BLANCHARD
GROUP OF FUNDS
BLANCHARD
ASSET ALLOCATION FUND
Prospectus
November 30, 1997
BLANCHARD
BLANCHARD ASSET ALLOCATION FUND
(A PORTFOLIO OF BLANCHARD FUNDS)
PROSPECTUS
The shares of Blanchard Asset Allocation Fund (the "Fund") offered by this
prospectus represent interests in a diversified portfolio in Blanchard Funds
(the "Trust"), an open-end management investment company (a mutual fund). The
Fund seeks to maximize total return over the long term by allocating its assets
among stocks, bonds, short-term instruments, and other investments.
INVESTMENT PRODUCTS 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.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus if you have received this copy electronically,
free of charge, by calling 1-800-829-3863. To obtain other information, or make
inquiries about the Fund, contact Signet Financial Services, Inc. at
1-800-829-3863. The Statement of Additional Information, material incorporated
by reference into this document and other information regarding the Fund, is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization, on behalf of the Fund, pursuant to which, on or about February
27, 1998, all of the assets, and certain liabilities of the Fund would be
acquired in exchange for shares of a similarly managed fund (the "Acquiring
Fund") that is advised by an affiliate of First Union Corporation. The
reorganization would result in the liquidation and termination of the Fund.
Pursuant to the reorganization, holders of Shares of the Fund would receive,
tax-free, that number of shares of the Acquiring Fund having a value equal to
the value of such shareholders' Shares immediately prior to the reorganization.
Consummation of the reorganization is subject to approval of the shareholders of
the Fund at a meeting scheduled to be held on February 20, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1 INVESTOR SERVICES 22
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FINANCIAL HIGHLIGHTS 2 Automatic Withdrawal Plan 22
- ------------------------------------- Retirement Plans 22
GENERAL INFORMATION 5 Exchange Privilege 23
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WHO MAY WANT TO INVEST 5 HOW TO REDEEM 23
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INVESTMENT INFORMATION 5 General Information 24
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Investment Objective 5 SHAREHOLDER INFORMATION 25
Investment Policies 5 -------------------------------------
Additional Risk Considerations 16 Voting Rights 25
Investment Risks Associated with
Investment in Equity and Debt EFFECT OF BANKING LAWS 25
Securities 17 -------------------------------------
Portfolio Turnover 17 TAX INFORMATION 26
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BLANCHARD FUNDS INFORMATION 17 Federal Income Tax 26
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Management of the Fund 17 PERFORMANCE INFORMATION 26
Distribution of Fund Shares 19 -------------------------------------
Administration of the Funds 20 Total Return 26
Yield Information 27
NET ASSET VALUE 20 Distribution Rate 27
- ------------------------------------- Comparative Results 27
HOW TO INVEST 21
- ------------------------------------- FINANCIALS 29
Purchases by Mail 21 -------------------------------------
General Information 22 INDEPENDENT AUDITORS' REPORT 37
-------------------------------------
ADDRESSES 38
-------------------------------------
BLANCHARD ASSET ALLOCATION FUND
SUMMARY OF FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price).................................................................... None
Maximum Sales Load on Reinvested Dividends (as a percentage of offering
price).................................................................... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, as applicable)................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)....... None
Exchange Fee.............................................................. None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee (after waiver) (1)......................................... 0.00%
12b-1 Fees (2)............................................................ 0.00%
Other Expenses (after waivers) (3)........................................ 1.00%
Total Fund Operating Expenses (after waiver) (4)........................ 1.00%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver by the investment advisor. The advisor may terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 1.00%.
(2) The Fund has no present intention of paying or accruing 12b-1 fees during
the fiscal year ending September 30, 1998. If the Fund were paying or
accruing 12b-1 fees, the Fund would be able to pay up to 0.25% of its
average daily net assets.
(3) Other Expenses would be 5.90% absent the voluntary waivers of the custodian
fees, a portion of the administrative fees, and the assumption of other
operating expenses by the advisor.
(4) Total Annual Fund Operating Expenses would be 6.90%, absent the voluntary
waiver of the advisory fees, administrative fees, custodian fees, and the
assumption by the advisor described above in notes 1 and 3.
Total Operating expenses in the table above are based on expenses expected to
be incurred during the fiscal year ending September 30, 1998. The total
operating expenses were 1.00% for the fiscal year ended September 30, 1997 and
would have been 5.57% absent the waivers of the management fee, administrative
fee, custodian fee, and the assumption of other operating expenses by the
advisor.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER WILL BEAR EITHER DIRECTLY OR
INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES,
SEE "HOW TO INVEST." WIRE-TRANSFERRED REDEMPTIONS MAY BE SUBJECT TO AN
ADDITIONAL FEE.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- --------
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period. The Fund
charges no redemption
fees.......................................... $10 $32 $55 $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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR FISCAL YEAR ENDING SEPTEMBER 30, 1998.
BLANCHARD ASSET ALLOCATION FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 (A)
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.51 $10.00
- -------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------
Net investment income 0.61 0.17
- -------------------------------------------------
Net realized and unrealized gain on investments
and futures contracts 3.27 0.34
- ------------------------------------------------- ------ ------
Total from investment operations 3.88 0.51
- ------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -------------------------------------------------
Distributions from net investment income (0.31) --
- -------------------------------------------------
Distributions from net realized gain on invest-
ments
and futures contracts (0.45) --
- ------------------------------------------------- ------ ------
Total distributions (0.76) --
- ------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $13.63 $10.51
- ------------------------------------------------- ------ ------
TOTAL RETURN (B) 38.64% 5.10%
- -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------
Expenses 1.00% 1.00%*
- -------------------------------------------------
Net investment income 5.08% 5.39%*
- -------------------------------------------------
Expense waiver/reimbursement (c) 4.57% 6.24%*
- -------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------
Net assets, end of period (000 omitted) $4,669 $3,368
- -------------------------------------------------
Portfolio turnover 22% 33%
- -------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 6, 1996 (date of initial public
investment) to September 30, 1996.
(b) Based on net asset value.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- -------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees (the "Board" or "Trustees") has not
established separate classes of shares. A minimum initial investment of $3,000
($2,000 for qualified retirement plans, such as IRAs and Keoghs) is required.
The minimum subsequent investment requirement for the Fund is $200. The Fund is
advised by Virtus Capital Management, Inc.
Fund shares are sold and redeemed at net asset value.
WHO MAY WANT TO INVEST
- -------------------------------------------------------------------------------
The Fund is designed for long-term investors who are willing to tolerate market
fluctuation in pursuit of potentially high long-term returns. Since the Fund
uses options and futures to gain additional economic exposure to the stock and
bond markets, Fund share prices can fluctuate significantly. When a shareholder
sells his or her shares, they may be worth more or less than what the
shareholder paid for them.
INVESTMENT INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return over the long
term by allocating its assets among stocks, bonds, short-term instruments, and
other instruments. The investment objective cannot be changed without
shareholder approval. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
The Fund's investment policies permit investments in any type of domestic
security (and in foreign equity securities that trade on the United States
securities exchanges, and foreign income securities that are denominated in U.S.
dollars), in any proportion deemed appropriate by Mellon Capital Management
Corporation (the "Portfolio Adviser"), except as noted below. In addition, the
Fund may invest in options and futures contracts. The Portfolio Adviser has
broad latitude in selecting the class of investments and market sectors in which
the Fund will invest. The Fund is not a "balanced" fund and, therefore, will not
be required to continually maintain at least 25% of its assets in fixed income
senior securities. Unlike shareholders of other types of funds, a shareholder of
the Fund confers substantially more investment discretion on the Portfolio
Adviser, enabling the Portfolio Adviser to allocate the Fund's investments among
a wide variety of investment choices.
In seeking to maximize total return, the Portfolio Adviser allocates the Fund's
investments principally among three major asset classes (as discussed below):
stocks, bonds, and short-term instruments.
Options and futures may be used, separately or in combination, to gain
additional economic exposure to an asset class. See "Derivative Contracts and
Securities" and "Futures and Options on Futures."
The Portfolio Adviser regularly reviews the Fund's investment allocation, and
will vary such allocation to emphasize the asset classes that, in the Portfolio
Adviser's then-current judgment, provide the most favorable total return
outlook. While the Fund's investments will generally be spread among the asset
classes in varying proportions, there is no limitation on the amount that may be
invested in any one asset class, and the Fund may at times be fully invested in
stocks, bonds, or short-term instruments if the Portfolio Adviser perceives
those asset classes to offer the most favorable total return outlook. In
addition, options and futures may be used to gain additional economic exposure
to an asset class.
In making asset allocation decisions, the Portfolio Adviser will evaluate
projections of risk, market conditions, economic conditions, volatility, yields,
and returns, among others. The Portfolio Adviser seeks to diversify the Fund's
holdings within each asset class, in order to moderate risks. The Portfolio
Adviser will use database systems to help analyze past situations and trends,
portfolio management professionals to determine asset allocation, and its own
credit analysis as well as credit analyses provided by rating services.
The Fund seeks total return over the long term; however, asset shifts among
classes will be made at the Portfolio Adviser's discretion.
The short-term instrument class includes all types of securities and short-term
instruments with remaining maturities of three years or less. The Portfolio
Adviser will seek to maximize total return within the short-term instrument
class by taking advantage of yield differentials between different instruments
and issuers. Short-term instruments may include corporate debt securities such
as commercial paper and notes; asset-backed securities; government securities
issued by the United States government or its agencies or instrumentalities;
bank deposits and other financial institution obligations; repurchase agreements
involving any type of security; and other similar short-term instruments. These
instruments must be denominated in United States dollars.
The bond class includes all varieties of domestic fixed-income securities. The
Portfolio Adviser seeks to maximize total returns within the bond class by
adjusting the Fund's investments in securities with different credit qualities,
maturities, and coupon or dividend rates, and by seeking to take advantage of
yield differentials between securities. Securities in this class may include
bonds, notes, adjustable rate preferred stocks, convertible bonds,
mortgage-related and asset-backed securities, domestic government and government
agency securities, zero coupon bonds, and other intermediate and long-term
securities. As with the short-term class, these securities must be denominated
in United States dollars.
At no time will more than 20% of the Fund's assets in any asset category be
invested in foreign securities.
The stock class consists of a diversified portfolio of common stocks selected by
the Portfolio Adviser from those stocks which trade on the United States
securities exchanges, including those stocks which comprise the Standard &
Poor's 500 Composite Stock Price Index* (the "S&P 500 Index"), although the Fund
does not track the S&P 500 Index or attempt to track the S&P 500 Index's returns
by holding a representative sample of this Index.
The Fund may buy and sell options and futures contracts to manage its exposure
to changing security prices, as an efficient means of managing allocations
between asset classes and as a means of increasing total return. The Fund may
invest in options and futures based on any type of security or index, including
options and futures not traded on exchanges.
Some options and futures strategies, including selling futures, buying puts, and
writing calls, tend to hedge the Fund's investments against price fluctuations.
