MENTOR
VARIABLE INVESTMENT PORTFOLIOS
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Mentor Variable Investment Portfolios (the "Trust") offers shares of beneficial
interest in five separate investment portfolios (collectively, the "Portfolios")
for purchase by separate accounts of insurance companies. The Portfolios, which
have different investment objectives and policies, offered by this Prospectus
are: Mentor VIP Balanced Portfolio, Mentor VIP Capital Growth Portfolio, Mentor
VIP Perpetual International Portfolio, Mentor VIP Growth Portfolio, and Mentor
VIP Strategy Portfolio. The Balanced Portfolio may use "leverage"- that is, it
may borrow money to purchase additional portfolio securities, which involves
special risks. See "Other Investment Practices - Leverage" on page 7.
This Prospectus sets forth concisely what you should know before investing in
the Trust and should be read in conjunction with the prospectus for the separate
account of the variable annuity or variable life insurance product that
accompanies this Prospectus. Please read it carefully and keep it for future
reference. Investors can find more detailed information about the Trust in the
February 20, 1998 Statement of Additional Information, as amended from time to
time. For a free copy of the Statement of Additional Information, call Mentor
Distributors, LLC at 1-800-382-0016. The Statement of Additional Information has
been filed with the Securities and Exchange Commission and is incorporated into
this Prospectus by reference.
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SHARES OF THE PORTFOLIOS ARE PRESENTLY AVAILABLE AND ARE BEING MARKETED
EXCLUSIVELY AS A POOLED FUNDING VEHICLE FOR VARIABLE ANNUITY CONTRACT AND
VARIABLE LIFE INSURANCE POLICY SEPARATE ACCOUNTS OF VARIOUS PARTICIPATING
INSURANCE COMPANIES.
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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.
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Prospectus Dated: February 20, 1998
Mentor Variable Investment Portfolios
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Mentor Variable Investment Portfolios
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The Trust The Trust is an open-end, management investment company designed to
serve as a funding vehicle for insurance separate accounts associated with
variable annuity contracts and variable life insurance policies. You should
consult the prospectus issued by your insurance company for more information
about a separate account. Shares of the Trust are offered to these separate
accounts through Mentor Distributors, LLC ("Mentor Distributors"), the principal
underwriter for the Trust. The Trust is offering by this Prospectus five
separate investment Portfolios with different investment objectives, policies
and risks. Investment Objectives and Polices Each Portfolio of the Trust has its
own investment objective which it pursues through its investment policies as
described below. The particular objectives and policies of the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. For more information about
the investment strategies employed by the Portfolios, see "Other Investment
Practices". The investment objective and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees without a vote of
shareholders. None of the Portfolios is intended to be a complete investment
program, and there is no assurance that any Portfolio will achieve its
objective. Each of the Portfolios is a diversified mutual fund.
Any percentage limitation on a Portfolio's investments will apply only
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at the time of investment; a Portfolio would not be considered to have violated
any such limitation unless an excess or deficiency occurs or exists as a result
of an investment. In addition, a Portfolio will not necessarily dispose of a
security when its rating is reduced below any applicable minimum rating,
although the investment adviser or sub-adviser of the Portfolio will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Portfolio's investment objective.
Additional Portfolios with differing investment objectives and policies
may be created from time to time for use as funding vehicles for insurance
company separate accounts or for other insurance products. In addition, the
Trustees may, subject to any necessary regulatory approvals, eliminate any
Portfolio or divide any Portfolio into two or more classes of shares with such
special or relative rights and privileges as the Trustees may determine.
Mentor VIP Balanced Portfolio
(the "Balanced Portfolio")
Investment adviser: Mentor Investment Advisors, LLC
("Mentor Advisors")
The Balanced Portfolio's investment objective is to seek capital growth
and current income. The Portfolio invests in a diversified portfolio of equity
and fixed-income securities which Mentor Advisors believes will produce both
capital growth and current income.
The Portfolio may invest in almost any type of security. The
Portfolio's securities will include some securities selected primarily to
provide for growth in value, others selected for current income, and other for
stability of principal.
Mentor Advisors will adjust the proportions of the Portfolio's assets
invested in the different types of securities in order to adjust to changing
market conditions. For example, under certain market conditions, Mentor Advisors
may judge that most of the Portfolio's assets should be invested in equity
securities, and that only a relatively small portion of the Portfolio's assets
should be invested in fixed-income securities. At other times, Mentor Advisors
may invest most of the Portfolio's assets in fixed-income securities, with a
corresponding reduction in the portion of the Portfolio's assets invested in
equity securities. Under normal circumstances, the Portfolio will invest at
least 25% of its assets in fixed-income securities and 25% of its assets in
equity securities.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market conditions to
maintain a portfolio of securities with a dollar-weighted average rating of A or
better. A security will be considered to be of "investment grade" if, at the
time of investment by the Portfolio, it is rated at least Baa3 by Moody's or
BBB- by S&P or the equivalent by another nationally recognized rating
organization or, if unrated, determined by Mentor Advisors to be of comparable
quality. Securities rated Baa or BBB lack outstanding investment characteristics
and have speculative characteristics and are subject to greater credit and
market risks than higher-rated securities. See the Statement of Additional
Information for descriptions of securities ratings assigned by Moody's and S&P.
At times Mentor Advisors may decide that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, Mentor Advisors may
temporarily use alternative investment strategies primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio would be permitted to hold all or any
portion of its assets in high quality fixed-income securities, cash, or money
market instruments. It is impossible to predict when, or for how long, the
Portfolio will use these alternative strategies.
Mentor VIP Capital Growth Portfolio
(the "Capital Growth Portfolio")
Investment adviser: Mentor Investment Advisors, LLC
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety of
securities which Mentor Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed
by Mentor Advisors to have the potential for capital appreciation. The Portfolio
may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, convertible debentures and any other class or type
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of security Mentor Advisors believes offers the potential for capital
appreciation. In selecting investments, Mentor Advisors will attempt to identify
securities it believes will provide capital appreciation over the intermediate
or long term due to changes in the financial condition of issuers, changes in
financial conditions generally, or other factors. The Portfolio also may invest
in fixed-income securities, and cash or money market investments, for temporary
defensive purposes.
