily in a broad range
of short-term debt securities. There is no assurance that the FUND will achieve
its investment objective. This objective is a fundamental policy and may not be
changed except by a majority vote of shareholders.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled "Investment
Objective and Policies," "Certain Portfolio Securities" and "Certain Investment
Strategies and Policies."
Under normal market conditions, the FUND will invest at least 80% of
its assets in a broad range of U.S. debt securities of all types. The FUND may
invest up to 20% of the value of its assets in
securities of foreign issuers denominated in foreign currency and not publicly
traded in the United States.
At least 65% of the value of the FUND's assets will be invested in
investment-grade debt securities, which are considered to be those rated at
least Baa by Moody's Investors Service, Inc. ("Moody's") or at least BBB by
Standard & Poor's Corporation ("Standard & Poor's") or, if unrated, deemed to be
of comparable quality by OFFITBANK. The FUND may invest up to 35% of its assets
in lower-quality debt securities if OFFITBANK deems that such securities present
attractive investment opportunities. The FUND will not invest in debt securities
rated lower than Caa by Moody's and CCC by Standard & Poor's, or, if unrated,
are of comparable quality in OFFITBANK's opinion. Debt securities rated Baa by
Moody's and BBB by Standard & Poor's are considered investment grade obligations
which lack outstanding investment characteristics and may have speculative
characteristics as well. Debt securities rated Caa by Moody's and CCC by
Standard & Poor's are considered to have predominantly speculative
characteristics with respect to capacity to pay interest and repay principal and
to be of poor standing. See "Risk Factors -- Lower Quality Securities" and
Appendix A in the FUND's Prospectus.
Normally, the dollar-weighted average maturity of the FUND's portfolio
will be less than three years, but will never exceed five years. However, the
FUND may invest in individual securities with terms to maturity of greater than
five years if the FUND's portfolio contains sufficient short-term securities so
that the weighted average maturity complies with the above-stated policy. As the
useful life of individual pools of assets underlying certain obligations in
which the Fund may invest may at times be of a shorter duration than the stated
maturity of the obligation itself, the Fund may consider the useful life of such
underlying assets as the maturity of the obligation owned by the Fund. Although
it is intended that the average maturity of the FUND's portfolio will be three
years or less, the FUND retains the flexibility to increase the average maturity
up to five years if OFFITBANK considers it appropriate or advantageous to
investors. Accordingly, the FUND's average maturity may vary, based on
OFFITBANK's analysis of interest rate trends and other data. In general, the
FUND's average maturity will tend to be shorter when OFFITBANK expects interest
rates to rise and longer when it expects interest rates to decline.
Under normal market conditions, the FUND does not expect to have a
substantial portion of its assets invested in money market instruments. However,
when OFFITBANK determines that adverse market conditions exist, the FUND may
adopt a temporary defensive posture and invest its entire portfolio in money
market instruments. To the extent the FUND is so invested, the FUND's investment
objective may not be achieved.
SECURITIES IN WHICH THE FUND MAY INVEST
The FUND's portfolio may include, in any proportion, bonds, notes,
mortgage securities, asset-backed securities, government and government agency
obligations, zero coupon securities and convertible securities, and short-term
obligations such as bankers' acceptances, certificates of deposit, repurchase
agreements and commercial paper.

<PAGE>

The FUND may invest in U.S. government securities and in options,
futures contracts and repurchase transactions with respect to such securities.
Certain of these obligations including U.S. Treasury bills, notes and bonds,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("GNMA"), and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
government securities issued or guaranteed by Federal agencies or government
sponsored enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by the right of
the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home
Loan Banks, and obligations supported only by the credit of the instrumentality,
such as Federal National Mortgage Association Bonds. When purchasing securities
in the U.S. government market, OFFITBANK may take full advantage of the entire
range of maturities of U.S. government securities and may adjust the average
maturity of the investments held in the portfolio from time to time, depending
on its assessment of relative yields of securities of different maturities and
its expectations of future changes in interest rates. To the extent that the
FUND invests in the mortgage market, OFFITBANK usually will evaluate, among
other things, relevant economic, environmental and security-specific variables
such as housing starts, coupon and age trends. To determine relative value among
markets OFFITBANK may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.
The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. government
securities held in its portfolio. In addition, the FUND may at times, through
the writing and purchase of options on U.S. government securities, and the
purchase and sale of futures contracts and related options with respect to U.S.
government securities, seek to reduce fluctuations in net asset value by hedging
against a decline in the value of U.S. government securities owned by the FUND
or an increase in the price of such securities which the FUND plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. government
securities. Options on U.S. government securities and futures and related
options are not considered U.S. government securities; accordingly, they have a
different set of risks and features. These practices and related risks are
described below.
U.S. government securities are considered among the most creditworthy
of fixed-income investments. Because of this added safety, the yields available
from U.S. government securities are generally lower than the yields available
from corporate debt securities. The values of U.S. government securities (like
those of fixed-income securities generally) will change as interest rates
fluctuate. During periods of falling U.S. interest rates, the values of
outstanding long term U.S. government securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities and the FUND expects that its portfolio of
U.S. government securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although changes
in the value of U.S. government securities will not affect investment income
from those securities, they will affect the FUND's net asset value.
The FUND may invest up to 35% of its assets in higher- yielding (and,
therefore, higher risk), lower rated bonds and other debt securities and
securities with debt-like characteristics, including U.S. corporate fixed-income
securities, convertible securities and preferred stocks and unrated corporate
fixed-income securities. Lower quality debt securities, commonly referred to as
"junk bonds," are considered speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness than higher
quality debt securities. See "Risk Factors-Lower Quality Debt Securities" below
for a discussion of certain risks.
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indexes of
U.S. Treasury Securities. The FUND may continue to hold securities obtained as a
result of the conversion of convertible securities held by the FUND when
OFFITBANK believes retaining such securities is consistent with the FUND's
investment objective.