Other strategies including buying futures, writing puts, and buying calls, tend
to increase market exposure. Options and futures may be combined with each other
or with forward contracts, in order to adjust the risk and return
characteristics of an overall strategy.
In addition to strategies designed to hedge its portfolio, the Fund may purchase
put options or write call options on United States stock indexes and government
securities to attempt to profit from declines in stock or bond prices. The
Adviser may enter into these strategies when it anticipates negative returns
from the underlying stock or bond markets. If prices do not decline as
anticipated, the Fund may experience losses from short strategies that are not
offset by gains from its other investments.
CORPORATE DEBT SECURITIES. The corporate bonds, notes, and convertible debt
securities in which the Fund may invest must be rated, at the time of purchase,
BBB or better by Standard and Poor's Ratings Group ("S&P"), or Fitch Investors
Services ("Fitch"), or Baa or better by Moody's Investors Service, Inc.
(Moody's), or, if unrated, be of comparable quality as determined by the Fund's
adviser. (If a security's rating is reduced below the required minimum after the
Fund has purchased it, the Fund is not required to sell the security, but may
consider doing so.) Bonds rated "BBB" by Standard & Poor's or Fitch or "Baa" by
Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than higher rated bonds.
COMMERCIAL PAPER. The Fund may invest in commercial paper rated A-1 by S&P, or
Prime-1 by Moody's, or F-1 by Fitch and money market instruments (including
commercial paper) which are unrated but of comparable quality, including
Canadian Commercial Paper ("CCPs") and Europaper.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon bonds and zero
coupon convertible securities. The Fund may invest in zero coupon bonds in
order to receive the rate of return through the appreciation of the bond. This
application is extremely attractive in a falling rate environment as the price
of the bond rises rapidly in value as opposed to regular coupon bonds. A zero
coupon bond makes no periodic interest payments and the entire obligation
becomes due only upon maturity.
- --------
* "Standard & Poor's(R)", "S&P(R)", and "S&P 500(R)" and "Standard & Poor's 500"
are trademarks of McGraw Hill, Inc. and have been licensed for use by Mellon
Capital Management Corporation ("MCM").
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of the Fund or any member of the public
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do no entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds to the issuer at a stated price before
maturity.
Generally, the price of zero coupon securities are more sensitive to
fluctuations in interest than are conventional bonds and convertible securities.
In addition, federal tax law requires the holder of a zero coupon security to
recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and to avoid
liability of federal income taxes, the Fund will be required to distribute
income accrued from zero coupon securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
BANK INSTRUMENTS. The Fund may invest in instruments of domestic and foreign
banks and savings and loans (such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances) if they have capital,
surplus, and undivided profits over $100,000,000, or if the principal amount
of the instrument is insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC") or the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC. These instruments may include Eurodollar Certificates of Deposit
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time
Deposits ("ETDs").
- --------
Footnote continued from page 5.
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. S&P's only relationship to MCM is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to MCM or the Fund. S&P has no
obligation to take the needs of MCM or the owners of the Fund into
consideration in determining, composing or calculating the S&P 500 Index. S&P
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. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY MCM, OWNERS OF THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). The Fund may invest in ADRs. ADRs are
receipts typically issued by an American bank or trust company that evidence
ownership of underlying securities issued by a foreign issuer.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund expects to invest in floating
rate corporate debt obligations, including increasing rate securities. Floating
rate securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities is
then reset periodically (commonly every 90 days) to an increment over some
predetermined interest rate index. Commonly utilized indices include the
three-month Treasury bill rate, the six-month Treasury bill rate, the one-month
or three-month London Interbank Offered Rate (LIBOR), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S. Treasury
securities.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund will also invest in fixed rate
securities, including fixed rate securities with short-term characteristics.
Fixed rate securities with short-term characteristics are long-term debt
obligations but are treated in the market as having short maturities because
call features of the securities may make them callable within a short period of
time. A fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a fixed income
security approaching maturity, where the expectation of call or redemption is
high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES. The Fund may purchase variable rate demand notes.
Variable rate demand notes are long-term corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended to
cause the securities to trade at par. The interest rate may float or be adjusted
at regular intervals (ranging from daily to annually), and is normally based on
a published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more than
seven days prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S. Treasury; the
issuer's right to borrow an amount limited to a specific line of credit from the
U.S. Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities, the securities of which are
permissible investments which may not always receive financial support from the
U.S. government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Federal National Mortgage Association; Student Loan Marketing
Association; and Federal Home Loan Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed securities
rated BBB or Baa or better by a nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property.) There are currently four basic types of mortgagebacked securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; (iii) those issued by private issuers that represent an
interest in or are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form private credit
enhancement; and (iv) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). The Fund may invest in ARMS.
ARMS are pass-through mortgage-backed securities with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued by Ginnie
Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed
by the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Fund may invest in CMOs.
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but may be collateralized by whole loans or private pass-through
securities. CMOs may have fixed or floating rates of interest.
The Fund will invest only in CMOs that are rated BBB or Baa or better by a
nationally recognized statistical rating organization. The Fund may also
invest in certain CMOs which are issued by private entities such as investment
banking firms and companies related to the construction industry. The CMOs in
which the Fund may invest may be: (i) securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government;
(ii) securities which are collateralized by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; (iii)
collateralized by pools of mortgages in which payment of principal and
interest is dependent upon the underlying pool of mortgages with no U.S.
government guarantee; or (iv) other securities in which the proceeds of the
issuance are invested in mortgagebacked securities and payment of the
principal and interest is supported by the credit of any agency or
instrumentality of the U.S.
government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). The Fund may invest in
REMICs. REMICs are offerings of multiple class mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code, as amended. Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the REMIC.
A REMIC interest must consist of one or more classes of "regular interests,"
some of which may offer adjustable rates of interest, and a single class of
"residual interests." To qualify as a REMIC, substantially all the assets of
the entity must be in assets directly or indirectly secured principally by
real property.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities rated BBB or Baa or better by a nationally recognized
statistical rating organization including, but not limited to, interests in
pools of receivables, such as motor vehicle installment obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by nongovernmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-
backed and asset-backed securities generally pay back principal and interest
over the life of the security. At the time the Fund reinvests the payments and
any unscheduled prepayments of principal received, the Fund may receive a rate
of interest which is actually lower than the rate of interest paid on these
securities ("prepayment risks"). Mortgage-backed and asset-backed securities are
subject to higher prepayment risks than most other types of debt instruments
with prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-backed securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of assetbacked securities backed by motor
vehicle installment purchase obligations permit the servicer of such receivables
to retain possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
SHORT-TERM INSTRUMENTS. The Fund may invest in U.S. and foreign short-term
money market instruments, including:
. commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or
F-1 or F-2 by Fitch, and Europaper (dollar-denominated commercial paper
issued outside the United States) rated A-1, A-2, Prime-1, or Prime-2;
. instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances) if they have capital, surplus, and undivided profits
of over $100,000,000, or if the principal amount of the instrument is
insured by the Bank Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), or the Savings Association
Insurance Fund, which is also administered by the FDIC. These instruments
may include Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits
("ETDs");
. obligations of the U.S. government or its agencies or instrumentalities;
. repurchase agreements;
. securities of other investment companies; and
. other short-term instruments which are not rated but are determined by
the Adviser to be of comparable quality to the other obligations in which
the Fund may invest.
OPTIONS TRANSACTIONS. The Fund may engage in options transactions. The Fund may
purchase and sell options both to increase total return and to hedge against the
effect of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions.
The Fund may write (i.e., sell) covered call options and covered put options. By
writing a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the exercise
price. By writing a put option, the Fund becomes obligated during the term of
the option to purchase the securities underlying the option at the exercise
price if the option is exercised.
All options written by the Fund must be "covered" options. This means that, so
long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or in the case of call options on
U.S. Treasury bills, substantially similar securities) or have the right to
obtain such securities without payment of further consideration (or have the
right to sell the underlying securities without payment of further
consideration, or have segregated cash in the amount of any additional
consideration).
The Fund will be considered "covered" with respect to a put option it writes, if
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option (or has the
right to purchase a put option with an exercise price equal to or greater than
the exercise price of the written put option).
The principal reason for writing call or put options is to manage price
volatility (or risk). In addition, the Fund will attempt to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option which it retains whether or not the option is exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise. The Fund will write put options only on securities
which the Fund wishes to have in its portfolio and where the Fund has
determined, as an investment consideration, that it is willing to pay the
exercise price of the option.
The Fund may purchase put options and call options. Such investments in put and
call options may not exceed 5% of the Fund's assets, represented by the premium
paid, and will only relate to specific securities (or groups of specific
securities) in which the Fund may invest. The Fund may purchase call and put
options for the purpose of offsetting previously written call and put options of
the same series.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Put options may also be purchased to protect against
price movements in particular securities in the Fund's portfolio. A put option
gives the Fund, in return for a premium, the right to sell the underlying
securities to the writer (seller) at a specified price during the term of the
option. The Fund will purchase options only to the extent permitted by the
policies of state securities authorities in states where shares of the Fund is
qualified for offer and sale.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell futures contracts
to hedge against the effect of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions. In addition, the
Fund may use futures contracts as a means of increasing total return. Futures
contracts call for the delivery of particular instruments at a certain time in
the future. These instruments may include interest rate instruments, fixed
income securities, Eurodollars, or contracts based on stock indices. The seller
of the contract agrees to make delivery of the type of instrument called for in
the contract, and the buyer agrees to take delivery of the instrument at the
specified future time.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index future contract
is an agreement to which two parties agree to take or make delivery of an amount
of cash equal to the difference between the value of the index at the close of
the last trading day of the contract and the price at which the index contract
was originally written.
The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of selling a futures contract at a fixed price at
any time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option.
The Fund may also write put options and purchase call options on futures
contracts as hedges against rising purchase prices of portfolio securities. The
Fund will use these transactions to attempt to protect its ability to purchase
portfolio securities in the future at price levels existing at the time it
enters into the transactions. When the Fund writes a put option on a futures
contract, it is undertaking to buy a particular futures contract at a fixed
price at any time during a specified period if the option is exercised. As a
purchaser of a call option on a futures contract, the Fund is entitled (but not
obligated) to purchase a futures contract at a fixed price at any time during
the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. In addition, certain provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), may limit the
Fund's use of futures contracts and options. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged. When the Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
RISKS. When the Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options
to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its expectations
about the direction or extent of market factors such as stock price movements.
In these events, the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will
exist for any particular futures contract or option at any particular time. A
Fund's ability to establish and close out futures and options positions
depends on this secondary market.
SHORT SELLING. The Fund may make short sales with respect to futures, pursuant
to a fundamental policy. Short sales are transactions in which the Fund sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Fund must borrow the security
to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund replaces a borrowed security in connection with a short sale, the
Fund will be required to maintain a daily segregated account, containing cash or
U.S. government securities, at such a level that (i) the amount deposited in the
account plus the amount deposited with the broker as collateral will at all
times equal to at least 100% of the current value of the security sold short and
(ii) the amount deposited in the segregated account plus the amount deposited
with the broker as collateral will not be less than the market value of the
security at the time it was sold short.