Mentor VIP Perpetual International Portfolio
(the "International Portfolio")
Investment adviser: Mentor Perpetual Advisors, LLC
("Mentor Perpetual")
The International Portfolio's investment objective is long-term capital
appreciation. The Portfolio invests in a diversified portfolio of securities of
issuers located outside the United States. The Portfolio's investments will
normally include common stocks, preferred stocks, securities convertible into
common stocks or preferred stocks, and warrants to purchase common stocks or
preferred stocks. The Portfolio may also invest to a lesser extent in debt
securities and other types of investments if Mentor Perpetual believes they
would help achieve the Portfolio's objective. The Portfolio may hold a portion
of its assets in cash or money market instruments. See "Foreign Securities"
below for a description of risks associated with foreign investments.
The Portfolio will not limit its investments to any particular type of
company. The Portfolio may invest in companies, large or small, whose earnings
are believed to be in a relatively strong growth trend, or in companies in which
significant further growth is not anticipated but whose market value per share
is thought to be undervalued.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally, although
those risks may be increased due to conditions in such markets. For example, the
securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a substantial
portion of its assets in securities traded in the over-the-counter markets and
not on any exchange, which may affect the liquidity of its investment and expose
the Portfolio to the credit risk of its counterparties in trading those
investments.
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa3 by
Moody's or BBB- by Standard & Poor's, or at a comparable rating by another
nationally recognized rating agency. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities. The
Portfolio will not be required to dispose of a security held by it if the
security's rating falls below investment grade, although Mentor Perpetual will
consider whether continued investment in the security is consistent with the
Portfolio's investment objective. See Appendix A for descriptions of securities
ratings assigned by Moody's and Standard & Poor's.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies. At such times, the Portfolio may invest without limit
in securities of issuers located in the United States. It is impossible to
predict when, or for how long, the Portfolio will use these defensive
strategies.
The Portfolio may invest a substantial portion of its assets in
securities issued by small companies. Such companies may offer greater
opportunities for capital appreciation than larger companies, but investments in
such companies may involve certain special risks. Such companies may have
limited product lines, markets, or financial resources and may be dependent on a
limited management group. While the markets in securities of such companies have
grown rapidly in recent years, such securities may trade less frequently and in
smaller volume than more widely held securities. The values of these securities
may fluctuate more sharply than those of other securities, and the Portfolio may
experience some difficulty in establishing or closing out positions in these
securities at prevailing market prices. There may be less publicly-available
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information about the issuers of these securities or less market interest in
such securities than in the case of larger companies, and it may take a longer
period of time for the prices of such securities to reflect the full value of
their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when Mentor Perpetual would otherwise
have sold the security. It is possible that Mentor Perpetual or its affiliates
or clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
Mentor VIP Growth Portfolio (the "Growth Portfolio")
Investment adviser: Mentor Investment Advisors, LLC
The Growth Portfolio's investment objective is long-term capital
growth. Although the Portfolio may receive current income from dividends,
interest, and other sources, income is only an incidental consideration.
The Portfolio attempts to achieve long-term capital growth by investing
in a diversified portfolio of securities. Under normal circumstances at least
75% of the
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Portfolio's assets will be invested in common stocks of companies domiciled or
located in the United States. Although the Portfolio may invest in companies of
any size, the Portfolio invests principally in common stocks of small to
mid-sized companies. The Portfolio invests in companies that, in the opinion of
Mentor Advisors, have demonstrated earnings, asset values, or growth potential
not yet reflected in their market price. A key indication of such undervaluation
considered by Mentor Advisors is earnings growth which is above average compared
to the S&P 500 Index. Other important factors in selecting investments include a
strong balance sheet and product leadership in niche markets. Mentor Advisors
believes that such investments may offer better than average potential for
long-term capital growth.
Small and mid-size companies may present greater opportunities for
capital growth than do larger companies because of high potential earnings
growth, but may also involve greater risk. They may have limited product lines,
market or financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in limited volume, and only in
the over-the-counter market or on a regional securities exchange. As a result,
these securities may change in value more than those of larger, more established
companies.
Mentor VIP Strategy Portfolio (the "Strategy Portfolio")
Investment adviser: Mentor Investment Advisors, LLC
The Strategy Portfolio's investment objective is to seek high total
return on its investments. In seeking to achieve this objective, Mentor Advisors
actively allocates the Portfolio's assets among the major asset categories of
equity securities, fixed-income securities, and money market instruments. The
Portfolio will normally invest some portion of its assets in each asset
category, but may invest without limit in any asset category. Total return
consists of current income (including dividends, interest, and, in the case of
discounted instruments, discount accruals) and capital appreciation (including
realized and unrealized capital gains and losses).
Mentor Advisors believes that the Portfolio has the potential to
achieve above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of the
market as opposed to relying solely on just one market sector. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to short-term bonds and money market instruments in order to earn current return
and to reduce the potential adverse effect of declines in the bond and equity
markets. After determining the portions of the Portfolio's assets to be invested
in the various market sectors, Mentor Advisors attempts to select the securities
of companies within those sectors offering among other things, the ability of
Mentor Advisors to assess correctly the effects of economic and market trends on
different sectors of the market. The Portfolio's investments may include both
securities of U.S. issuers and securities traded principally in foreign markets.
The Portfolio may invest without limit in foreign securities. See "Other
Investment Practices - Foreign Securities" for a description of risks associated
with investments in such securities.
Within the equity sector, Mentor Advisors actively allocates the
Portfolio's assets to those industries and issuers it expects to benefit from
major market trends or which it otherwise believes offer the potential for
above-average total return. The Portfolio may purchase equity securities
(including convertible debt obligations and convertible preferred stock) sold on
the New York, American, and other U.S. or foreign stock exchanges and in the
over-the-counter market.