<PAGE>

Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by Standard & Poor's. The FUND may invest in any security which is rated
by Moody's or by Standard & Poor's, or in any unrated security which OFFITBANK
determines is of suitable quality. Securities in the rating categories below Baa
as determined by Moody's and BBB as determined by Standard & Poor's are
considered to be of poor standing and predominantly speculative. The rating
services descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the time
of rating. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate. Although OFFITBANK will
consider security ratings when making investment decisions in the high yield
market, it will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services. OFFITBANK's analysis
generally may include, among other things, consideration of the issuer's
experience and managerial strength, changing financial condition, borrowing
requirements or debt maturity schedules, and its responsiveness to changes in
business conditions and interest rates. It also considers relative values based
on anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects.
The FUND may invest up to 20% of its assets in international securities
consisting of debt obligations and other fixed-income securities, in each case
denominated in non-U.S. currencies or composite currencies, including: debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (described below);
debt obligations of the U.S. Government issued in non-dollar securities; and
debt obligations and other fixed-income securities of foreign and U.S.
corporate issuers (non-dollar denominated).
When investing in international securities, the FUND is not limited to
purchasing debt securities rated at the time of purchase by Moody's or Standard
& Poor's. However, the FUND is limited to the extent that it may not invest more
than 35% of its assets in lower quality debt securities. In making international
securities investments, OFFITBANK may consider, among other things, the relative
growth and inflation rates of different countries. OFFITBANK may also consider
expected changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of securities
denominated in foreign currencies. OFFITBANK may further evaluate, among other
things, foreign yield curves and regulatory and political factors, including the
fiscal and monetary policies of such countries.
The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar denominated
securities of issuers in the industrialized Western European countries; in
Canada, Japan, Australia and New Zealand; and in Latin America. The FUND may
invest up to 10% of its assets in the debt securities of issuers in emerging
market countries.
The FUND may invest, without limitation, in unrated debt securities
issued by foreign governments, their agencies and instrumentalities, where the
foreign government, its agency or instrumentality is rated less than Baa by
Moody's or less than BBB by Standard & Poor's, provided, however, that OFFITBANK
has determined through its own credit analysis that the credit characteristics
of any such unrated security are equivalent to those of a security rated at
least Baa by Moody's or BBB by Standard & Poor's. To the extent that OFFITBANK
has not made any such determination, such unrated debt securities will be deemed
to have the rating assigned by Moody's or Standard & Poor's to the governmental
entity. To the extent that such securities are deemed to be rated less than Baa
by Moody's or less than BBB by Standard & Poor's, investment in such securities
will be subject to the overall 35% limitation on investment in lower quality
debt securities.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.

<PAGE>

Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to making additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. The FUND does not have a
policy of concentrating investments in supranational entities. Risk Factors
Lower Quality Debt Securities. The lower quality debt securities that
may comprise up to 35% of the FUND's investments generally produce a higher
current yield than do debt securities of higher quality. However, these debt
securities are considered speculative because they involve greater price
volatility and risk than do higher quality debt securities and yields on these
debt securities will tend to fluctuate over time. Although the market value of
all debt securities varies as a result of changes in prevailing interest rates
(e.g., when interest rates rise, the market value of debt securities can be
expected to decline), values of lower quality debt securities tend to react
differently than the values of higher quality debt securities. The prices of
lower quality debt securities are less sensitive to changes in interest rates
than higher quality debt securities. Conversely, lower quality debt securities
also involve a greater risk of default by the issuer in the payment of principal
and income and are more sensitive to economic downturns and recessions than
higher quality debt securities. The financial stress resulting from an economic
downturn could have a greater negative effect on the ability of issuers of lower
quality debt securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other debt securities in the
FUND's portfolio, the net asset value of the FUND will be negatively affected.
Moreover, as the market for lower quality debt securities is a relatively new
one, a severe economic downturn might increase the number of defaults, thereby
adversely affecting the value of all outstanding lower quality debt securities
and disrupting the market for such securities. Debt securities purchased by the
FUND as part of an initial underwriting present an additional risk due to their
lack of market history. These risks are exacerbated with respect to debt
securities rated Caa by Moody's or CCC by Standard & Poor's. Unrated debt
securities generally carry the same risks as do lower rated debt securities.
Lower quality debt securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower quality debt securities tend to be institutions, rather than individuals,
a factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower quality debt securities
may not be as liquid as Treasury and investment grade bonds. The ability of the
FUND to sell lower quality debt securities will be adversely affected to the
extent that such securities are thinly traded or illiquid. Moreover, the ability
of the FUND to value lower quality debt securities becomes more difficult, and
judgment plays a greater role in valuation, as there is less reliable, objective
data available with respect to such securities that are thinly traded or
illiquid. Unrated debt securities are not necessarily of lower quality than
rated debt securities, but they may not be attractive to as many buyers.
Because investors may perceive that there are greater risks associated
with the lower quality debt securities of the type in which the FUND may invest,
the yields and prices of such securities may tend to fluctuate more than those
for lower quality debt securities. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the debt securities market than do changes in
higher quality segments of the debt securities market, resulting in greater
yield and price volatility. The speculative characteristics of lower rated debt
securities are set forth in Appendix A in the FUND's Prospectus.