SPECIAL RISKS ASSOCIATED WITH SHORT SELLING. The Fund will incur a loss as a
result of the short sale if the price of the security increases between the
date of the short sale and the date on which the Fund replaces the borrowed
security; conversely, the Fund will realize a gain if the security declines in
price between those dates. This result is the opposite of what one would
expect from a cash purchase of a long position in a security. The amount of
any gain will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of interest the Fund may be required
to pay in connection with a short sale.
LEVERAGE THROUGH BORROWING. The Fund may borrow for investment purposes
pursuant to a fundamental policy. This borrowing, which is known as
leveraging, generally will be unsecured, except to the extent the Fund enters
into the reverse repurchase agreements described below. The Investment Company
Act of 1940 requires the Fund to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings)
of 300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to
sell some of its portfolio holdings within three days to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
SPECIAL RISKS ASSOCIATED WITH LEVERAGING. Borrowing by the Fund creates an
opportunity for increased net income but, at the same time, creates special
risk considerations. For example, leveraging may exaggerate the effect on net
asset value of any increase or decrease in the market value of the Fund's
portfolio. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if
borrowing were not used, and, therefore, the amount available for distribution
to shareholders as dividends will be reduced. The Fund also may be required to
maintain minimum average balances in connection with such borrowing or to pay
a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate.
Among the forms of borrowing in which the Fund may engage is the entry into
reverse repurchase agreements with banks, brokers or dealers. These transactions
involve the transfer by the Fund of an underlying debt instrument in return for
cash proceeds based on a percentage of the value of the security. The Fund
retains the right to receive interest and principal payments on the security. At
an agreed upon future date, the Fund repurchases the security at an agreed-upon
price. In certain types of agreements, there is no agreed upon repurchase date,
and interest payments are calculated daily, often based on the prevailing U.S.
government securities or other high-quality liquid debt securities at least
equal to the aggregate amount of its reverse repurchase obligations, plus
accrued interest, in certain cases, in accordance with releases promulgated by
the Securities and Exchange Commission. The Securities and Exchange Commission
views reverse repurchase transactions as collateralized borrowings by the Fund.
These agreements, which are treated as if reestablished each day, are expected
to provide the Fund with a flexible borrowing tool.
REPURCHASE AGREEMENTS. The securities in which the Fund invests may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but will not own more than 3% of
the total outstanding voting stock of any investment company, invest more than
5% of total assets in any one investment company, or invest more than 10% of
total assets in investment companies in general. The Fund will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. It should be
noted that investment companies incur certain expenses such as management fees
and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. VCM will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Portfolio
Adviser deems it appropriate to do so. In addition, the Fund may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the Portfolio Adviser has determined are creditworthy under
guidelines established by the Trustees and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of the
securities loaned at all times. This policy is fundamental and cannot be changed
without the approval of holders of a majority of the Fund's shares.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies but which are
subject to restrictions on resale under federal securities law. However, the
Fund will limit investments in illiquid securities, including (where applicable)
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of its net asset.
BORROWING MONEY. The Fund will not borrow money directly or through reverse
repurchase agreements (arrangements in which the Fund sells a portfolio
instrument for a percentage of its cash value with an agreement to buy it back
on a set date) or pledge securities except, under certain circumstances, the
Fund may borrow up to one-third of the value of its total assets and pledge
assets as necessary to secure such borrowings. This policy is fundamental and
cannot be changed without the approval of holders of a majority of the Fund's
shares.
DIVERSIFICATION. With respect to 75% of the value of total assets, the Fund will
not invest more than 5% in securities of any one issuer, other than cash, cash
items or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities or acquire more than 10% of the outstanding voting
securities of any one issuer. This policy is fundamental and cannot be changed
without the approval of holders of a majority of the Fund's shares.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including, futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities that
incorporate the performance characteristics of these contracts are also referred
to as "derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies and limitations.
ADDITIONAL RISK CONSIDERATIONS
FOREIGN SECURITIES. The Fund may invest in foreign securities. Investing in
foreign securities can carry higher returns and risks than those associated
with domestic investments.
FOREIGN COMPANIES. Differences between investing in foreign and U.S. companies
include:
. less publicly available information about foreign companies;
. the lack of uniform financial accounting standards applicable to foreign
companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign
securities exchanges, brokers, listed companies, and banks;
. generally lower foreign securities market volume;
. the likelihood that foreign securities may be less liquid or more
volatile;
. generally higher foreign brokerage commissions;
. possible difficulty in enforcing contractual obligations or obtaining
court judgments abroad because of differences in the legal systems;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments in some
countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad. Although the Fund is
unaware of any current restrictions which would materially adversely affect
its ability to meet its investment objective and policies, investors are
advised that these U.S. government policies could be reinstituted.
INVESTMENT RISKS ASSOCIATED WITH INVESTMENT IN EQUITY AND DEBT SECURITIES
As with other mutual funds that invest in equity securities, the Fund is subject
to market risks. That is, the possibility exists that common stocks will decline
over short or even extended periods of time. The United States equity market
tends to be cyclical, experiencing both periods when stock prices generally
increase and periods when stock prices generally decrease.
In addition, with respect to fixed income securities, investors should be aware
that prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Portfolio Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Portfolio Adviser does not anticipate that the Fund's
annual turnover rate will exceed 200% under normal market conditions. A higher
rate of portfolio turnover may lead to increased costs and may also result in
higher taxes paid by the Fund's shareholders.
BLANCHARD FUNDS INFORMATION
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MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the Trust and for exercising
all of the powers of the Fund except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
MANAGER. Virtus Capital Management, Inc. ("VCM"), the Fund's Manager, is
responsible for managing the Fund and overseeing the investment of its assets.
In addition, VCM selects, monitors, and evaluates the Fund's Portfolio
Adviser. VCM will review the Portfolio Adviser's performance record
periodically, and will make exchanges, if necessary, subject to Board and
shareholder approval.
MANAGEMENT FEES. VCM receives an annual management fee of 1.00% of the Fund's
average net assets. The fee paid by the Fund, while higher than the management
fee paid by other mutual funds in general, is comparable to fees paid by other
mutual funds with similar objectives and policies. The management contract
provides for the voluntary waiver of expenses by the VCM from time to time. VCM
can terminate this voluntary waiver of expenses at any time at its sole
discretion.
VCM'S BACKGROUND. VCM, a Maryland corporation formed in 1995, is a wholly-owned
subsidiary of Signet Banking Corporation. Signet Banking Corporation is a
multi-state holding company which has provided investment management services
since 1956. On July 18, 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, had more than $1.9 billion in assets under management as of
September 30, 1997. As part of its regular banking operations, Signet Bank may
make loans to public companies. Thus, it may be possible, from time to time, for
the Fund to hold or acquire the securities of issuers which are also lending
clients of Signet Bank. The lending relationship will not be a factor in the
selection of securities.
THE PORTFOLIO ADVISER. Pursuant to the terms of an investment sub-advisory
agreement between the Fund's Manager, VCM, and Mellon Capital Management
Corporation, a Delaware corporation (the "Portfolio Adviser "), the Portfolio
Adviser furnishes portfolio advisory services for the Fund. Under the terms of
the sub-advisory agreement, the Portfolio Adviser has discretion to purchase and
sell securities for the Fund, except as limited by the Fund's investment
objective, policies and restrictions. Although the Portfolio Adviser's
activities are subject to general oversight by VCM and the Trustees, selection
of specific securities in which the Fund may invest are made by the Portfolio
Adviser. For the services provided and the expenses incurred by the Portfolio
Adviser pursuant to the sub-advisory agreement, the Portfolio Adviser is
entitled to receive an annual sub-advisory fee equal to .50% of the Fund's
average daily net assets up to $50 million; .375% on net assets between $50
million and $200 million, and .25% on net assets in excess of $200 million,
payable by VCM, in quarterly installments. The Portfolio Adviser may elect to
waive some or all of its fee. In no event shall the Fund be responsible for any
fees due to the Portfolio Adviser for its services to VCM.
THE PORTFOLIO ADVISER'S BACKGROUND. The Portfolio Adviser, which is located at
595 Market Street, 30th Floor, San Francisco, CA 94105, is a registered
investment advisory firm founded in 1983.
The Portfolio Adviser manages assets of approximately $46 billion. The Portfolio
Adviser is an indirect, wholly-owned subsidiary of Mellon Bank Corporation.
Dr. Tom Hazuka and Dr. Charles Jacklin are responsible for the day-to-day
management of the Fund.
Dr. Tom Hazuka is Executive Vice President of Mellon Capital Management
Corporation. As Chief Investment Officer, he is responsible for the portfolio
management and trading of domestic and international equities and fixed
income, as well as Tactical Asset Allocation strategies. Dr. Hazuka joined
Mellon Capital Management in 1986, as Manager of Fixed Income, in order to
create a fixed income capability. He was also given responsibility for Equity
Portfolio Management in 1988, and for Equity Arbitrage Trading in 1989. Dr.
Hazuka worked at Wells Fargo Investment Advisors from 1981 through 1986
primarily in a research capacity. Dr. Hazuka received his Ph.D. in Finance
from Stanford University in 1981. He received an M.B.A. from the University of
Connecticut in 1973, and a B.S. in Electrical Engineering from Stevens
Institute of Technology in 1966.
Dr. Jacklin is Senior Vice President and Director of Asset Allocation
Strategies at Mellon Capital Management Corporation. He is responsible for
overseeing domestic, international and global asset allocation strategies.
Prior to joining Mellon Capital Management Corporation, Dr. Jacklin was on the
finance faculty of Stanford University's Graduate School of Business. In
addition, he has been an instructor for the Stanford--London Business School
International Investment Management Program, the Stanford Financial Management
Program, and the Pacific Coast Banking School. For the academic year 19901991,
Dr. Jacklin served as Senior Staff Economist for Financial Markets and Banking
for the President's Council of Economic Advisers in Washington D.C. While at
the Council, he had primary responsibility for all matters related to financial
markets and banking. Prior to joining Stanford in 1987, Dr. Jacklin also served
on the finance faculty at the University of Chicago's Graduate School of
Business. From 1978 through 1980, Dr. Jacklin worked as a consultant with Ernst
& Ernst. Dr. Jacklin received his Ph.D. in Finance from Stanford University in
1985, and M.B.A. from the University of Illinois in 1978, and a B.S. in
Mathematics, cum laude, from the University of Maryland in 1976.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. According to the provisions of a distribution plan adopted
pursuant to Investment Company Act Rule 12b-1, the Distributor may select
brokers and dealers to provide distribution and administrative services as to
shares of the Fund. The Distributor may also select administrators (including
financial institutions, fiduciaries, custodians for public funds and investment
advisers) to provide administrative services. Administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests for its shares.
Brokers, dealers and administrators will receive fees based upon shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined from time to time by the Board,
provided that for any period the total amount of fees representing an expense to
the Fund shall not exceed an annual rate of .25% of the average daily net assets
of shares of the Fund held in 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 Fund from the assets of the Fund.