Within the fixed-income sector, Mentor Advisors seeks to maximize the
return on its investments by adjusting maturities and coupon rates as well as by
exploiting yield
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differentials among different types of investment-grade securities. The
Portfolio may invest in debt securities of any maturity, preferred stocks, and
other fixed-income instruments, including, for example, U.S. Government
securities and corporate debt securities (including zero-coupon securities). A
substantial portion of the Portfolio's investments in the fixed-income sector
may be in mortgage-backed securities, including collateralized mortgage
obligations ("CMOs") and certain other stripped mortgage-backed securities,
which have certain special risks. See "Other Investment Practices
- -Mortgage-Backed Securities; Other Asset-Backed Securities" and "- Other
mortgage-related securities" for a description of these risks. The Portfolio
will only invest in debt securities which are rated at the time of purchase Baa
or better by Moody's or BBB or better by S&P or, if unrated, are deemed by
Mentor Advisors to be of comparable quality. While bonds rated Baa or BBB are
considered to be of investment grade, they have speculative characteristics as
well. A description of securities ratings is contained in the Appendix to this
Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P. Other
Investment Practices Each of the Portfolios (except as noted below) may engage
in the other investment practices described below. See the Statement of
Additional Information for a more detailed description of these practices and
certain risks they may involve. Mortgage-Backed Securities; Other Asset-Backed
Securities.The Strategy Portfolio and Balanced Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs. Interest and principal payments on
the mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed securities. Mortgage-backed securities currently
offer yields higher than those available from many other types of fixed-income
securities but because of their prepayment aspects, their price volatility and
yield characteristics will change based on changes in prepayment rates. As a
result, mortgage-backed securities are less effective than other securities as a
means of "locking in" long-term interest rates. Generally, prepayment rates
increase if interest rates fall and decrease if interest rates rise. For many
types of mortgage-backed securities, this can result in unfavorable changes in
price and yield characteristics in response to changes in interest rates and
other market conditions. For example, as a result of their prepayment aspects,
mortgage-backed securities have less potential for capital appreciation during
periods of declining interest rates than other fixed-income securities of
comparable maturities, although such obligations may have a comparable risk of
decline in market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
The Strategy Portfolio and Balanced Portfolio may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are usually
structured with two classes that receive different portions of the interest and
principal distributions on a pool of mortgage assets. The Strategy Portfolio may
invest in both the interest-only - or "IO" class and the principal-only - or
"PO" - class. The yield to maturity and price of an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on
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the related underlying mortgage assets, and a rapid rate of principal payments
may have a material adverse effect on the Portfolio's net asset value. This
would typically be the case in an environment of falling interest rates. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may under some circumstances fail to fully recoup its
initial investment in these securities. Conversely, POs tend to increase in
value if prepayments are greater than anticipated and decline if prepayments are
slower than anticipated. The secondary market for stripped mortgage-backed
securities may be more volatile and less liquid than that for other
mortgage-backed securities, potentially limiting the Portfolio's ability to buy
or sell those securities at any particular time.
Certain mortgage-backed securities held by the Strategy Portfolio and
Balanced Portfolio may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem securities held by a Portfolio during a
time of declining interest rates, the Portfolio may not be able to reinvest the
proceeds in securities providing the same investment return as the securities
redeemed.
The Strategy Portfolio and Balanced Portfolio also may invest in
securities representing interests in other types of financial assets, such as
automobile-finance receivables or credit-card receivables. Such securities may
or may not be secured by the receivables themselves or may be unsecured
obligations of their issuers. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying assets may be
limited. For example, the laws of certain states may prevent or restrict
repossession of collateral from a debtor.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolios may
invest in a wide variety of such securities, including mortgage-backed and other
asset-backed securities that will pay principal or interest only under certain
circumstances, or in amounts that may increase or decrease substantially
depending on changes in interest rates or other market factors. Such securities
may experience extreme price volatility in response to changes in interest rates
or other market factors; this may be especially true in the case of securities
where the amounts of principal or interest paid, or the timing of such payments,
varies widely depending on prevailing interest rates.
A Portfolio's investment adviser may not be able to obtain current
market quotations for certain mortgage-backed or asset-backed securities at all
times, or to obtain market quotations believed by it to reflect the values of
such securities accurately. In such cases, it may be necessary to estimate the
value of such a security using quotations provided by pricing services or
securities dealers making a market in such securities, or based on other
comparable securities or other bench-mark securities or interest rates.
Mortgage-backed and other asset-backed securities in which a Portfolio may
invest may be highly illiquid, and a Portfolio may not be able to sell such
securities at a particular time or at the value it has placed on such
securities.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, a Portfolio's investment adviser will be required to
estimate the extent to which the values of the securities are likely to change
in response to changes in interest rates or other market conditions, and the
rate at which prepayments on the underlying mortgages or other assets are likely
to occur under different scenarios. There can be no assurance that a Portfolio's
investment adviser will be able to predict the amount of principal or interest
to be paid on any security under different rate or market conditions or that its
predictions will be accurate, nor can there be any assurance that a Portfolio
will recover the entire amount of the principal paid by it to purchase any such
securities. Zero-Coupon Bonds.Each of the International, Balanced, and Strategy
Portfolios may at times invest in so-called "zero-coupon" bonds. Zero-coupon
bonds are issued at a significant discount from face value and pay interest only
at maturity rather than at intervals during the life of the security. Because
zero-coupon bonds do not pay current interest, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that pay
interest currently. Zero-coupon bonds allow an issuer
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to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds that pay
interest currently. Even though such bonds do not pay current interest in cash,
a Portfolio is nonetheless required for federal income tax purposes to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus, a Portfolio could be required at times to
liquidate other investments in order to satisfy this distribution requirement.
Premium Securities.The Portfolios may at times invest in securities bearing
coupon rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amount payable on
maturity. Although a Portfolio generally amortizes the amount of any such
premium into income, the Portfolio may recognize a capital loss if such premium
securities are called or sold prior to maturity and the call or sale price is
less than the purchase price. Additionally, a Portfolio may recognize a capital
loss if it holds such securities to maturity. Options and Futures.Each of the
Portfolios may buy and sell put and call options on securities it owns or plans
to purchase to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, each of the Portfolios may at times seek to hedge against
fluctuations in net asset value. In addition, to the extent consistent with
applicable law, the Portfolios may buy and sell futures contracts and related
options to increase investment return.