<PAGE>

OFFITBANK believes that the risks of investing in such high yielding,
debt securities may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and Standard &
Poor's is considered in selecting portfolio securities, they evaluate the safety
of the principal and the interest payments of the security, not their market
value risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. OFFITBANK relies, primarily, on its
own credit analysis (see above). This may suggest, however, that the achievement
of the FUND's investment objective is more dependent on OFFITBANK's proprietary
credit analysis, than is otherwise the case for a fund that invests exclusively
in higher quality debt securities.
Once the rating of a portfolio security or the quality determination
ascribed by OFFITBANK to an unrated debt security has been downgraded, OFFITBANK
will consider all circumstances deemed relevant in determining whether to
continue to hold the security, but in no event will the FUND retain such
securities if it would cause the FUND to have more than 35% of the value of its
assets invested in debt securities rated lower than Baa by Moody's or BBB or
Standard & Poor's, or if unrated, are judged by OFFITBANK to be of comparable
quality.
Foreign Investments. Foreign investments involve certain risks that are
not present in domestic securities. Because the FUND intends to purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of the FUND's assets and the FUND's income available for
distribution. In addition, although a portion of the FUND's investment income
may be received or realized in such currencies, the Internal Revenue Code of
1986 (the "Code") requires that the FUND compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such currency declines
after the FUND's income has been earned and translated into a U.S. dollar
equivalent, but before payment of the foreign currency denominated gain, the
FUND could be required to liquidate portfolio securities to make such
distributions. Similarly, if an exchange rate depreciates between the time the
FUND incurs expenses in U.S. dollars and the time such expenses are paid, the
amount of such currency required to be converted into U.S. dollars in order to
pay such expenses in U.S. dollars will be greater than the equivalent amount in
any such currency of such expenses at the time they were incurred. Under the
Code, changes in an exchange rate which occur between the time the FUND accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the FUND actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount which is higher or lower than the FUND's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed-income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely affect
the value of investments in those countries. OFFITBANK does not expect to invest
the FUND's assets in countries where it believes such events are likely to
occur.
Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by the FUND will reduce its net income
available for distribution to shareholders.

<PAGE>

Investors should recognize that investing in debt obligations and other
fixed-income securities of issuers in emerging countries involves certain
special considerations and risk factors, including those set forth below, which
are not typically associated with investing in debt obligations and other
fixed-income securities of U.S. issuers.
Trading volume in emerging country securities markets is substantially
less than that in the United States. Further, securities of some emerging
country issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Commissions for trading on emerging country stock exchanges are
generally higher than commissions for trading on U.S. exchanges, although the
FUND will endeavor to achieve the most favorable net results on its portfolio
transactions and may, in certain instances, be able to purchase its portfolio
investments on other stock exchanges where commissions are negotiable.
Issuers in emerging countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. issuers. Consequently, there
may be less publicly available information about an emerging country issuer than
about a U.S. issuer. Further, there is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed issuers than in the
United States.
The FUND may invest in unlisted emerging country debt obligations and
other fixed-income securities, including investments in new and early stage
issuers, which may involve a high degree of business and financial risk that can
result in substantial losses. Because of the absence of any trading market for
these investments, the FUND may take longer to liquidate these positions than
would be the case for publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices realized on these
sales could be less than those originally paid by the FUND. Further, issuers
whose securities are not publicly traded may not be subject to public disclosure
and other investor protection requirements applicable to publicly traded
securities.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of the FUND's investments in those countries. In addition, it may be difficult
to obtain and enforce a judgment in a court outside of the United States.
Mortgage-Related Securities. The FUND may invest in mortgage-related
securities. The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes in market yields will affect the value
of these securities as the price of fixed-income securities generally increases
when interest rates decline and decreases when interest rates rise. Prices of
longer term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes. In addition,
prepayment of principal on mortgage pass-through securities may make it
difficult to lock in interest rates for a fixed period of time. To the extent
that mortgage securities are purchased at prices that differ from par, these
prepayments (which are received at par) may make up a significant portion of the
pass-through total return. Generally, mortgage securities yield more than
Treasury securities of the same average life.

<PAGE>

Asset-Backed Securities. The FUND may invest in asset-backed
securities. In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. The FUND will invest in, to the extent
available, (i) loan pass-through certificates or participations representing an
undivided ownership interest in pools of installment sales contracts and
installment loans (the "Participations") and (ii) debt obligations issued by
special purpose corporations which hold subordinated equity interests in such
installment sales contracts and installment loans. The FUND anticipates that a
substantial portion of the asset backed securities in which it invests will
consist of the debt obligations of such special purpose corporations.
Asset-backed securities, in general, are of a shorter maturity (usually
five years) than most conventional mortgage-backed securities and historically
have been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
asset-backed securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as mortgage-backed securities. The
yield characteristics of asset-backed securities differ from more traditional
debt securities in that interest and principal payments are paid more
frequently, usually monthly, and principal may be prepaid at any time. As a
result, if the FUND purchases an asset-backed security at a discount, similar to
conventional mortgage-backed securities, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium, faster
than expected prepayments will reduce, while slower than expected prepayments
will increase, yield to maturity. Prepayments may result from a number of
factors, including trade-ins and liquidations due to default, as well as the
receipt of proceeds from physical damage, credit, life and disability insurance
policies. The rate of prepayments on asset-backed securities may also be
influenced by a variety of economic and social factors, including general
measures of consumer confidence; accordingly, from time to time, substantial
amounts of prepayments may be available for reinvestment by the FUND and will be
subject to the prevailing interest rates at the time of prepayment.
Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely payments
on underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying asset. Liquidity protection ensures that the pass
through of payments due on the installment sales contracts and installment loans
which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction, or through a combination of such
approaches. The FUND will not pay any additional fees for such credit support.
However, the existence of credit support may increase the market price of the
security. Description of Certain Mortgage-Related Securities GNMA Certificates
Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban
Development. GNMA's principal programs involve its guarantees of privately
issued securities backed by pools of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the FUND will be
reinvested in additional GNMA Certificates or in other permissible investments.

<PAGE>

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration ("FHA") or the
Farmers Home Administration or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common type
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount,
rather than at par.
2. After issuance, Certificates usually trade in the secondary
market at a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the
case for traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by
the prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the
principal returned to Certificate holders may be reinvested at
higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.