The distributor will, periodically, uniformly offer to pay cash or promotional
incentives in the form of trips to sales seminars at luxury resorts, tickets or
other items to all dealers selling shares of the Fund. Such payments will be
predicated upon the amount of shares of the Fund that are sold by the dealers.
Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of the Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee based upon the average net asset value of shares of the Fund of their
customers invested in the Trust for providing administrative services. This fee,
if paid, will be reimbursed by VCM and not the Trust.
GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings association) from being an underwriter
or distributor of most securities. In the event the Glass-Steagall Act is deemed
to prohibit depository institutions from acting in the administrative capacities
described above or should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate changes in the
administrative services.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Fund with certain administrative personnel and
services necessary to operate the Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Administrative
Services provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
AVERAGE COMBINED AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE TRUST/BLANCHARD PRECIOUS
AINISTRATIVE FEEM METALS FUND, INC. AND THE VIRTUS FUNDS
---------------- --------------------------------------
<S> <C>
.15% on the first $250 million
.125% on the next $250 million
.10% 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. Federated Administrative Services may voluntarily waive a portion of
its fee.
BROKERAGE TRANSACTIONS. Subject to the supervision of the Board and VCM,
decisions to buy and sell specific securities for the Fund are made by its
Portfolio Adviser. The Portfolio Adviser is authorized, subject to most
favorable price and execution, to place portfolio transactions with brokerage
firms that provide assistance in the distribution of Fund shares and/or supply
research. The Board has also authorized the Fund to allocate brokerage to the
Portfolio Adviser or an affiliated broker-dealer as well as to use the
Distributor, on an agency basis, or affiliates thereof, to effect portfolio
transactions which are executed on United States and foreign stock exchanges or
which are traded in the over-the-counter market. The Fund has adopted certain
procedures incorporating the standards of Rule 17e-1 of the 1940 Act, which
require that the commissions paid to the Portfolio Adviser or the Distributor or
to affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee, or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." From time to time, the Fund may purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Fund. Transactions are allocated to
various dealers selected by VCM or the Portfolio Adviser primarily on the basis
of prompt execution of orders at the most favorable prices. Transactions may be
allocated based on the sale of Fund shares. The Fund has determined that the
foregoing arrangements are in the best interest of the Fund's shareholders.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
HOW TO INVEST
- -------------------------------------------------------------------------------
You may purchase shares of any Fund from Federated Securities Corp., the Fund's
principal Distributor. You may also purchase shares from broker-dealers who have
entered into a dealer agreement with the Distributor at net asset value, which
is determined as of the close of trading (normally 4:00 p.m., New York time) on
the New York Stock Exchange. If your order is received after the above time,
your shares will be purchased at the net asset value of the next business day.
The Fund determines the net asset value of its shares on each day that the New
York Stock Exchange is open for business and on such other days as there is
sufficient trading in its securities to affect materially its net asset value
per share.
The minimum initial investment requirement is $3,000 and the minimum initial
investment requirement for qualified pension plans (IRAs, Keoghs, etc.) is
$2,000. The minimum investment requirement for additional investments is at
least $200 per investment. (The foregoing minimum investment requirements may be
modified or waived at any time at our discretion.)
PURCHASES BY MAIL
To purchase shares of the Fund by mail, simply send a completed Application
(included with this Prospectus or obtainable from the Fund), to the Blanchard
Group of Funds, c/o Signet Financial Services, Inc., P.O. Box 26301, Richmond,
VA 23260, together with a check payable to the Fund in payment for the shares.
If you need assistance in completing the application, call 1-800-829-3863.
All purchases must be made in U.S. dollars and checks must be drawn on a United
States bank. Payment for shares may not be made by third party checks; however,
second party checks are acceptable when properly endorsed. We reserve the right
to limit the number of checks for one account processed at one time. If your
check does not clear, your purchase will be canceled and you could be liable for
any losses or fees incurred. Payments transmitted by check are accepted subject
to collection at full face amount.
Order by mail are considered received after payment by check is converted into
Federal Funds. This is generally the next business day after Signet Financial
Services, Inc. ("Signet") receives the check.
PURCHASE BY WIRE. You may also purchase shares by bank wire. For opening new
accounts in this manner, please call 1-800-829-3863 (toll free) before wiring
your funds, and furnish the following information: the account registration and
address, and your taxpayer identification number (for individuals, a Social
Security number). When making additional investments by wire to your existing
accounts, please provide your account numbers. You must include your name and
telephone number, the amount being wired and the name of the wiring bank with
both new and existing account purchases.
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 transferal of funds from a bank checking account that you may
designate. All such purchases require a minimum of $100 per transaction. Call
1-800-829-3863 for information and forms required to establish these Plans.
BY TELEPHONE. This service allows you to purchase additional shares quickly and
conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, Blanchard will automatically debit your
predesignated bank account for the desired amount. To establish the telephone
purchase option on your new account you must complete the section on the
application and attach a "voided" check from your bank account. If your account
is already established, please call 1-800-829-3863 to request the appropriate
form. This option will become effective ten business days after the form is
received.
GENERAL INFORMATION
Dividends on the Fund are declared and paid annually. Capital gains realized by
the Fund, if any, will be distributed once every 12 months.
All ordinary income, dividends and capital gains distributions, if any, are
automatically reinvested at net asset value in additional Fund shares unless we
receive written notice from you, at least 30 days prior to the record day of
such distribution, requesting that your dividends and distributions be
distributed to you in cash. See "Tax Matters".
We reserve the right to suspend the offering of Fund shares for a period of
time. We also reserve the right to reject any purchase order.
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. Share certificates are not issued.
INVESTOR SERVICES
- -------------------------------------------------------------------------------
AUTOMATIC WITHDRAWAL PLAN
If you purchase $10,000 or more of Fund shares, you may establish an Automatic
Withdrawal Plan to authorize a specified dollar amount to be paid periodically
to a designated payee. Under this Plan, all income dividends and capital gains
distributions will be reinvested in shares in your account at the applicable
payment dates' closing net asset value.
Your specified withdrawal payments are made monthly or quarterly in any amount
you choose, but not less than $100 per month or $300 quarterly. Please note that
any redemptions of your shares, which may result in a gain or loss for tax
purposes, may involve the use of principal, and may eventually use up all of the
shares in your account. Such payments do not provide a guaranteed annuity and
may be terminated for any shareholder by the Fund if the value of the account
drops below $10,000 due to transfer or redemption of shares. In such a case, the
shareholder will be notified that the withdrawal payments will be terminated.
The cost of administering the Automatic Withdrawal Plan for the benefit of
shareholders is the Fund expense.
RETIREMENT PLANS
We offer a Prototype Pension and Profit Sharing Plan, including Keogh Plans,
IRAs SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan support
services are available by calling 1-800-829-3863.
EXCHANGE PRIVILEGE
You may exchange your Fund shares for shares of another Fund in the Blanchard
Group of Funds or for Investment Shares of The Virtus Funds, on the basis of
relative net asset values per share at the time of exchange. No fees are charged
when you exchange from one Fund to another within the Blanchard Group of Funds
or into one of the aforementioned portfolios of The Virtus Funds. Before making
an exchange, you should read the Prospectus concerning the Fund into which your
exchange is being made.
To request an exchange by telephone, simply call 1-800-829-3863, prior to 4:00
p.m. New York time. Exchanges can be made in this manner only after you have
completed and sent to the Transfer Agent the telephone exchange authorization
form that is included on the New Account Application accompanying this
Prospectus and only if your account registration has not changed within the last
30 days.
It is the Funds' policy to mail to you at your address of record, within five
business days after any telephone call transaction, a written confirmation
statement of the transaction. All calls will be recorded for your protection. As
a result of the Funds' policy, neither the Fund nor its transfer agent will be
responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. As a result of the
Fund's policy, neither the Fund nor Signet will be responsible for any claims,
losses or expenses for acting on telephone instructions that they believe to be
genuine.
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 effecting an exchange. The dollar amount of an exchange must meet the
initial investment requirement of the Fund into which the exchange is being
made. All subsequent exchanges into that Fund must be at least $1,000. We may
modify or suspend the Exchange Privilege at any time upon 60 days' written
notice.
Any exchange of shares is, in effect, a redemption of shares in one Fund and a
purchase of the other fund. You should consider the possible tax effects of an
exchange. To prevent excessive trading between Funds to the disadvantage of
other shareholders, we reserve the right to modify or terminate this Privilege
with respect to any shareholder.
A completed Purchase Application must be received by Signet before the Automatic
Withdrawal Plan, or Exchange Privilege may be used.
HOW TO REDEEM
- -------------------------------------------------------------------------------
You may redeem your shares on any business day at the next determined net asset
value calculated after your redemption request has been accepted by Signet as
described below.
BY TELEPHONE. You may redeem you shares by telephone by calling 1-800-8293863,
prior to 4:00 p.m. New York time. All calls will be recorded. Redemption 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 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 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.
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
must be endorsed and must accompany the redemption request. Signatures on
redemption request for any amount in excess of $25,000 and endorsed share
certificates submitted for redemption must be accompanied by signature
guarantees from any eligible guarantor institution approved by 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 association, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by Signet pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
Signet at (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 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.
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the operation of the Trust or the Fund and
for the election of Trustees under certain circumstances. As of October 29,
1997, Bova & Company, Richmond, VA, owned 93.64% of the voting securities of the
Fund and, therefore, may, for certain purposes, be deemed to control the Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
EFFECT OF BANKING LAWS
- -------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such a customer. Signet Trust Company is subject to such
banking laws and regulations.
Signet Trust Company believes, based on the advice of its counsel, that VCM may
perform the services for the Fund contemplated by its advisory agreement with
the Trust without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of such or future statutes and regulations, could
prevent VCM from continuing to perform all or a part of the above services for
its customers and/or the Fund. If it were prohibited from engaging in these
customer-related activities, the Trustees would consider alternative advisers
and means of continuing available investment services. In such event, changes in
the operation of the Fund may occur, including possible termination of any
automatic or other Fund share investment and redemption services then being
provided by VCM. It is not expected that existing shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
VCM is found) as a result of any of these occurrences.
TAX INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
other portfolios of Blanchard Funds will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distribution, including capital gains, received. This
applies whether dividends and distributions are received in cash or as
additional shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
Advertisements and communications to investors regarding the Fund may cite
certain performance and ranking information and may make performance comparisons
to other funds or to relevant indices, as described below. In addition, the
Fund's Portfolio Adviser and other outside analysts may, from time to time,
report on the market outlook for their investments as well as comment on the
historical reasons for these investments including as a hedge against inflation.
The Fund's performance may be calculated both in terms of total return and on
the basis of current yield over any period of time and may include a computation
of the Fund's distribution rate.
TOTAL RETURN
Cumulative total return data is computed by considering all elements 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 the Fund
for performance purposes). Average annual total return figures are annualized
and, therefore, represent the average annual percentage change over the period
in question.