Each of the Portfolios may buy and sell index futures contracts ("index
futures") and options on index futures and indices for hedging purposes (or may
purchase warrants whose value is based on the value from time to time of one or
more foreign securities indices). An "index futures" contract is a contract to
buy or sell units of a particular bond or stock index at an agreed price on a
specified future date. Depending on the change in value of the index between the
time when a Portfolio enters into and terminates an index futures or option
transaction, the Portfolio realizes a gain or loss. The Portfolios may also, to
the extent consistent with applicable law, buy and sell index futures and
options to increase investment return.
The Strategy Portfolio may also buy and sell options and futures
contracts (including index options and futures contracts) to implement changes
in its asset allocations among various market sectors, pending the sale of its
existing investments and reinvestments in new securities. Risks Related to
Options and Futures Strategies. Options and futures transactions involve costs
and may result in losses. Certain risks arise because of the possibility of
imperfect correlations between movements in the prices of futures and options
and movements in the prices of the underlying security or index or of the
securities held by a Portfolio that are the subject of a hedge. The successful
use by a Portfolio of the strategies described above further depends on the
ability of its investment adviser to forecast market movements correctly. Other
risks arise from a Portfolio's potential inability to close out futures or
options positions. Although a Portfolio will enter into options or futures
transactions only if its investment adviser believes that a liquid secondary
market exists for such option or futures contract, there can be no assurance
that a Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price. Transactions in options and futures contracts
involve brokerage costs and may require a Portfolio to segregate assets to cover
its outstanding positions. For more information, see the Statement of Additional
Information.
Each Portfolio's options and futures transactions will generally be
conducted on recognized exchanges. However, a Portfolio may purchase and sell
options in transactions in the over-the-counter markets. A Portfolio's ability
to terminate options in the over-the-counter markets may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are not appropriate and when, in the opinion of its investment adviser, the
pricing mechanism and liquidity of the over-the-counter markets are satisfactory
and the participants are responsible parties likely to meet their contractual
obligations. Securities Loans and Repurchase Agreements.Each Portfolio may lend
portfolio securities and may enter into
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repurchase agreements with banks, broker/dealers, and other recognized financial
institutions. The Strategy Portfolio and Balanced Portfolio may enter into each
type of transaction on up to 25% of its assets, and each of the other Portfolios
may enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk to
a Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral. Leverage.The
Balanced Portfolio may borrow money to invest in additional portfolio securities
to see current income. Certain other Portfolios may engage in reverse repurchase
agreements, forward commitments and dollar- roll transactions described below
and in the Statement of Additional Information, which may have the same economic
effect as if the Portfolios had borrowed money.
The use of borrowed money, known as "leverage," increases the
Portfolio's market exposure and risk. When the Portfolio has borrowed money for
leverage and its investments increase or decrease in value, its net asset value
will normally increase or decrease more than if it had not borrowed money for
this purpose. The interest that the Portfolio must pay on borrowed money will
reduce its net investment income, and may also either offset any potential
capital gains or increase any losses. The Portfolio currently intends to use
leverage in order to adjust the dollar-weighted average duration of its
portfolio of investments. The Portfolio will not always borrow money for
investment and the extent to which the Portfolio will borrow money, and the
amount it may borrow, depend on market conditions and interest rates. Successful
use of leverage depends on Mentor Advisors' ability to predict market movements
correctly. The amount of leverage that can exist at any one time will not exceed
one-third of the value of the Portfolio's total assets. Reverse Repurchase
Agreements; Forward Commitments.Each Portfolio, other than the Growth and
Strategy Portfolios, may enter into "reverse" repurchase agreements on up to
one-third of its assets. "Reverse" repurchase agreements generally involve the
sale by a Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. Each Portfolio
also may enter into forward commitments, in which a Portfolio buys securities
for future delivery. Reverse repurchase agreements and forward commitments
involve leverage, and may increase a Portfolio's overall investment exposure.
Their use by a Portfolio may result in losses. See "Leverage," above.
Dollar-Roll Transactions.In order to enhance portfolio returns and manage
prepayment risks, the Capital Growth, International, and Balanced Portfolios may
engage in dollar-roll transactions with respect to mortgage-related securities
issued by GNMA, FNMA, and FHLMC. In a dollar-roll transaction, a Portfolio sells
a mortgage-related security to a financial institution, such as a bank or
broker/dealer, and simultaneously agrees to repurchase a substantially similar
(i.e., same type, coupon, and maturity) security from the institution at a later
date at an agreed upon price. The mortgage-related securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories. Dollar-roll transactions involve leverage and may increase overall
investment exposure. Their use by a Portfolio may result in losses. See
"Leverage," above. Foreign Securities.Each Portfolio other than the Growth
Portfolio may invest in securities principally traded in foreign markets. The
Capital Growth and Balanced Portfolios will limit such investments to 15% of
their total assets. (Those percentage limitations do not apply to American
Depository Receipts, Global Depository Receipts, and other U.S.
dollar-denominated securities of issuers located outside the United States.)
Since foreign securities are normally denominated and traded in foreign
currencies, the value of a Portfolio's assets may be affected favorably or
unfavorably by changes in currency exchange rates, exchange control regulations,
foreign withholding taxes and restrictions or prohibitions on the repatriation
of foreign currencies. There may be less information publicly available about a
foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing, and financial reporting standards and
practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of a
<PAGE>
Portfolio's assets held abroad) and expenses not present in the settlement of
domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of a Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit a Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. A Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
A Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing nations,
which are sometimes referred to as "emerging markets." Foreign Currency Exchange
Transactions.Each Portfolio that may invest in foreign securities may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. A Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes, a
Portfolio may also purchase and sell call and put options on foreign currency
futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, a Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above. Interest Rate
Transactions.In order to attempt to protect the value of its portfolio from
interest rate fluctuations and to adjust the interest rate sensitivity of its
portfolio, the Balanced Portfolio and International Portfolio may enter
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into interest rate swaps and other interest rate transactions, such as interest
rate caps, floors, and collars. Interest rate swaps involve the exchange by a
Portfolio with another party of different types of interest rate streams (e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of an interest rate cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the floor
to the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. Each
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. A Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations. The use of interest rate
swaps and other interest rate transactions is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If a Portfolio's investment
adviser is incorrect in its forecasts of market values, interest rates, or other
applicable factors, the investment performance of the Portfolio would be less
favorable than it would have been if this investment technique were not used.