<PAGE>

FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States. FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in conventional
residential mortgages. The FHLMC issues two types of mortgage pass-through
securities ("FHLMC Certificates"): mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States. Futures Contracts
The FUND may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies which otherwise meet
the FUND's investment policies, to the extent permitted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges which have been designated "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. The
FUND may also enter into futures contracts which are based on non-U.S.
Government bonds.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific,
interest rate-sensitive financial instrument (debt security) at a specified
price, date, time and place. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place.
The FUND may not enter into futures transactions if the sum of the
amount of initial margin deposits on its existing futures contracts and premiums
paid for unexpired options would exceed 5% of the fair market value of the
FUND's total assets, after taking into account unrealized profits and unrealized
losses on commodity contracts it has entered into. The FUND will not use
leverage when it enters into long futures or options contracts and for each such
long position the FUND will deposit cash or cash equivalents, such as U.S.
Government Securities or high grade debt obligations, having a value equal to
the underlying commodity value of the contract as collateral with its custodian
in a segregated account.
No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, equal to approximately 5% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the FUND upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in

<PAGE>

the margin account if the FUND fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the currency or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a futures contract, the FUND may elect to close the
position by taking an opposite position, which will operate to terminate the
FUND's existing position in the contract.
There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability of FUND
management to predict correctly movements in the price of the securities or
currencies underlying the particular transaction. These predictions and, thus,
the use of futures contracts involve skills and techniques that are different
from those involved in the management of portfolio securities.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
FUND intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting the FUND to substantial losses. In such event, and in the event
of adverse price movements, the FUND would be required to make daily cash
payments of variation margin. Options on Futures Contracts
The FUND may purchase and write put and call options on interest rate
and foreign currency contracts that are traded on a U.S. exchange or board of
trade or a foreign exchange, to the extent permitted by the CFTC, and may enter
into closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or foreign currency contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts currently available include those with respect to U.S. Treasury Bonds,
U.S. Treasury Notes, U.S. Treasury Bills and Eurodollars. Options on foreign
currency futures currently available include those with respect to British
Pounds, Swiss Francs, Japanese Yen, Canadian Dollars and Australian Dollars.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contracts exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the FUND. Options on Foreign
Currencies
The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures contracts
on foreign currencies, or forward contracts, will be utilized.
The FUND intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the FUND is "covered" if the FUND
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian or by a designated sub-custodian) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the FUND has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price or the call written or (b) is greater
than the exercise

<PAGE>

price of the call written if the difference is maintained by the FUND in cash,
U.S. Government Securities and other high grade liquid debt securities in a
segregated account with its Custodian or with a designated sub-custodian. As a
writer of a covered put option, the FUND incurs an obligation to buy the
security underlying the option from the purchaser of the put, at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and over-the-counter put options written by the FUND will be
exercisable by the purchaser only on a specific date). A put is "covered" if, at
all times, the FUND maintains, in a segregated account maintained on its behalf
at the FUND's custodian, cash, U.S. Government securities or other high grade
obligations in an amount equal to at least the exercise price of the option, at
all times during the option period. Similarly, a short put position could be
covered by the FUND by its purchase of a put option on the same security
(currency) as the underlying security of the written option, where the exercise
price of the purchased option is equal to or more than the exercise price of the
put written or less than the exercise price of the put written if the marked to
market difference is maintained by the FUND in cash, U.S. Government securities
or other high grade debt obligations which the FUND holds in a segregated
account maintained at its custodian. Forward Currency Contracts
The FUND may engage in currency exchange transactions as a portfolio
management technique. The FUND will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or sell
currency. A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
If a devaluation is generally anticipated, the FUND may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The FUND will not enter into a currency transaction if, as a
result, it will fail to qualify as a regulated investment company under the Code
for any given year. Options on Portfolio Securities
The FUND may write only covered call option contracts. Currently, the
principal exchanges on which such options may be written are the Chicago Board
Option Exchange and the American, Philadelphia, and Pacific Stock Exchanges. In
addition, the FUND may purchase and sell options in the over-the-counter market
("OTC Options"). A call option gives the purchaser of the option the right to
buy the underlying security from the writer at the exercise price at any time
prior to the expiration of the contract, regardless of the market price of the
security during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. The
writer forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter options and the assets used
as cover for written over-the-counter options are illiquid securities. The FUND
will write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). The FUND may also
write, to the extent available, OTC Options with non-primary dealers, such as
foreign dealers; however, unlike OTC Options written with primary dealers, any
OTC Options written with such non-primary dealers and the assets used as cover
for such options will be treated as illiquid securities. In connection with
these special arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may enter
into OTC Option contracts and those standards, as modified from time to time,
will be implemented and monitored by the Manager. Under these special
arrangements, the FUND will enter into contracts with primary and non-primary
dealers which provide that the FUND has the absolute right to repurchase an
option it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary and non-primary dealers, the
formula will generally be based on a multiple of the premium received by the
FUND for writing the option, plus the amount, if any, by which the option is
"in-the-money." The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Under such circumstances, and with
respect to OTC

<PAGE>

Options written with primary dealers only, the FUND will treat as illiquid that
amount of the "cover" assets equal to the amount by which the formula price for
the repurchase of the option is greater than the amount by which the market
value of the security subject to the option exceeds the exercise price of the
option (the amount by which the option is "in-the-money"). Although each
agreement will provide that the FUND's repurchase price shall be determined in
good faith (and that it shall not exceed the maximum determined pursuant to the
formula) the formula price will not necessarily reflect the market value of the
option written, therefore, the FUND might pay more to repurchase the OTC Option
contract than the FUND would pay to close out a similar exchange traded option.
In determining the FUND's net asset value, the current market value of
any option written by the FUND is subtracted from net asset value. If the
current market value of the option exceeds the premium received by the FUND, the
excess represents an unrealized loss, and, conversely, if the premium exceeds
the current market value of the option, such excess would be unrealized gain.
Risks of Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies
Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC and
forward currency contracts are not regulated by the Commission. Instead, forward
currency contracts are traded through financial institutions acting as
market-makers. Foreign currency options are traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board options Exchange, subject to regulation by the Commission. In the forward
currency market, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, a trader of forward contracts could lose amounts substantially in
excess of its initial investments, due to the collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting the FUND to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, future contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
Pursuant to the sub-advisory agreement, OFFITBANK, where permitted by
law, will purchase and sell foreign exchange in the interbank dealer market for
a fee on behalf of the FUND, subject to certain procedures and reporting
requirements adopted by the Board of Trustees.