YIELD INFORMATION
The term "yield" refers to the income generated by an investment over a
one-month or 30-day period. This income is computed by 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 Fund may also
quote tax-equivalent yield, which shows the taxable yield that an investor would
have to earn before taxes to equal the Fund's tax-free yield. The taxequivalent
yield is calculated by dividing the Fund's tax-exempt yield by the result of one
minus any combination of the stated federal, state, or city tax rate. If only a
portion of the Fund's income is tax-exempt only that portion is adjusted in the
calculation.
DISTRIBUTION RATE
The Fund may also quote distribution rates and/or effective distribution rates
in sales literature or other shareholders communications. The Fund's
distribution rate is computed by dividing the most recent monthly distribution
per share annualized by dividing the distribution rate by the ratio used to
annualize the distribution and reinvesting the resulting amount for a full year
on the basis of such ratio. The effective distribution rate will be higher than
the distribution rate because of the compounding effect of the assumed
reinvestment. The Fund's distribution rate may differ from its yield because the
distribution rate may contain net investment income and other items of income
(such as returns of capital), while yield reflects only earned interest and
dividend items of income.
COMPARATIVE RESULTS
From time to time in advertisements or sales material, the Fund may discuss its
performance rating and may be compared to the performance of other mutual funds
or mutual fund indexes as published by widely recognized independent mutual fund
reporting services such as Lipper Analytical Services, Inc., CDS and
Morningstar, Inc. The Fund may also discuss the past performance and ranking of
its Portfolio Adviser, and compare its performance to various investment
indexes. The Fund may use performance information as reported in publications of
general interest, national, financial and industry publications such as Forbes
or Money Magazine and various investment newsletters such as Donoghue's Money
Letter. In addition, the Fund may compare its total return to the total return
of indexes of U.S. markets or world markets, to that of other mutual funds,
individual country indexes, or other recognized indexes.
From time to time, the Fund may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Funds Magazine. The Fund may also compare the historical
returns on various investments, performance indexes of those investments and
economic indicators. In addition, the Fund may reprint articles about the Fund
and provide them to prospective shareholders. The Distributor may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Fund may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be presented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparisons
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Fund, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Fund's investments.
Performance information will vary from time to time and past results are not
necessarily representative of future results. You should remember that the
Fund's performance is a function of portfolio managers in selecting the type and
quality of securities in which the Fund may invest, and is affected by
operation, distribution and marketing expenses.
BLANCHARD ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
CONTRACTS VALUE
---------- ------------------------------------------------------ ----------
<C> <S> <C>
COMMERCIAL PAPER--9.6%
-----------------------------------------------------------------
$ 150,000 Ford Motor Credit Corp., 5.50%, 12/12/1997 $ 148,483
------------------------------------------------------
150,000 General Electric Capital Corp., 5.50%, 10/8/1997 149,840
------------------------------------------------------
150,000 New Center Asset Trust, 5.53%, 10/6/1997 149,885
------------------------------------------------------ ----------
TOTAL COMMERCIAL PAPER (IDENTIFIED COST $448,074) 448,208
------------------------------------------------------ ----------
CORPORATE NOTES--3.2%
-----------------------------------------------------------------
Hertz Corp., 5.50%, 12/12/1997 (IDENTIFIED COST 148,484
150,000 $148,350)
------------------------------------------------------ ----------
OPTIONS--8.7%
-----------------------------------------------------------------
4,000 (a)Call option on U.S. Long Bond, expires 11/14/1997 53,125
strike at 102
------------------------------------------------------
1,000 (a)Call option on S&P 500, expires 12/19/1997 strike 122,250
at 840
------------------------------------------------------
2,500 (a)Call option on S&P 500, expires 12/19/1997 strike 232,187
at 875
------------------------------------------------------ ----------
TOTAL OPTIONS (IDENTIFIED COST $194,838) 407,562
------------------------------------------------------ ----------
U.S. TREASURY--59.0%
-----------------------------------------------------------------
2,200,000 United States Treasury Bond, 8.75%, 5/15/2017
(IDENTIFIED COST $2,575,027) 2,754,125
------------------------------------------------------ ----------
(B) REPURCHASE AGREEMENT--18.6%
-----------------------------------------------------------------
868,352 CS First Boston, 6.05%, dated 9/30/1997, due 10/1/1997
(AT AMORTIZED COST) 868,352
------------------------------------------------------ ----------
TOTAL INVESTMENTS (IDENTIFIED COST $4,234,641) (C) $4,626,731
------------------------------------------------------ ----------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $4,234,641. The
unrealized appreciation of investments on a federal tax basis amounts to
$392,090 at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($4,669,456) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
BLANCHARD ASSET ALLOCATION FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------
Investments in repurchase agreements $ 868,352
- ------------------------------------
Investments in securities 3,758,379
- ------------------------------------ ----------
Total investments in securities, at value
(identified and tax cost $4,234,641) $4,626,731
- ------------------------------------------------
Income receivable 72,858
- ------------------------------------------------ ----------
Total assets 4,699,589
- ------------------------------------------------
LIABILITIES:
- ------------------------------------
Payable for daily variation margin 3,625
- ------------------------------------
Accrued expenses 26,508
- ------------------------------------ ----------
Total liabilities 30,133
- ------------------------------------------------ ----------
NET ASSETS for 342,488 shares outstanding $4,669,456
- ------------------------------------------------ ----------
NET ASSETS CONSIST OF:
- ------------------------------------------------
Paid in capital $3,438,577
- ------------------------------------------------
Net unrealized appreciation of investments and
futures contracts 398,915
- ------------------------------------------------
Accumulated net realized gain on investments
and futures contracts 673,129
- ------------------------------------------------
Undistributed net investment income 158,835
- ------------------------------------------------ ----------
Total Net Assets $4,669,456
- ------------------------------------------------ ----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PROCEEDS PER SHARE:
- ------------------------------------------------
$4,669,456 / 342,488 shares outstanding $13.63
- ------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD ASSET ALLOCATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------
Interest $ 243,779
- ------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------
Management fee $ 40,068
- ------------------------------------------------------
Administrative personnel and services fee 75,000
- ------------------------------------------------------
Custodian fees 10,132
- ------------------------------------------------------
Transfer and dividend disbursing agent fees and
expenses 31,276
- ------------------------------------------------------
Directors'/Trustees' fees 1,750
- ------------------------------------------------------
Auditing fees 12,868
- ------------------------------------------------------
Legal fees 1,750
- ------------------------------------------------------
Portfolio accounting fees 39,469
- ------------------------------------------------------
Share registration costs 18
- ------------------------------------------------------
Printing and postage 7,080
- ------------------------------------------------------
Miscellaneous 3,790
- ------------------------------------------------------ ----------
Total expenses 223,201
- ------------------------------------------------------
Waivers and reimbursement--
- --------------------------------------------
Waiver of management fee $ (40,068)
- --------------------------------------------
Waiver of administrative personnel and
services fee (49,932)
- --------------------------------------------
Waiver of custodian fees (10,132)
- --------------------------------------------
Reimbursement of other operating expenses (83,000)
- -------------------------------------------- ---------
Total waivers and reimbursement (183,132)
- ------------------------------------------------------ ----------
Net expenses 40,069
- ------------------------------------------------------------------ ----------
Net investment income 203,710
- ------------------------------------------------------------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
CONTRACTS:
- ------------------------------------------------------------------
Net realized gain on investments and futures contracts 914,849
- ------------------------------------------------------------------
Net change in unrealized appreciation of investments and futures
contracts 185,672
- ------------------------------------------------------------------ ----------
Net realized and unrealized gain on investments and futures
contracts 1,100,521
- ------------------------------------------------------------------ ----------
Change in net assets resulting from operations $1,304,231
- ------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BLANCHARD ASSET ALLOCATION FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996(A)
- -------------------------------------------------- ------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------
OPERATIONS--
- --------------------------------------------------
Net investment income $ 203,710 $ 53,879
- --------------------------------------------------
Net realized gain (loss) on investments and futures contracts ($966,874 and
$68,583 net gain, respectively, as computed for federal tax
purposes) 914,849 (98,943)
- --------------------------------------------------
Net change in unrealized appreciation/depreciation
of
investments and futures contracts 185,672 213,243
- -------------------------------------------------- ---------- ----------
Change in net assets resulting from operations 1,304,231 168,179
- -------------------------------------------------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------
Distributions from net investment income (98,754) --
- --------------------------------------------------
Distributions from net realized gains (142,777) --
- -------------------------------------------------- ---------- ----------
Change in net assets resulting from
distributions to shareholders (241,531) --
- -------------------------------------------------- ---------- ----------
SHARE TRANSACTIONS--
- --------------------------------------------------
Proceeds from sale of shares 11 3,200,250
- --------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 238,434 --
- --------------------------------------------------
Cost of shares redeemed (18) (100)
- -------------------------------------------------- ---------- ----------
Change in net assets resulting from share
transactions 238,427 3,200,150
- -------------------------------------------------- ---------- ----------
Change in net assets 1,301,127 3,368,329
- --------------------------------------------------
NET ASSETS:
- --------------------------------------------------
Beginning of period 3,368,329 --
- -------------------------------------------------- ---------- ----------
End of period (including undistributed net
investment
income of $158,835 and $53,879, respectively) $4,669,456 $3,368,329
- -------------------------------------------------- ---------- ----------
</TABLE>
(a)For the period from June 6, 1996 (date of initial public investment) to
September 30, 1996.
(See Notes which are an integral part of the Financial Statements)
BLANCHARD ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
Blanchard Group of Funds consists of Blanchard Funds (the "Trust") and Blanchard
Precious Metals Fund, Inc. (the "Company") which are registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of six portfolios. The
financial statements included herein are only those of Blanchard Asset
Allocation Fund (the "Fund"), a diversified portfolio. The financial statements
of the other portfolios are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The investment objective of the Fund is to maximize total
return over the long term by allocating its assets among stocks, bonds,
short-term instruments, and other instruments.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities, listed corporate bonds,
options, futures, other fixed income and asset-backed securities, and unlisted
securities and private placement securities are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions
to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-
issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FUTURES CONTRACTS--The Fund purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is
required to deposit in a segregated account a specified amount of cash or U.S.
government securities. Futures contracts are valued daily and unrealized gains
or losses are recorded in a "variation margin" account. Daily, the Fund
receives from or pays to the broker a specified amount of cash based upon
changes in the variation margin account. When a contract is closed, the Fund
recognizes a realized gain or loss. For the year ended September 30, 1997, the
Fund had realized gains on future contracts of $343,540. Future contracts have
market risks, including the risk that the change in the value of the contract
may not correlate with changes in the value of the underlying securities.
At September 30, 1997, the Fund had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
EXPIRATION UNREALIZED
DATE CONTRACTS TO RECEIVE POSITION APPRECIATION
------------- ------------------------- -------- ------------
<S> <C> <C> <C>
December 1997 1 S&P 500 December Future Long $6,825
</TABLE>
OPTIONS TRANSACTIONS--The Fund may purchase over-the-counter put and call
options to hedge against the effects of the fluctuations in interest rates and
other market conditions. The risk associated with purchasing and option is
that the Fund pays a premium whether or not the option is exercised.