Indexed Securities.The International Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities. General.As indicated above, the Portfolios are
generally managed in styles similar to other open-end investment companies which
are managed by Mentor Advisors or Mentor Perpetual and whose shares are
generally offered to the public. These other Mentor portfolios may, however,
employ different investment practices and may invest in securities different
from those in which their counterpart Portfolios invest, and consequently will
not have identical portfolios or experience identical investment results.
Portfolio Turnover.The length of time a Portfolio has held a particular security
is not generally a consideration in investment decisions. A change in the
securities held by a Portfolio is known as "portfolio turnover." As a result of
each Portfolio's investment policies, under certain market conditions its
portfolio turnover rate may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to a Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such transactions may result in
realization of taxable gains. While it is impossible to predict portfolio
turnover for any Portfolio, the respective investment advisers expect that
turnover rates for each of the Portfolios will not exceed the following amounts:
Balanced Portfolio - 150%; Capital Growth Portfolio - 150%; International
Portfolio - 200%; Growth Portfolio - 150%; Strategy Portfolio - 250%.
Management The Trustees of the Trust are responsible for generally overseeing
the conduct of its business. Mentor Investment Advisors, LLC is the investment
adviser to each of the Portfolios other than the International Portfolio. Mentor
Perpetual Advisors, LLC is the investment adviser to the International
Portfolio. Each of the investment advisers is located at 901 East Byrd Street,
Richmond, Virginia.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group") and its affiliates. Mentor Investment
Group is a subsidiary of Wheat First Butcher Singer, Inc., which is in turn a
wholly owned subsidiary of First Union Corp. ("First Union"). First Union is a
leading financial services company with approximately $157 billion in assets and
$12 billion in total stockholders' equity as of December 31, 1997. Mentor
Advisors has over $12 billion in assets under management.
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Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Perpetual, an investment advisory firm organized in 1995, is
owned equally by Perpetual plc, a diversified financial services holding
company, and Mentor Advisors. The Perpetual organization currently serves as
investment adviser for assets of more than $10 billion. Its clients include 28
unit investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
Mentor Advisors and Mentor Perpetual together serve as investment
adviser to twenty-seven separate investment portfolios in the Mentor Family of
Funds, including those offered by this Prospectus. All investment decisions made
for the Portfolios by Mentor Advisors and Mentor Perpetual are made by
investment management teams at those firms.
Each of the Portfolios (other than the International Portfolio) pays
management fees to Mentor Advisors monthly at the following annual rates
(expressed as a percentage of the applicable Portfolio's average daily net
assets): Balanced Portfolio - 0.75%; Capital Growth Portfolio - 0.80%; Growth
Portfolio - 0.70%; and Strategy Portfolio - 0.85%. The International Portfolio
pays management fees to Mentor Perpetual monthly at the annual rate of 1.00% of
the Portfolio's average daily net assets. The advisory fees paid by the Capital
Growth, International Growth, and Balanced Portfolios are higher than those paid
by many other mutual funds. An investment adviser may from time to time
voluntarily waive some or all of its investment advisory fees and may terminate
any such voluntary waiver at any time in its sole discretion.
Subject to the general oversight of the Trustees, each Portfolio's
investment adviser manages the relevant Portfolio's investments in accordance
with the stated policies of the Portfolio. Each makes investment decisions for a
Portfolio and places the purchase and sale orders for the Portfolio's portfolio
transactions. In addition, each pays the salaries of all officers and employees
who are employed by both it and the Trust. The Trust pays all expenses not
assumed by an investment adviser, including, among other things, Trustees' fees,
auditing, accounting, legal, custodial, investor servicing, and reporting
expenses.
In selecting broker-dealers, an investment adviser may consider
research and brokerage services furnished to it and its affiliates. Subject to
seeking the best overall terms available, a Portfolio's investment adviser may
consider sales of the Portfolios (and, if permitted by law, of the other funds
in the Mentor family) as a factor in the selection of broker-dealers. A
Portfolio's investment adviser may at times cause the Portfolio to pay
commissions to broker-dealers affiliated with the adviser. Administrative
Services.Mentor Investment Group, LLC, located at 901 East Byrd Street,
Richmond, Virginia 23219, provides each Portfolio with certain administrative
personnel and services necessary to operate the Portfolio, such as bookkeeping
and accounting services. Mentor Investment Group provides these services to each
Portfolio at an annual rate of 0.10% of the Portfolio's average net assets. How
a Portfolio Values Its Shares The Trust calculates the net asset value of a
share of a Portfolio by dividing the total value of its assets, less
liabilities, by the number of its shares outstanding. Shares are valued as of
the close of regular trading on the New York Stock Exchange each day the
Exchange is open. Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are stated at amortized cost, which approximates market value.
All other securities and assets are valued at their fair values.
Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rates or at such other rates as may be used in
accordance with procedures of the Trust. As a result, fluctuations in the values
of such currencies in relation to the U.S. dollar will affect the net asset
value of a Portfolio's shares even though there
<PAGE>
has not been any change in the values of such securities as quoted in such
foreign currencies. Sales and Redemption The Trust has an underwriting agreement
relating to the Portfolios with Mentor Distributors, LLC, located at 3435
Steizer Road, Columbus, Ohio 43219. Mentor Distributors offers shares of each
Portfolio continuously to separate accounts of various participating insurance
companies. Mentor Distributors is not obligated to sell any specific amount of
shares.