<PAGE>

Repurchase Agreements
The FUND may enter into repurchase agreements. Under a repurchase
agreement, the FUND acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the FUND to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the FUND's money is invested. The FUND's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the FUND enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the Investment Company Act of 1940, as amended (the "1940
Act"), collateralized by the underlying securities. The return on the collateral
may be more or less than that from the repurchase agreement. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest earned. In evaluating whether to enter into a
repurchase agreement, OFFITBANK will carefully consider the creditworthiness of
the seller. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the FUND may incur a loss. Lending of Portfolio
Securities
In order to generate additional income, the FUND may lend its portfolio
securities in an amount up to 33-1/3% of total FUND assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made to any companies affiliated with VCM or OFFITBANK. The
borrower at all times during the loan must maintain with the FUND cash or cash
equivalent collateral or provide to the FUND an irrevocable letter of credit
equal in value at all times to at least 100% of the value of the securities
loaned. During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. Loans are subject to termination at the option
of the FUND or the borrower at any time. The FUND may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Illiquid Securities
The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of the
FUND's total assets (taken at market value) would be invested in such
securities. For this purpose, illiquid securities include (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, (c) covered call options on portfolio securities
written by the FUND over-the-counter and the cover for such options and (d)
repurchase agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

<PAGE>

In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration.
The SEC has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. FUND management anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In reaching
liquidity decision, FUND management will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
INVESTMENT RESTRICTIONS
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of the FUND. As used in the Prospectus and the Statement
of Additional Information, the term "majority of the outstanding shares" of the
FUND means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of the
outstanding shares of the FUND are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the FUND. The following are the FUND's
investment restrictions set forth in their entirety.
1. The FUND, a non-diversified management investment company, has the
following restrictions: (a) with respect to 50% of the FUND's total
assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of
the U.S. Government, its agencies and instrumentalities) and (b) with
respect to the other 50% of the FUND's total assets, the FUND may not
invest more than 25% of the market value of its total assets in a
single issuer (except the securities of the U.S. Government, its
agencies and instrumentalities). These two restrictions,
hypothetically, could give rise to the FUND having securities, other
than U.S. government securities, of as few as twelve issuers. 2. The
FUND will not purchase a security if, as a result: (a) it would own
more than 10% of any class or of the outstanding voting securities of
any single company; (b) more than 5% of its total assets would be
invested in the securities of companies (including predecessors) that
have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any
one industry (except that this restriction does not apply to U.S.
government securities); or (d) more than 5% of net assets would be
invested in warrants or rights. (Included within that amount, but not
to exceed 2% of the value of the FUND's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges.)

<PAGE>

3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets. 4. The FUND will
not make loans of money or securities except (i) through repurchase
agreements, (ii) through loan participations, and (iii) through the
lending of its portfolio securities as described in "Lending of
Portfolio Securities" in the Prospectus and in this Statement. 5. The
FUND may not invest more than 5% of its total assets in the securities
of other investment companies or purchase more than 3% of any other
investment company's voting securities, except as they may be acquired
as part of a merger, consolidation or acquisition of assets. 6. The
FUND may not pledge, mortgage or hypothecate its assets, except that to
secure borrowings permitted by Restriction 3 above, the FUND may pledge
securities having a value at the time of pledge not exceeding 10% of
the market value of the FUND's total assets. 7. The FUND may not buy
any securities or other property on margin (except for such short term
credits as are necessary for the clearance of transactions) or engage
in short sales. 8. The FUND may not invest in companies for the purpose
of exercising control or management. 9. The FUND may not underwrite
securities issued by others except to the extent that the FUND may be
deemed an underwriter when purchasing or selling portfolio securities.
10. The FUND may not purchase or retain securities of any issuer (other
than the shares of the FUND) if to the FUND's knowledge, those officers
and Trustees of the FUND and the officers and directors of VCM or
OFFITBANK, who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities. 11. The FUND may not purchase
or sell real property (including limited partnership interests, but
excluding readily marketable interests in real estate investment trusts
or readily marketable securities of companies which invest in real
estate). 12. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs or leases. 13. The FUND may
not issue senior securities. In order to permit the sale of shares of
the FUND in certain states, the FUND may make commitments more
restrictive than the restrictions described above. Should the FUND
determine that any such
commitment is no longer in the best interests of the FUND and its shareholders
it will revoke the commitment by terminating sales of its shares in the state(s)
involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.