Additionally, the Fund bears the risk of loss of premium and change in market
value should the counterparty not perform under the contract. Put and call
options purchased are accounted for in the same manner as portfolio
securities. For the period ended September 30, 1997, the Fund had realized
gains on options of $531,419.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
- -------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996*
- ---------------------------------------------- ------------- -------------
<S> <C> <C>
Shares sold 1 320,643
- ----------------------------------------------
Shares issued to shareholders in payment
of distributions declared 21,855 --
- ----------------------------------------------
Shares redeemed (1) (10)
- ---------------------------------------------- ------ -------
Net change resulting from share transactions 21,855 320,633
- ---------------------------------------------- ------ -------
</TABLE>
*For the period from June 6, 1996 (date of initial public investment) to
September 30, 1996.
(4) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE--Virtus Capital Management Inc., the Fund's manager (the
"Manager"), receives for its services an annual management fee equal to 1.00%
of the Fund's average daily net assets. The Manager may voluntarily choose to
waive any portion of its fee and/or reimburse certain operating expenses of
the Fund. The Manager can modify or terminate this voluntary waiver and/or
reimbursement at any time at its sole discretion.
SUB-ADVISORY FEE--Under the terms of a sub-advisory agreement between the
Manager and the Mellon Capital Management Corporation (the "Portfolio
Adviser"), the Portfolio Adviser receives an annual fee from the Manager equal
to 0.50% of the Fund's average daily net assets up to $50 million, 0.375% of
the Fund's net assets between $50 million and $200 million, and 0.25% on net
assets in excess of $200 million, payable by the Manager, in quarterly
installments.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the
Fund with certain administrative personnel and services. The fee paid to FAS
is based on the level of average combined aggregate net assets of the Trust,
the Blanchard Precious Metals Fund Inc., and the Virtus Funds, all of which
are advised by the Manager, for the period. The administrative fee received
during the period of the Administrative Services Agreement shall be at least
$75,000 per portfolio. FAS may voluntarily choose to waive a portion of its
fee.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% of the average daily net assets of the
Fund, annually, to reimburse FSC. As of September 30, 1997, the fund accrued
no distribution services fee and has no intention of accruing this fee.
- -------------------------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ"), through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee is paid to FSSC is based on size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Fund's custodian. The fee is based
on the level of the Fund's average daily net assets for the period, plus
out-of-pocket expenses. The custodian may voluntarily choose to waive a
portion of its fee.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 989,383
- --------- -----------
SALES $ 1,429,728
- --------- -----------
</TABLE>
(6) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this merger, First Union will succeed to the investment advisory
and administrative functions formerly performed for the funds by various units
of Signet and various unaffiliated parties.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganization would result in the liquidation
and termination of the Funds. Pursuant to the reorganization, shareholders of
the Funds will receive, tax-free, the number of shares of the acquiring fund
having a value equal to the value of their shares immediately prior to the
reorganization. Consummation of the reorganization is subject to approval of the
shareholders of the Funds.
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Directors of
Blanchard Asset Allocation Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Blanchard Asset Allocation Fund (the "Fund") as
of September 30, 1997, and the related statements of operations for the year
then ended, the statements of changes in net assets for the years ended
September 30, 1997 and the period from June 6, 1996 to September 30, 1996, and
the financial highlights for the periods presented. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Blanchard Asset
Allocation Fund as of September 30, 1997, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
As more fully described in Note 6, in November, 1997 the Fund is expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Fund would be acquired in exchange for shares or
a similarly managed Fund that is advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Fund.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Blanchard Asset Allocation Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Manager
Virtus Capital Management, Inc. 707 East Main Street
Suite 1300
Richmond, Virginia 23219
- ---------------------------------------------------------------------------
Portfolio Adviser
Mellon Capital Management 595 Market Street, 30th Floor
Corporation San Francisco, California 94105
- ---------------------------------------------------------------------------
Custodian
Signet Trust Company 7 North Eighth Street
Richmond, Virginia 23219
- ---------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Federated Investors Tower
Company Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------
</TABLE>
The Blanchard Group of Funds are available through Signet Financial Servies,
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.
(2194)
CUSIP 093212504
G01386-06 (11/97)
B L A N C H A R D
Blanchard Asset Allocation Fund
(A Portfolio of Blanchard Funds)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of the Blanchard Asset Allocation Fund dated November 30, 1997. This
Statement is not a prospectus itself. You may request a copy of the
prospectus, or a paper copy of this Statement of Additional Information, if
you have received it electronically, free of charge by calling
1-800-829-3863.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1997
VIRTUS CAPITAL MANAGEMENT, INC.
INVESTMENT ADVISER
FEDERATED SECURITIES CORP.
Distributor
CUSIP 093212504
G01386-15 (11/97)
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
1
General Information About the Fund 1
Investment Objectives and Policies 1
Portfolio Turnover 5
Investment Limitations 5
Blanchard Asset Allocation Fund Management 8
Fund Ownership 11
Trustees Compensation 12
Trustee Liability 12
Investment Advisory Services 12
Manager of the Fund 12
Management Fees 13
Portfolio Adviser of the Fund 13
Sub-Advisory Fees 13
Other Services 13
Administrative Services 13
Custodian 13
Transfer Agent and Dividend Disbursing Agent 13
Independent Accountants 13
Brokerage Transactions 13
Purchasing Shares 14
Distribution Plan 14
Administrative Arrangements 14
Conversion to Federal Funds 14
Determining Net Asset Value 14
Determining Market Value of Securities14
Trading in Foreign Securities 15
Exchange Privilege 15
Requirements for Exchange 15
Making an Exchange 15
Redeeming Shares 15
Redemption in Kind 15
Massachusetts Partnership Law 16
Tax Status 16
The Fund's Tax Status 16
Foreign Taxes 16
Shareholders' Tax Status 16
Total Return 17
Yield 17
Performance Comparisons 17
Economic and Market Information 18
Appendix 19
<PAGE>
General Information About the Fund
The Fund is a portfolio of Blanchard Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
January 24, 1986. The Declaration of Trust permits the Trust to offer separate
series of shares of beneficial interest representing interests in separate
portfolios of securities. Investment Objectives and Policies The Fund's
investment objective is to maximize total return over the long term by
allocating its assets among stocks, bonds, short-term instruments and other
instruments. The investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the policies described below may be
changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
Warrants
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. The Fund will not invest more than 5% of the value of its
total assets in warrants. No more than 2% of this 5% may be in warrants which
are not listed on the New York or American Stock Exchanges. Warrants required in
units or attached to securities may be deemed to be without value for purposes
of this policy. Convertible Securities
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds of
appropriate rating or comparable quality (as described in the prospectus) that
can be used, in whole or in part, customarily at full face value, in lieu of
cash to purchase the issuer's common stock. When owned as part of a unit along
with warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality. The Fund
will exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. Otherwise, the Fund will
hold or trade the convertible securities. In selecting convertible securities
for the Fund, the adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument and the investment potential
of the underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the adviser considers
numerous factors, including the economic and political outlook, the value of the
security relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and practices.
<PAGE>
Collateralized Mortgage Obligations ("CMOs")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs -- most of the CMOs in which the Fund invests use the same basic
structure: (1) Several classes of securities are issued against a pool of
mortgage collateral.
The most common structure contains four tranches of securities: the first
three (A, B, and C bonds) pay interest at their stated rates beginning with
the issue date and the final tranche (Z bonds) typically receives any
excess income from the underlying investments after payments are made to
the other tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity tranche (or A bonds). When
those securities are completely retired, all principal payments are then
directed to the next-shortest-maturity tranche (or B bonds). This process
continues until all of the tranches have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. One or more of the
tranches often bear interest at an adjustable rate. The interest portion of
these payments is distributed by the Fund as income, and the principal portion
is reinvested. When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees. Lending of
Portfolio Securities
As a fundamental policy of the Fund, the Fund may lend portfolio securities. The
collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
<PAGE>
Restricted and Illiquid Securities
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The ability of the Trustees to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive
safe-harbor for certain secondary market transactions involving registration for
resales of otherwise restricted securities to qualified institutional buyers.
The Rule was expected to further enhance the liquidity of the secondary market
for securities eligible for resale under the Rule. The Fund believes that the
staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Trustees. The Trustees may consider the following
criteria in determining the liquidity of certain restricted securities: o the
frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Futures Contracts
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. For example, in the fixed income
securities market, prices move inversely to interest rates. A rise in the rate
means a drop in the price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. The Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates. The Fund may use
futures contracts for hedging purposes and to increase total return. "Margin" in
Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. A futures contract held by the Fund
is valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker of
the amount one would owe the other if the futures contract expired. In computing
its daily net asset value, the Fund will mark to market its open futures
positions. The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
<PAGE>
Put Options on Futures Contracts
The Fund may purchase put options on futures contracts to protect portfolio
securities against decreases in value resulting from market factors, such as an
anticipated increase in interest rates. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or before a future
date whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an option,
the related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its option
by selling an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sales of the second option will be large enough to
offset both the premium paid by the Fund for the original option plus the
decrease in value of the hedged securities. Alternatively, the Fund may exercise
its put option to close out the position. To do so, it would simultaneously
enter into a futures contract of the type underlying the option (for a price
less than the strike price of the option) and exercise the option. The Fund
would then deliver the futures contract in return for payment of the strike
price. If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the premium paid
for the contract will be lost. The Fund may also write put options on futures
contracts to protect against rising purchase prices of portfolio securities. The
Fund may use put options on futures contracts for hedging purposes and to
increase total return. Call Options on Futures Contracts
In addition to purchasing put options on futures, the Fund may write listed and
over-the-counter call options on futures contracts to hedge its portfolio
against an increase in market interest rates or a decrease in stock prices. When
the Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures contract) at
the fixed strike price at any time during the life of the option if the option
is exercised. As stock prices fall or market interest rates rise, causing the
prices of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the value of
the Fund's call option position to increase. In other words, as the underlying
futures price goes down below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the premium received for the
option. This premium can substantially offset the drop in value of the Fund's
portfolio securities. Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then substantially offset the decrease in value
of the hedged securities. The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on futures contracts if, in
the aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation. The Fund may also purchase call options on futures contracts as
hedges against rising purchase prices of portfolio securities. The Fund may use
call options on futures contracts for hedging purposes and to increase total
return. Stock Index Options
The Fund may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market value of the stocks included in the index. The
effectiveness of purchasing stock index options will depend upon the extent to
which price movements in the Fund's portfolio correlate with price movements of
the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of the option on
an index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
availability of the Fund's adviser to predict correctly movements in the
directions of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the prices
of individual stocks. Over-the-Counter Options
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements pursuant to a
fundamental policy. These transactions are similar to borrowing cash. In a
reverse repurchase agreement, the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time. When effecting reverse repurchase
agreements, liquid assets of the Fund in a dollar amount sufficient to make
payment for the obligations to be purchased are segregated at the trade date.