Separate accounts of participating insurance companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to variable annuity contracts and variable life
insurance policies. Orders received by the Trust or its agent are effected on
days on which the New York Stock Exchange is open for trading.
Shares of the Portfolios are sold or redeemed at the net asset value
per share next determined after receipt of a purchase or redemption request in
good order. Orders for purchases or sales of shares of a Portfolio must be
received by the Trust or its agent before the close of regular trading on the
New York Stock Exchange in order to receive that day's net asset value. No fee
is charged to a separate account when it redeems Portfolio shares.
Payment for redemptions will be made within seven days after receipt of
a redemption request in good order. Under unusual circumstances, the Trust may
suspend redemptions or postpone payment for up to seven days or longer, as
permitted by federal securities law.
Please check with your insurance company to determine the Portfolios
available under your variable annuity contract or variable life insurance
policy. Certain Portfolios may not be available in your state due to various
insurance regulations. Inclusion in this Prospectus of a Portfolio that is not
available in your state is not to be considered a solicitation. This Prospectus
should be read in conjunction with the prospectus of the separate account of the
specific insurance product which accompanies this Prospectus. Distribution Plan
Each of the Portfolios has adopted a Distribution Plan under Rule 12b-1 with
respect to its shares providing for payments by the Portfolio to Mentor
Distributors from the assets attributable to the Portfolio's shares at the
annual rate of 0.25% of the Portfolio's average net assets. The Trustees may
reduce the amount of payments or suspend the Distribution Plan for such periods
as they may determine. None of the Portfolios currently make payments under the
Plan.
Payments under the Distribution Plan would be intended to compensate
Mentor Distributors for services provided and expenses incurred by it as
principal underwriter of the Portfolios' shares, including for payments to
participating insurance companies to cover various costs incurred or paid by any
such insurance company in connection with the selling of Portfolio shares.
Depending on the participating insurance company's corporate structure and
applicable law, Mentor Distributors may remit payments to a participating
insurance company's affiliates. The schedules of such fees and the basis upon
which such fees would be paid would be determined from time to time by Mentor
Distributors. Mentor Distributors may suspend or modify such payments. Such
payments would also be subject to the continuation of the Distribution Plan, the
terms of any agreements between dealers and Mentor Distributors, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc. Mentor Distributors may, at its expense, provide promotional incentives to
dealers that sell variable insurance products. Exchange Privilege A shareholder
may exchange shares of any Portfolio for shares of the same class of any other
Portfolio of the Trust on the basis of their respective net asset values.
Exchanges may not be made into Portfolios not offered by your variable annuity
contract or variable life policy.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on separate accounts. In order to limit excessive
exchange activity and in other circumstances where Mentor Distributors or the
Trustees believe doing so would be in the
<PAGE>
best interests of a Portfolio, the Trust reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. Your insurance company would be notified of any such action
to the extent required by law. Before requesting an exchange, call
1-800-382-0016 for more information. See the Statement of Additional Information
to find out more about the exchange privilege. Distributions and Taxes
Dividends, if any, are declared and paid quarterly for the Balanced Portfolio
and annually for the Capital Growth, International, Growth, and Strategy
Portfolios. Each Portfolio will distribute its net capital gain, if any, at
least annually. All dividends and distributions of net capital gain will be
invested in additional shares of the same class of a Portfolio unless an
election is made on behalf of a separate account to receive some or all
distributions in cash.
Each Portfolio intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to separate accounts. For information concerning federal income tax
consequences for the holders of variable annuity contracts and variable life
insurance policies, contract and policy owners should consult the prospectus of
the applicable separate account.
Internal Revenue Service regulations applicable to variable annuity and
variable life insurance separate accounts generally require that portfolios that
serve as the funding vehicles solely for such separate accounts invest no more
than 55% of the value of their assets in one investment, 70% in two investments,
80% in three investments, and 90% in four investments. Alternatively, a
Portfolio will be treated as meeting these requirements for any quarter of its
taxable year if, as of the close of such quarter, the Portfolio meets the
diversification requirements applicable to regulated investment companies (see
"Taxes" in the Statement of Additional Information) and no more than 55% of the
value of its total assets consists of cash and cash items (including
receivables), U.S. government securities and securities of other regulated
investment companies. Each of the Portfolios intends to comply with these
requirements.
Portfolio investments in foreign securities may be subject to
withholding taxes at the source on dividend or interest payments. In that case,
a Portfolio's yield on those securities would be decreased.
Portfolio transactions in foreign currencies and hedging activities
will likely produce a difference between book income and taxable income. This
difference may cause a portion of a Portfolio's income distributions to
constitute a return of capital for tax purposes or require a Portfolio to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
The foregoing is a general summary of the federal income tax
consequences of investing in a Portfolio. Please refer to the prospectus for the
separate account and the variable contract for information regarding the federal
income tax treatment of variable contracts in general and distributions to the
separate account in particular. See "Taxes" in the Statement of Additional
Information for more information on taxes. General Mentor Variable Investment
Portfolios is a Massachusetts business trust organized on March 20, 1997. A copy
of the Agreement and Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of the Commonwealth of
Massachusetts.
The Trust is an open-end management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into five
series, each representing a separate investment Portfolio which is being offered
through separate accounts of participating insurance companies. Each share has
one vote, with fractional shares voting proportionally. Shares of each series
will vote together as a single series except when required by law or determined
by the Trustees. Shares of each
<PAGE>
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
that Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Trust nor any
Portfolio is required to hold annual meetings of shareholders, shareholders have
the right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Agreement and Declaration of Trust.
Shares of the Portfolios may only be purchased by an insurance company
separate account. For matters requiring shareholder approval, you may be able to
instruct the insurance company separate account how to vote the Portfolio shares
attributable to your contract or policy. See the section relating to voting
rights of your insurance product prospectus for more information.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees, and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of First Union and its subsidiaries, SEC
fees and related expenses, state Blue Sky qualification fees, charges of the
custodian and transfer and dividend disbursing agents, outside auditing,
accounting, and legal services, certain investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges and charges relating to corporate matters, are borne
by the Portfolio.