<PAGE>

PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Manager subject to the supervision of VCM
and the Trustees and pursuant to authority contained in the Investment Advisory
Contract between the FUND and VCM, and the Sub-Advisory Agreement between VCM
and OFFITBANK. In selecting such brokers or dealers, OFFITBANK will consider
various relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character of the
markets for the security to be purchased or sold, the execution efficiency,
settlement capability, financial condition of the broker-dealer firm, the
broker-dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to the FUND or to OFFITBANK for the FUND's use, which
in the opinion of the Trustees, are reasonable and necessary to the FUND's
normal operations. Those services may include economic studies, industry
studies, security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to OFFITBANK. Such allocation shall be
in such amounts as VCM or OFFITBANK shall determine and OFFITBANK shall report
regularly to VCM who will in turn report to the Trustees on the allocation of
brokerage for such services.
The receipt of research from broker-dealers may be useful to OFFITBANK
in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of OFFITBANK's other clients may be useful to OFFITBANK in
carrying out its obligations to the FUND. The receipt of such research may not
reduce OFFITBANK's normal independent research activities.
OFFITBANK is authorized, subject to best price and execution, to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the FUND and are authorized to use Federated
Securities Corp. (the "Distributor"), and OFFITBANK or an affiliated
broker-dealer on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market. Any profits resulting from portfolio
transactions earned by the Distributor as a result of FUND transactions will
accrue to the benefit of the shareholders of the Distributor who are also
shareholders of VCM. The Investment Advisory Contract does not provide for any
reduction in the advisory fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-Advisory
Agreement between VCM and OFFITBANK does not provide for any reduction in the
advisory fees as a result of profits resulting from portfolio transactions
effected through OFFITBANK or an affiliated brokerage firm.
The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid the Distributor or to OFFITBANK or an affiliated broker-dealer
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." The Rule and the procedures also contain review requirements and
require VCM to furnish reports to the Trustees and to maintain records in
connection with such reviews.
Brokers or dealers who execute portfolio transactions on behalf of the
FUND may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, VCM determines in good faith that such commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by such executing brokers or dealers viewed in terms of a particular
transaction or VCM's overall responsibilities to the FUND.

<PAGE>

It may happen that the same security will be held by other clients of
VCM or of OFFITBANK. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by VCM to be equitable to each, taking
into consideration such factors as size of account, concentration of holdings,
investment objectives, tax status, cash availability, purchase cost, holding
period and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the security as
far as the FUND is concerned. In other cases, however, the ability of the FUND
to participate in volume transactions will produce better executions for the
FUND.

For the period from May 1, 1996 through September 30, 1996 and for the
fiscal years ended April 30, 1996 and 1995, the FUND's rates of portfolio
turnover were approximately 21%, 291% and 84%, respectively.

COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determining Market Value of Securities
Market or fair values of the FUND's portfolio securities are determined
as follows:
o according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that
security, as determined by the Adviser or sub-adviser, is
used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-counter;
o for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of
purchase, may be valued at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate; maturity;
type of issue; trading characteristics; and other market data.
The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing options positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and asked prices. Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset value,
the FUND values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates are determined when such rates
are made available to the FUND at times prior to the close of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into U.
S. dollars at current rates. Occasionally, events that affect these values and
exchange rates may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Trustees, although the actual
calculation may be done by others.

<PAGE>

PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the FUND to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the FUND. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000 T =
average annual total return n = number of years
(1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or at the end of the 1, 5
or 10 year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

The FUND's aggregate annualized total rate of return, reflecting the
initial investment and reinvestment of all dividends and distributions for the
period from May 1, 1996 through September 30, 1996 was 2.61%. For the fiscal
year ended April 30, 1996 and for the life of the FUND (April 16, 1993 to
September 30, 1996) the FUND's aggregate annualized total rates of return were
7.47% and 5.58%, respectively.

The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. 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.

<PAGE>

In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on the
date of the most recent balance sheet included in the FUND's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:

YIELD = 2[(a-b+1)6-1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the FUND's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted from
the maximum offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's rules.
In addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.

For the 30-day period ended September 30, 1996, the FUND's yield was
5.59%.

<PAGE>

TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Qualification as a Regulated Investment Company

The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, including foreign
currency gains and loss) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its "investment company taxable income"
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described below. Please note that the below-listed and defined "Short-Short Gain
Test" has been repealed pursuant to the Taxpayer Relief Act of 1997, effective
for taxable years beginning after the date of enactment. For purposes of the
FUND, the effective date of the repeal will be October 1, 1997. Distributions by
the FUND made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and can therefore satisfy
the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the FUND may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the FUND from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by the FUND at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose. At September
30, 1996, the FUND had a net capital loss carryover of $9,609,833, which is
available through 2003 to offset future capital gains. The FUND acquired a
capital loss carryforward of $9,885,574, which will expire in 2003, from
Blanchard Short-Term Global Income Fund as a result of the merger on February
12, 1996.

<PAGE>

Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (ii) the asset is otherwise held by the FUND as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the FUND
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
FUND grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (i) above. In
addition, the FUND may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an option
written by the FUND will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by the FUND will commence on the date it is written and end on the date it
lapses or the date a closing transaction is entered into. Accordingly, the FUND
may be limited in its ability to write options which expire within three months
and to enter into closing transactions at a gain within three months of the
writing of options.
Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contract have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss (except for Section
1256 forward foreign currency contracts, which are subject to Section 988
Rules). The FUND may elect not to have this special tax treatment apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service has held in several private rulings that gains arising from
Section 1256 contracts will be treated for purposes of the Short-Short Gain Test
as being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss, or any net foreign currency loss
incurred after October 31 as if they had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the FUND's
taxable year, at least 50% of the value of the FUND's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the FUND has
not invested more than 5% of the value of the FUND's total assets in securities
of such issuer and as to which the FUND does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the FUND controls and which are
engaged in the same or similar trades or businesses. Generally, options (call or
put) with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option. However, with regard to forward
currency contracts, there does not appear to be any formal or informal authority
which identifies the issuer of such instrument.