These securities are marked to market daily and are maintained until the
transaction is settled. Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal year ended September 30, 1997,
and for the period from June 6, 1996 (the fund's date of initial public
investment) to September 30, 1996, the Fund's portfolio turnover rates were 22%
and 33%, respectively.
Investment Limitations
Buying on Margin
The Fund will not purchase securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions, except
that the Fund may make margin payments in connection with its use of
financial futures contracts or related options and transactions.
Borrowing Money
The Fund will not issue senior securities, except that (a) the Fund may
borrow money directly or through reverse repurchase agreements in amounts
up to one-third of the value of its total assets, including the amount
borrowed, either (i) as a temporary, extraordinary, or emergency measure
or to facilitate management of the Fund by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous, or (ii) for investment purposes.
The Fund will not purchase any securities for the purpose stated under
clause "(i)" above while any borrowings in excess of 5% of its total
assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: (a) the
deposit of assets in escrow in connection with the writing of covered put
or call options and the purchase of securities on a when-issued or delayed
delivery basis; and (b) collateral arrangement with respect to (i) the
purchase and sale of stock options (and options on stock indices) and (ii)
initial or variation margin for futures contracts. Margin deposits for the
purchase and sale of futures contracts and related options are not deemed
to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more than
5% of the value of its total assets would be invested in the securities of
that issuer, or if it would own more than 10% of the outstanding voting
securities of that issuer.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
Selling Short
The Fund will not sell securities short unless (1) it owns, or has a right
to acquire, an equal amount of such securities or (2) if it does not own
the securities, it has segregated an amount of its other assets equal to
the lesser of the market value of the securities sold short or the amount
required to acquire such securities. While in a short position, the Fund
will retain the securities, rights, or segregated assets.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies, and limitations or the
Trust's Declaration of Trust.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities).
Issuing Senior Securities
The Fund will not issue senior securities except for delayed-delivery and
when-issued transactions and futures contracts, each of which might be
considered a senior security.
The above investment limitations are fundamental and cannot be changed without
shareholder approval. The following investment limitations may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of continuous
operations, including the operation of any predecessor.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of the
Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, and invest no more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of investment
companies only in open-market transactions involving only customary
broker's commissions. However, these limitations are not applicable if the
securities are acquired in a merger, consolidation, or acquisition of
assets.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
certain restricted securities not determined by the Trustees to be liquid.
Purchasing Securities to Exercise Control
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
Writing Covered Call Options
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan association having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
"cash items."
<PAGE>
Blanchard Asset Allocation Fund Management
Officers and Trustees are listed with their addresses, birthdates, present
positions with Blanchard Group-Signet, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
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
Birthdate: June 23, 1937
Trustee
President, Investment 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
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
<PAGE>
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, 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
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
<PAGE>
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; 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
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
<PAGE>
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings
of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 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; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; 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
Officers and Trustees own less than 1% of the Fund's outstanding shares. As of
October 29, 1997, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund: Bova & Company, Richmond, VA, owned
approximately 320,714 shares (93.64%).
<PAGE>
Trustees' Compensation
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +
John F. Donahue $0 $0 for the Fund Complex
Chairman and Trustee
Thomas G. Bigley $1,011 $3,217 for the Fund Complex
Trustee
John T. Conroy, Jr. $1,114 $3,538 for the Fund Complex
Trustee
William J. Copeland $1,114 $3,538 for the Fund Complex
Trustee
James E. Dowd $1,114 $3,538 for the Fund Complex
Trustee
Lawrence D. Ellis, M.D. $1,011 $3,217 for the Fund Complex
Trustee
Edward L. Flaherty, Jr. $1,114 $3,538 for the Fund Complex
Trustee
Edward C. Gonzales $0 $0 for the Fund Complex
President and Trustee
Peter E. Madden $1,011 $3,217 for the Fund Complex
Trustee
John E. Murray, Jr. $1,011 $3,217 for the Fund Complex
Trustee
Wesley W. Posvar $1,011 $3,217 for the Fund Complex
Trustee
Marjorie P. Smuts $1,011 $3,217 for the Fund Complex
Trustee
* The aggregate compensation for the fiscal year ended 9/30/97 is provided for
the Trust which is comprised of five portfolios.
+ 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 9/30/97.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office. Investment Advisory Services
Manager of the Fund
The Fund's manager is Virtus Capital Management, Inc. ("VCM" or "Adviser"). VCM
is a wholly-owned subsidiary of Signet Banking Corporation. Because of internal
controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or it affiliates' lending relationships with an issuer. VCM shall not be
liable to the Trust, the Fund, or any shareholder of the Fund for any losses
that may be sustained in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Trust. Management Fees
For its management services, VCM receives an annual management fee as described
in the prospectus. For the fiscal year ended September 30, 1997, and for the
period from June 6, 1996 (date of intial public investment) to September 30,
1996, VCM earned $40,068 and $9,999, respectively, all of which was voluntarily
waived.
Portfolio Adviser of the Fund
The Fund's portfolio adviser is Mellon Capital Management Corporation
("Portfolio Adviser"). The Portfolio Adviser shall not be liable to the manager,
the Trust, the Fund, or any shareholder of the Fund for any losses that may be
sustained in the purchase, holding, lending, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Manager. Sub-Advisory Fees
For its sub-advisory services, the Portfolio Adviser receives an annual
sub-advisory fee as described in the Prospectus.
For the fiscal year ended September 30, 1997, and for the period from June 6,
1996 (date of initial public investment) to September 30, 1996, the Portfolio
Adviser earned $20,034 and $0, respectively.
Other Services
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal year ended September 30, 1997, and for the period
from June 6, 1996 (date of initial public investment) to September 30, 1996,
Federated Administrative Services earned $75,000 and $23,836, respectively, of
which $49,932 and $23,836 ,respectively, was voluntarily waived.
Custodian
Signet Trust Company, Richmond, Virginia, is custodian for the securities and
cash of the Fund. Under the Custodian Agreement, Signet Trust Company holds the
Fund's portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. The custodian receives an annual fee equal to
.16% of the Fund's average daily net assets. For the fiscal year ended September
30, 1997 and period ended September 30, 1996, fees were $10,132 and $2,605,
respectively, all of which were waived. Transfer Agent and Dividend Disbursing
Agent Federated Shareholder Services Company, Pittsburgh, Pennsylvania, is
transfer agent for the shares of the Fund and dividend disbursing agent for the
Fund. Independent Accountants Deloitte & Touche LLP, 2500 One PPG Place,
Pittsburgh, Pennsylvania 15222-5401 has been appointed the independent public
accountants for the Fund. Brokerage Transactions The Adviser may select brokers
and dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: o advice as to
the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are reasonable
in relationship to the value of the brokerage and research services provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser might otherwise have paid,
it would tend to reduce their expenses.
For the fiscal year ended September 30, 1997, and for the period from June 6,
1996 (date of initial public investment) to September 30, 1996, the Fund paid no
brokerage commissions.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value on days the New York Stock Exchange and the Federal
Reserve Wire System are open for business. The minimum initial investment in the
Fund by an investor is $3,000, except for qualified pension plans (IRAs, Keoghs,
etc.), which have a minimum initial investment of $2,000. Distribution Plan
With respect to the Fund, the Trust has adopted a Plan pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of the Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of the Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers and others for such services. The Trustees expect that the
adoption of the Plan will result in the sale of a sufficient number of shares so
as to allow the Fund to achieve economic viability. It is also anticipated that
an increase in the size of the Fund will facilitate more efficient portfolio
management and assist the Fund in seeking to achieve its investment objectives.
For the fiscal year ended September 30, 1997, and for the period from June 6,
1996 (date of initial public investment) to September 30, 1996, the Fund accrued
no distribution service fees. The Fund has no present intention of paying or
accruing 12b-1 fees during the fiscal year ending September 30, 1998.
Administrative Arrangements
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as the Fund may reasonably request. Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Determining Net Asset Value
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. Net asset value is not
determined on (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; or (iii) the following holidays: New
Year's Day, President's Day, Good Friday, Martin Luther King Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Determining
Market Value of Securities
Market or fair values of the Fund's securities are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices;
o for bonds and other fixed income securities, as determined by an independent
pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. The Fund will value
options at their market values established by the exchanges at the close of
option trading on such exchanges unless the Trustees determine in good faith
that another method of valuing option positions is necessary. Over-the-counter
put options will be valued at the mean between the bid and the asked prices.
Covered call options will be valued at the last sale price on the national
exchange on which such option is traded. Unlisted call options will be valued at
the latest bid price as provided by brokers. Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to me closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are portfolio securities, these
securities may be valued at their fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others. Exchange
Privilege Requirements for Exchange
Shareholders using the exchange privilege must exchange shares having a net
asset value of at least $1,000. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made. This
privilege is available to shareholders resident in any state in which the fund
shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. Further information on the
exchange privilege and prospectuses may be obtained by calling 1-800-829-3863.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee. Redeeming Shares The Fund redeems shares at the
next computed net asset value after the Funds' transfer agent receives the
redemption request. Redemptions will be made on days on which the Fund computes
its net asset value. Redemption requests cannot be executed on days on which the
New York Stock Exchange is closed or on federal holidays restricting wire
transfers. Redemption procedures are explained in the prospectus under "How to
Redeem." Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective fund's portfolio. To satisfy
registration requirements in a particular state, redemption in kind will be made
in readily marketable securities to the extent that such securities are
available. If this state's policy changes, the Fund reserves the right to redeem
in kind by delivering those securities it deems appropriate. Redemption in kind
will be made in conformity with applicable Securities and Exchange Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable. The Trust has elected to be governed by Rule 18f-1 under
the Investment Company Act of 1940 under which the Trust is obligated to redeem
shares for any one shareholder in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period. Redemption in kind is
not as liquid as a cash redemption. If redemption is made in kind, shareholders
receiving their securities and selling them before their maturity could receive
less than the redemption value of their securities and could incur certain
transaction costs. Massachusetts Partnership Law Under certain circumstances,
shareholders may be held personally liable as partners under Massachusetts law
for acts or obligations of the Trust. To protect shareholders, the Trust has
filed legal documents with Massachusetts that expressly disclaim the liability
of shareholders for such acts or obligations of the Trust. These documents
require notice of this disclaimer to be given in each agreement, obligation, or
instrument the Trust or its Trustees enter into or sign. In the unlikely event a
shareholder is held personally liable for obligations of the Trust, the Trust is
required to use its property to protect or compensate the shareholder. On
request, the Trust will defend any claim made and pay any judgment against a
shareholder for any act or obligation of the Trust. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from its assets. Tax Status The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements: o derive at least 90% of its gross income from dividends,
interest, and gains from
the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject. Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation and to the extent designated by the Fund as
so qualifying. These dividends and any short-term capital gains are taxable as
ordinary income. Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held Fund shares.
Total Return
The average annual total return for the Trust is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the offering price per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the quarterly reinvestment of all dividends and distributions.