None of the Portfolios currently foresees any disadvantages to contract
or policy owners arising out of the fact that it may offer its shares to
separate accounts of various insurance companies to serve as the investment
medium for their variable products. Nevertheless, the Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts. If such a conflict were to occur, one or more
insurance companies' separate accounts might be required to withdraw their
investments in one or more Portfolios and shares of another Portfolio may be
substituted. This might force a Portfolio to sell portfolio securities at
disadvantageous prices. In addition, the Trustees may refuse to sell shares of
any Portfolio to any separate account or may suspend or terminate the offering
of shares of any Portfolio if such action is required by law or regulatory
authority or is in the best interests of the shareholders of the Portfolio.
Should any conflict between variable annuity contract and variable life
insurance policy owners arise which would require that a substantial amount of
net assets be withdrawn from a Portfolio, orderly portfolio management could be
disrupted to the potential detriment of such contract and policy owners.
Performance Information Yield and total return data may from time to time be
included in advertisements about the Portfolios. A Portfolio's "yield" is
calculated by dividing the Portfolio's annualized net investment income per
share during a recent 30-day period by the maximum public offering price per
share on the last day of that period. "Total return" for the one-, five-, and
ten-year periods (or for the life of a Portfolio, if shorter) through the most
recent calendar quarter represents the average annual compounded rate of return
on an investment of $1,000 in such Portfolio. Total return may also be presented
for other periods. Quotations of yield or total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. A Portfolio's performance may be compared to various indices.
See the Statement of Additional Information for more information. Information
may be presented in advertisements about a Portfolio describing the background
and professional experience of the Portfolio's investment adviser, sub-adviser,
or any of their personnel.
All data are based on a Portfolio's past investment results and do not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of a Portfolio, and a
Portfolio's operating expenses. Investment performance also often reflects the
risks associated with a Portfolio's investment objective and policies. These
factors should be considered when
<PAGE>
comparing a Portfolio's investment results to those of other mutual funds and
other investment vehicles.
Performance information presented for the Portfolios should not be
compared directly with performance information of other insurance products
without taking into account insurance-related charges and expenses payable with
respect to those insurance products. Insurance-related charges and expenses are
not reflected in the Portfolios' performance information. As a result of such
insurance-related charges and expenses, an investor's return under the insurance
product would be lower. Financial Information It is expected that owners of the
variable annuity contracts and variable life insurance policies who have
contract or policy values allocated to the Portfolios will receive an unaudited
semi-annual financial statement and an audited annual financial statement for
such Portfolios. These reports show the investments owned by each Portfolio and
provide other relevant information about the Portfolios.
Mentor Variable Investment Portfolios
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Mentor Variable Investment Portfolios
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Appendix Securities Ratings The following rating services describe rated
securities as follows:
Moody's Investors Service, Inc.
Bonds
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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as uppermedium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility of impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking, or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal
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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.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
earning any real investment standing.
Notes
MIG 1/VMIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
Commercial Paper
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above 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.
Standard & Poor's
Bonds
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
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AA - Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higherrated 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 or repay principal
for debt in this category than in higher-rated categories.
BB-B-CCC-CC-C - Debt rated "BB", "B", "CCC", "CC" and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and "C" the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B - Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "B" or "B-" rating.
CC - The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC-" rating.
C - The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C-" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
D - Bonds rated "D" are in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
Notes
SP-1 - Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus sign (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
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SP-3 - Speculative capacity to pay principal and interest.
Commercial Paper
A-1 - This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
<PAGE>
MENTOR VARIABLE INVESTMENT PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
February 20, 1998
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the applicable prospectus of the Trust dated
February 20, 1998. A copy of the applicable prospectus can be obtained upon
request from Mentor Services Company, Inc. at 901 East Byrd Street, Richmond,
Virginia 23219 (1-800-382-0016).
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INTRODUCTION..........................................................2
INVESTMENT RESTRICTIONS...............................................2
CERTAIN INVESTMENT PRACTICES .........................................4
MANAGEMENT OF THE TRUST..............................................25
PRINCIPAL HOLDERS OF SECURITIES......................................26
INVESTMENT ADVISORY SERVICES.........................................26
ADMINISTRATIVE SERVICES..............................................28
BROKERAGE TRANSACTIONS...............................................29
HOW TO BUY SHARES....................................................31
DISTRIBUTION.........................................................31
DETERMINING NET ASSET VALUE..........................................32
REDEMPTIONS IN KIND..................................................34
TAXES................................................................34
INDEPENDENT ACCOUNTANTS..............................................37
CUSTODIAN............................................................37
PERFORMANCE INFORMATION..............................................37
MEMBERS OF INVESTMENT MANAGEMENT TEAMS...............................44
SHAREHOLDER LIABILITY................................................47
FINANCIAL STATEMENT..................................................47
</TABLE>
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INTRODUCTION
Mentor Variable Investment Portfolios (the "Trust") is an open-end
series investment company. The Trust is a Massachusetts business trust organized
on March 20, 1997. The Trust consists of the following five portfolios
(collectively, the "Portfolios" and each individually, the "Portfolio"): Mentor
VIP Balanced Portfolio (the "Balanced Portfolio"); Mentor VIP Capital Growth
Portfolio (the "Capital Growth Portfolio"); Mentor VIP Growth Portfolio (the
"Growth Portfolio"); Mentor VIP Perpetual International Portfolio (the
"International Portfolio"); and Mentor VIP Strategy Portfolio (the "Strategy
Portfolio"). Each Portfolio has one class of shares of beneficial interest.
INVESTMENT RESTRICTIONS
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed below as fundamental or to the extent designated as such in
the prospectus in respect of a Portfolio, the other investment policies
described in this Statement or in a Portfolio's prospectus are not fundamental
and may be changed by approval of the Trustees.