<PAGE>

If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will he subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders. Excise Tax
on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the FUND may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability. FUND Distributions
The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for Federal income
tax purposes, but they will not qualify for the 70% dividends-received deduction
for corporations.
The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to distribute any
such amounts. Net capital gain distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the FUND prior to the date on which the shareholder acquired
his shares.
Investment income that may be received by the FUND from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the FUND to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the FUND's assets to be invested in various countries is not
known. If more than 50% of the value of the FUND's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations
(which is not likely), the FUND may elect to "pass through" to the FUND's
shareholders the amount of foreign taxes paid by the FUND. If the FUND so
elects, each shareholder would be required to include in gross income, even
though not actually received, his pro rata share of the foreign taxes paid by
the FUND, but would be treated as having paid his pro rata share of such foreign
taxes and would therefore be allowed to either deduct such amount in computing
taxable income or use such amount (subject to various Code limitations) as a
foreign tax credit against Federal income tax (but not both). For purposes of
the foreign tax credit limitation rules of the Code, each shareholder would
treat as foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the FUND representing income derived from
foreign sources. No deduction for foreign taxes could be claimed by an
individual shareholder who does not itemize deductions. Each shareholder should
consult his own tax adviser regarding the potential application of foreign tax
credits.

<PAGE>

Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the FUND will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the FUND (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the FUND reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the FUND, distributions of such
amounts will be taxable to the shareholder as dividends in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by the FUND
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the FUND) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. Federal
income tax consequences of distributions made (or deemed made) during the year.
The FUND will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the FUND that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient." Sale or Redemption of
Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the FUND within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the FUND will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently taxed at
a maximum rate 11.6% lower than the maximum rate applicable to ordinary income.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income. Foreign
Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the FUND is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
applicable treaty rate) on the gross income resulting from the FUND's election
to treat any foreign taxes paid by it as paid by its shareholders, but may not
be allowed a deduction against this gross income or a credit against this U.S.
withholding tax for the foreign shareholder's pro rata share of such foreign
taxes which it is treated as having been paid. Such a foreign shareholder would
generally be exempt from U.S. Federal income tax on gains realized on the sale
of shares of the FUND and capital gain dividends.

<PAGE>

If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
FUND will be subject to U.S. Federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the FUND with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the FUND,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. Federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the FUND under their particular
circumstances.
BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates,
and present positions with Blanchard Funds, and principal occupations.
<TABLE>
<CAPTION>

<S> <C>

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA Chairman and Trustee of the Fund; Chairman and
Birthdate: July 28, 1924 Trustee, Federated Investors, Federated Advisers, Federated Management, and Federated
Research; Chairman and Director, Federated Research Corp. and
Federated Global Research Corp.; Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Trustee of the Fund; Chairman of the Board,
Children's
Hospital of
Pittsburgh
formerly, Senior
Partner, Ernst &
Young LLP;
Director, MED 3000
Group, Inc.;
Director, Member
of Executive
Committee,
University of
Pittsburgh;
Director or
Trustee of the
Funds.
.

<PAGE>

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL Trustee of the Fund; President, Investment
Birthdate: June 23, 1937 Properties Corporation; Senior Vice-President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in private real estate ventures in
Southwest Florida; formerly, President, Naples Property Management, Inc. and
Northgate Village Development Corporation; Director or Trustee of the
Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA Trustee of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.

<PAGE>

Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA President, Treasurer and Trustee of the Fund;
Birthdate: October 22, 1930 Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of some
of the Funds; President, Executive Vice President and Treasurer of some
of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL Trustee of the Fund; Consultant; Former State
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation;
Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA Trustee of the Fund; Chairman, Meritcare, Inc.;
Birthdate: October 6, 1926 Director, Eat'N Park Restaurants, Inc.; Retired from the law firm of Miller,
Ament, Henny & Kochuba; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
Duquesne University
Pittsburgh, PA Trustee of the Fund; President, Law Professor,
Birthdate: December 20, 1932 Duquesne University; Consulting Partner, Mollica & Murray; Director or Trustee
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Trustee of the Fund; Professor, International
Birthdate: September 14, 1925 Politics; Management Consultant; Trustee, Carnegie Endowment for
International Peace, RAND Corporation, Online Computer Library Center, Inc.,
National Defense University, and U.S. Space Foundation; President Emeritus,
University of Pittsburgh; Founding Chairman; National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management
Advisory Board and Czech Management Center, Prague; Director or Trustee of the
Funds. .
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA Trustee of the Fund; Public
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning; Director or Trustee of the Funds.

<PAGE>

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA Executive Vice President of the Fund; President
Birthdate: April 11, 1949 and Trustee, Federated Investors, Federated Advisers, Federated Management,
and Federated Research:; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated
Shareholder Services; Director, Federated Services Company; President or
Executive Vice President of the Funds; Director or Trustee of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of
the Trust.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA Executive Vice President, and Secretary
Birthdate: October 26, 1938 of the Fund; Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company; Director,
Federated Services Company; President and Trustee, Federated Shareholder
Services; Director, Federated Securities Corp.; Executive Vice President
and Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA Vice President of the Fund; Executive Vice
Birthdate: May 17, 1923 President and Trustee, Federated
Investors,
Chairman and
Director,
Federated
Securities Corp.;
President or Vice
President of some
of the Funds;
Director or
Trustee of some of
the Funds.

<PAGE>

Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
Wesmark Funds; and World Investment Series, Inc. Fund Ownership As of August 1,
1997, Officers and Trustees own less than 1% of the outstanding shares of each
Fund. To the best knowledge of the FUND, as of August 1, 1997, the following
shareholder owned 5% or more of the outstanding shares of the FUND. Charles
Schwab & Co., Inc., San Francisco, CA owned approximately 2,666,139 shares
(5.78%).

</TABLE>
<TABLE>
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Officers and Trustees Compensation
<S> <C> <C>

<PAGE>

MANAGEMENT SERVICES
Manager to the Trust
The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which
is a wholly-owned subsidiary of Signet Banking Corporation. Because of the
internal controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.