The Fund's average annual total return for the fiscal year ended September 30,
1997, and for the period from June 6, 1996 (the date of initial public
investment) to September 30, 1997, was 38.64% and 33.03%, respectively.
Yield
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders. To the
extent that financial institutions and broker/dealers charge fees in connection
with services provided in conjunction with an investment in the Fund, the
performance will be reduced for those shareholders paying those fees.
The Fund's yield for the thirty-day period ended September 30, 1997, was 4.52%.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and maximum offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return. Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include: o
Lipper Analytical Services, Inc., ranks funds in various fund categories by
making
comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "growth"
category in advertising and sales literature.
o Standard & Poor's Daily Stock Price Index 500 Common Stocks, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard
& Poor's Index assumes reinvestment of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.Advertisements
may quote performance information which does not reflect the effect of the sales
charge.
Economic and Market Information
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.
<PAGE>
Appendix
Standard and Poor's Ratings Group Corporate Bond Ratings
AAA-Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. AA-Debt rated
"AA" has a very strong capacity to pay interest and repay principal and differs
from the higher rated issues only in small degree. A-Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB-Debt rated "BBB" is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. BB, B-Debt rated BB or B, is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates a low
degree of speculation. NR-Indicates that no public rating has been requested,
that there is insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular type of obligation as a matter of
policy. Plus (+) or Minus(-):-The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories. Moody's Investors Service, Inc., Corporate Bond Ratings
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa-Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group, they
comprise what are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities. A-Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa-Bonds which are rated Baa are considered
as medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. Ba-Bonds which are Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class. B-Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. NR-Not rated by Moody's. Moody's
applies numerical modifiers, 1, 2 and 3 in each generic rating classification
from Aa through B in its corporate or municipal bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
<PAGE>
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA-Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings. BBB-Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings. BB-Bonds are considered speculative.
The obligor's ability to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying its debt service
requirements. B-Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue. NR-NR indicates that Fitch does not
rate the specific issue. Plus (+) or Minus (-): Plus and minus signs are used
with a rating symbol to indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not used in the AAA
category. Standard and Poor's Ratings Group Commercial Paper Ratings A-1-This
highest category indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-2-Capacity for
timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated A-1. Moody's
Investors Service, Inc., Commercial Paper Ratings Prime-1-Issuers rated Prime-1
(or related supporting institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: leading market positions in well
established industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; well-established access to a range of financial
markets and assured sources of alternative liquidity. Prime-2-Issuers rated
Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. Fitch Investors
Service, Inc., Short-Term Ratings F-1+-Exceptionally Strong Credit Quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment. F-1-Very Strong Credit Quality. Issues assigned to
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+. F-2-Good Credit Quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment but the margin of
safety is not as great as the F-1+ and F-1 ratings.
Dear Shareholders,
Enclosed please find the Annual Report for the Blanchard Asset Allocation Fund
for the fiscal year ended September 30, 1997.
["Graphic representation A6 omitted. See Appendix."]
The Blanchard Asset Allocation Fund had a total return (price change plus
reinvested income) of 38.64% for the 12 months ended September 30, 1997. By
comparison, the Standard & Poor's 500 Index (the "S&P 500") returned 40.48%, and
the Lehman Long Term Treasury Index increased by 13.24% during the period from
September 30, 1996 to September 30, 1997.+
Early in the fiscal year, economic data pointed towards a cooling economy with
benign inflation. With monetary policy on hold, both the stock and bond markets
prospered during the first two months of the fiscal first quarter. However,
investor confidence was shaken early in December, 1996 following comments by the
Federal Reserve Board (the "Fed") Chairman about "irrational exuberance" in the
financial markets. Consequently, both markets pulled back in late December.
+The S&P 500 is an unmanaged index of common stocks in industrial,
transportation, and financial and public utility companies. Lehman Brothers Long
Term Treasury Index is an unmanaged index comprised of U.S. Treasury securities,
publicly issued by the U.S. Treasury. It is limited to securities with final
maturities of 10 years or longer. Investments cannot be made in an index.
During the first quarter of the fiscal year, October through December 1996,
the Fund returned 9.78% compared to the S&P 500, which gained 8.40% over the
same period. The fund's outperformance by 1.38% versus the S&P 500 was due in
part to its relatively large allocation towards stocks. In addition, by November
25, 1996, the fund had reduced its bond holdings by 20% just prior to a rise in
bond yields of 20 basis points. The fund started the quarter with an asset mix
of 80% equities, 70% bonds, (50%) cash, and ended the quarter after the 20%
reduction in bonds with 80% in equities, 50% bonds, (30%) cash.
The equity market jumped by 7% in the first two months of 1997, only to fall
by over 4% in March. For the second fiscal quarter, the fund returned 0.15%,
while the S&P 500 returned 2.6%. Bond yields rose on investors' increased fears
of inflation and in anticipation of tightening by the Fed. Finally, at the end
of March, the Fed tightened monetary policy in a preemptive strike against
inflation.
As bond yields rose during January in anticipation of tightening by the Fed,
the fund increased its bond holdings by 20% on January 27, 1997 to an asset mix
of 80% equities, 70% long treasuries and (50%) cash. The funds' underperformance
versus the S&P 500 in this quarter was due in part to the fund's investments in
long treasuries which fell after the fund had increased its holdings.
During the third fiscal quarter, the stock and bond markets reacted
enthusiastically as economic statistics released during the quarter showed that
the pace of economic activity was slowing. Fears of imminent inflation pressures
and tighter monetary policy fell decidedly. As the quarter closed, the markets
were buoyed by low inflation, low unemployment and continued high corporate
earnings.
While bond yields remained attractive during the early part of the fiscal
quarter, the expected return on equities declined substantially. In response to
a sustained signal favoring bonds, on May 6, 1997 the fund increased its bond
allocations by 10% to a new asset mix of 70% equities, 80% long treasuries and
(50%) cash. The fund underperformed the S&P 500, due in part to the unusual
strength of the equity market at a time when more of the Fund's assets were
invested in treasuries. The fund returned 16.55% for the third quarter, versus a
total return of 17.48% for the S&P 500 Index. Long treasuries posed a gain of
5.56% for the period of April through June, 1997.
The financial markets continued their strong performance during the final
fiscal quarter despite concerns that a tight labor market could eventually exert
inflationary pressure on wages and prices. The bond market reacted positively to
the economic reports released during this quarter, and yields steadily declined
throughout the period. Total return for this period was 5.76% for the Lehman
Long Term Treasury Index. The fund returned 9.21% for the fourth fiscal quarter,
versus a return of 7.52% for the S&P 500.
While the expected return on equities showed only a modest decline during the
final fiscal quarter, the yield on treasury bonds declined rather significantly
from 6.8% on June 30 to 6.38% on September 19, 1997. The large drop in bond
yields prompted the Asset Allocation Model to call for an immediate de-levering
in the portfolio and a reduction in bond exposure. Consequently, on September
19, we reduced the fund's bond exposure by 10% and shifted the fund's asset
allocation from 70% equities, 80% long treasuries and (50%) cash to a net asset
mix of 70% equities, 70% long treasuries and (40%) cash.
For the fourth fiscal quarter, the fund's outperformance versus the S&P 500
was due in part to the strength of both the equity and bond markets at a time
when the Blanchard Asset Allocation Fund continued to generate combined asset
class exposure over 100% by holding equity and bond call options. The fund ended
the quarter with an asset mix of 70% stocks, 70% bonds and (40%) cash.
Thank you for your continued patronage.
Sincerely,
[LOGO]
Thomas B. Hazuka, Ph.D.
Chief Investment Officer
Mellon Capital Management Corporation
Portfolio Manager of the
Blanchard Asset Allocation Fund
This report must be preceded or accompanied by the fund's prospectus dated
November 30, 1997, and, together with financial statements contained therein,
constitutes the fund's annual report.
CUSIP 093212504
G01386-14 (11/97)
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Global Growth Fund (the "Fund") is represented by a broken line. The Standard &
Poor's 500 Index (the "S&P 500") is represented by a solid line. The line graph
is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 4/30/98 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$20,006 and $44,582, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, five-year, ten-year and the since inception (6/1/86) periods ended
9/30/97, which were 13.20%, 10.51%, 6.44% and 8.97%, respectively.
A2. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Precious Metals Fund (the "Fund") is represented by a broken line. The Toronto
Stock Exchange Gold & Silver Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Toronto Stock Exchange Gold & Silver
Index. The "x" axis reflects computation periods from 6/23/88 to 9/30/97. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
Toronto Stock Exchange Gold & Silver Index; the ending values were $11,167and
$13,936, respectively. The legend in the upper middle quadrant of the graphic
presentation indicates the Fund's Average Annual Total Return for the one-year,
five-year, and the since inception (6/23/88) periods ended 9/30/97, which were
(15.24%), 9.96%, and 1.27%, respectively.
A3. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Income Fund (the "Fund") is represented by a broken line. The Merrill
Lynch Aggregate Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the Merrill Lynch Aggregate Bond Index.
The "x" axis reflects computation periods from 11/2/92 to 9/30/97. The "y" axis
reflects the cost of the investment. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the Merrill Lynch
Aggregate Bond Index; the ending values were $14,003 and $14,387, respectively.
The legend in the upper middle quadrant of the graphic presentation indicates
the Fund's Average Annual Total Return for the one-year, and the since inception
(11/2/92) periods ended 9/30/97, which were 9.53% and 7.25%, respectively.
A4. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Short-Term Flexible Income Fund (the "Fund") is represented by a broken line.
The Merrill Lynch Short-Term Govenment Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Merrill Lynch Short-Term
Govenment Index. The "x" axis reflects computation periods from 4/16/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Merrill Lynch Short-Term Govenment Index; the ending values were $12,940
and $12,709, respectively. The legend in the upper middle quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, and the since inception (4/16/93) periods ended 9/30/97, which were
7.24% and 5.95%, respectively.
A5. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Flexible Tax-Free Bond Fund (the "Fund") is represented by a broken line. The
Lehman Brothers Current Municipal Bond Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Fund and the Lehman Brothers Current
Municipal Bond Index. The "x" axis reflects computation periods from 8/12/93 to
9/30/97. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Current Municipal Bond Index; the ending values were
$13,553 and $12,485, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year, and the since inception (8/12/93) periods ended 9/30/97, which
were 9.59% and 7.63%, respectively.
A6. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Blanchard
Asset Allocation Fund (the "Fund") is represented by a broken line. The Standard
& Poor's 500 Index (the "S&P 500") is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a $10,000
hypothetical investment in the Fund and the S&P 500. The "x" axis reflects
computation periods from 6/6/96 to 9/30/97. The "y" axis reflects the cost of
the investment. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500; the ending values were
$14,534 and $14,571, respectively. The legend in the upper middle quadrant of
the graphic presentation indicates the Fund's Average Annual Total Return for
the one-year and the since inception (6/6/96) periods ended 9/30/97, which were
38.64%, 33.03%, respectively.