<PAGE>

OFFITBANK is responsible for decisions to buy and sell securities for
the FUND's portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. OFFITBANK's primary consideration in effecting a security
transaction will be execution at the most favorable price. In selecting a
broker-dealer to execute each particular transaction, OFFITBANK will take the
following into consideration: the best net price available, the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the FUND on a continuing
basis. Accordingly, the price to the FUND in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Trustees may determine,
OFFITBANK shall not be deemed to have acted unlawfully or to have breached any
duty created under the Sub-Advisory Agreement or otherwise solely by reason of
its having caused the FUND to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if OFFITBANK
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to such policies
as the Board of Trustees may determine, OFFITBANK will purchase and sell foreign
currency and futures contracts and other securities for the FUND. OFFITBANK is
further authorized to allocate the orders placed by it on behalf of the FUND to
any affiliated broker-dealer of the FUND or to such brokers and dealers who also
provide research or statistical material, or other services to the FUND, VCM or
OFFITBANK. Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the Board
of Trustees of the Trust indicating the brokers to whom such allocations have
been made and the basis therefor.
Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by OFFITBANK
on behalf of the FUND pursuant thereto, is at all times subject to any
directives of the Board of Trustees of the Trust. VCM provides OFFITBANK with
written notice of all such directives, so long as the Sub-Advisory Agreement
remains in effect.
Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at its
expense and without cost to VCM or the FUND, a trading function in order to
carry out its obligations to place orders for the purchase and sale of portfolio
securities for the FUND.
Pursuant to the Sub-Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, OFFITBANK may perform services on
behalf of the FUND which are not required by the Sub-Advisory Agreement. Such
services will be performed on behalf of the FUND and OFFITBANK's cost in
rendering such services may be billed monthly to VCM, subject to examination by
VCM's independent accountants. Payment or assumption by OFFITBANK of any FUND
expense that OFFITBANK is not required to pay or assume under the Sub-Advisory
Agreement shall not relieve VCM or OFFITBANK of any of their obligations to the
FUND or obligate OFFITBANK to pay or assume any similar FUND expense on any
subsequent occasions.
Pursuant to the Sub-Advisory Agreement, for the services to be rendered
and the facilities furnished hereunder, VCM pays OFFITBANK a monthly fee at the
annual rate of .30% of the FUND's first $25 million of average daily net assets;
plus .25% of the FUND's average daily net assets in excess of $25 million but
less than $50 million; plus .20% of the FUND's average daily net assets in
excess of $50 million.

For the period from May 1, 1996 through September 30, 1996, the fee
paid by VCM to OFFITBANK was $154,199. For the fiscal year ended April 30, 1996,
the fee paid by VCM and the prior manager to OFFITBANK was $101,549. For the
fiscal years ended April 30, 1995 and 1994, the fees paid by the prior manager
to OFFITBANK were $27,254 and $45,697, respectively. Compensation under the
Sub-Advisory Agreement is calculated and accrued daily and the amounts of the
daily accruals are paid monthly. The compensation paid to OFFITBANK will not be
reduced by the amount of brokerage commissions received by OFFITBANK or its
affiliated broker-dealer pursuant to Section 17(e)(2) of the 1940 Act.

<PAGE>

The Sub-Advisory Agreement was approved by the then Trustees on March
24, 1995. The Sub-Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from year to
year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a majority of
the FUND's outstanding voting securities (as defined in Section 2(a)(42) of the
1940 Act), and (b) by the affirmative vote of a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons of a party to
the Sub-Advisory Agreement (other than as a Trustee of the Trust), by votes cast
in person at a meeting specifically called for such purpose.
The Sub-Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by vote of a
majority of the FUND's outstanding voting securities (as defined in Section 2(a)
(42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60) days' written notice
to the other party. The Sub-Advisory Agreement automatically terminates: (a) in
the event of its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Contract between the FUND and VCM shall terminate.
CUSTODIAN
Signet Trust Company is custodian for the securities and cash of the
Funds. Under the Custodian Agreement, Signet Trust Company holds the Funds'
portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives a fee at an annual rate
of .05% on the first $10 million of average net assets of each of the six
respective portfolios and .025% on average net assets in excess of $10 million.
There is a $20 fee imposed on each transaction. The custodian fee received
during any fiscal year shall be at least $1,000 per Fund.
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 from May 1, 1996 through
September 30, 1996, Federated Administrative Services earned $66,161 in
administrative services fees. For the fiscal year ended April 30, 1996,
Federated Administrative Services earned $81,964 in administrative services
fees. For the fiscal years ended April 30, 1995 and 1994, the administrative
services fee was included as part of the Management fee.
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Fund pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission pursuant
to the Investment Company Act of 1940. The Plan provides that the Funds'
Distributor shall act as the Distributor of shares, and it permits the payment
of fees to brokers and dealers for distribution and administrative services and
to administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the Fund and its shareholders and (ii) stimulate administrators to
render administrative support services to the Fund and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
For the period from May 1, 1996 through September 30, 1996 and for the fiscal
year ended April 30, 1996, the Fund accrued payments under the Plan amounting to
$173,100 and $140,612, of which $0 and $36,364, respectively, was waived.

<PAGE>

By adopting the Plan, the then Board of Trustees expected that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the Fund may be able
to curb sharp fluctuations in rates of redemptions and sales.
DESCRIPTION OF THE FUND
Shareholder and Trustee Liability. The FUND is a series of an entity of
the type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.
The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for any
act or obligation of the FUND and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a majority
of the outstanding shares of the FUND. The FUND may also be terminated upon
liquidation and distribution of its assets, if approved by a majority
shareholder vote of the FUND. Shareholders of the FUND shall be entitled to
receive distributions as a class of the assets belonging to the FUND. The assets
of the FUND received for the issue or sale of the shares of the FUND and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the FUND, and constitute the underlying
assets of the FUND.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the FUND and other information. In addition, shareholders will receive
annual financial statements audited by the FUND's
independent accountants.

Cusip 093212405
G01386-12