FUNDAMENTAL RESTRICTIONS. As fundamental investment restrictions, which
may not be changed as to any Portfolio without a vote of a majority of the
outstanding voting securities of that Portfolio, the Trust may not and will not
take any of the following actions with respect to that Portfolio:
(1) Borrow more than 33 1/3% of the value of its total
assets less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under certain
federal securities laws.
(3) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which are
secured by interests in real estate, and securities which represent
interests in real estate, and it may acquire and dispose of real estate
or
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interests in real estate acquired through the exercise of its rights as
a holder of debt obligations secured by real estate or interests
therein.
(4) Purchase or sell commodities or commodity contracts, except that
it may purchase and sell financial futures contracts and options and
may enter into foreign exchange contracts and other financial
transactions not involving the direct purchase or sale of physical
commodities.
(5) Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by
entering into repurchase agreements, or by lending its portfolio
securities.
(6) With respect to 75% of its total assets, invest in the
securities of any issuer if, immediately after such investment, more
than 5% of the total assets of the Portfolio (taken at current value)
would be invested in the securities of such issuer; provided that this
limitation does not apply to obligations issued or guaranteed as to
interest or principal by the U.S. government or its agencies or
instrumentalities.
(7) With respect to 75% of its total assets, acquire more than 10%
of the outstanding voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S.
government, its agencies or instrumentalities) if, as a result of such
purchase, more than 25% of the Portfolio's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the Portfolio's
shares of beneficial interest, to the extent prohibited by the
Investment Company Act of 1940, as amended.
The Investment Company Act of 1940 provides that a "vote of a majority
of the outstanding voting securities" of a Portfolio or the Trust means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
a Portfolio or the Trust, as the case may be, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.
NON-FUNDAMENTAL RESTRICTION. It is contrary to each Portfolio's present
policy, which may be changed without shareholder approval, to invest in (a)
securities which are not readily marketable, (b) securities restricted as to
resale (excluding securities determined by the Trustees of the Trust (or the
person designated by the Trustees of the Trust to make such determinations) to
be readily marketable), and (c) repurchase agreements maturing in more than
seven days, if, as a result, more than 15% of the Portfolio's net assets (taken
at current value) would be invested in securities described in (a), (b) and (c)
above.
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All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above as fundamental
or to the extent designated as such in the Prospectus with respect to a
Portfolio, the other investment policies described in this Statement or in the
Prospectus are not fundamental and may be changed by approval of the Trustees.
CERTAIN INVESTMENT PRACTICES
Set forth below is information concerning certain investment practices
in which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment practices may not be available to a
Portfolio. See the prospectus relating to a particular Portfolio for a
description of the investment practices generally applicable to that Portfolio.
For purposes of this section, a Portfolio's investment adviser is referred to as
an "Adviser".
Options
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected
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market rise. Any profits from a closing purchase transaction may be offset by a
decline in the value of the underlying security. Conversely, because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from a closing
purchase transaction is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Portfolio.
Covered put options. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing put and call options. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
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Options on foreign securities. A Portfolio may purchase and sell
options on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
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Futures Contracts
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures and related options will, as may be
required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
Futures on Debt Securities and Related Options. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself to
make the future delivery of the security against payment of the agreed price.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of persons acting
at the direction of the Trustees as to the valuation of a Portfolio's assets,
reflect the fair value of the contract, in which case the positions will be
valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular
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securities when it has the necessary cash, but expects the rate of return
available in the securities markets at that time to be less favorable than rates
currently available in the futures markets. If the anticipated rise in the price
of the securities should occur (with its concomitant reduction in yield), the
increased cost to the Portfolio of purchasing the securities may be offset, at
least to some extent, by the rise in the value of the futures position taken in
anticipation of the subsequent purchase.
Successful use by a Portfolio of futures contracts on debt securities
is subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
Index Futures Contracts and Options. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. (Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although
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such futures contracts are expected to become available in the future.) A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Portfolio enters into a futures contract to buy 100 units of the S&P 100
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $184 on that future date, the Portfolio will gain $400 (100 units x
gain of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180 and
the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on stock index futures. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
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Options on Indices. As an alternative to purchasing and selling call
and put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the price of the
underlying security rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the market price of the securities underlying the futures contract. Conversely,
if the price of the underlying security falls below the delivery price of the
contract, the Portfolio's futures position increases in value. The broker then
must make a variation margin payment equal to the difference between the
delivery price of the futures contract and the market price of the securities
underlying the futures contract.
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When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options
Liquidity risks. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a Portfolio
has purchased puts on futures contracts to hedge its portfolio against a decline
in the market, the securities or index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in its portfolio
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securities. In addition, the prices of futures, for a number of reasons, may not
correlate perfectly with movements in the underlying securities or index due to
certain market distortions. First, all participants in the futures market are
subject to margin deposit requirements. Such requirements may cause investors to
close futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less onerous
than margin requirements in the securities markets in general, and as a result
the futures markets may attract more speculators than the securities markets do.
Increased participation by speculators in the futures markets may also cause
temporary price distortions. Due to the possibility of price distortion, even a
correct forecast of general market trends by a Portfolio's Adviser may still not
result in a successful hedging transaction over a short time period.
Other Risks. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
Forward Commitments
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security subject to
the obligation of the seller to
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repurchase and the Portfolio to resell such security at a fixed time and price
(representing the Portfolio's cost plus interest). It is the Trust's present
intention to enter into repurchase agreements only with member banks of the
Federal Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of the
Trust and only with respect to obligations of the U.S. government or its
agencies or instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which are
collateralized by the securities subject to repurchase. A Portfolio's Adviser
will monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults, a
Portfolio could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, a Portfolio
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if a Portfolio is treated as an unsecured
creditor and required to return the underlying collateral to the seller's
estate.
Loans of Portfolio Securities
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized
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by whole loans or private pass-through certificates (such collateral
collectively hereinafter referred to as "Mortgage Assets"). CMOs may be issued
by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
mortgage assets are applied to the classes of the series in a pre-determined
sequence.
Foreign Securities
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates, exchange control
regulations, foreign withholding taxes and restrictions or prohibitions on the
repatriation of foreign currencies. A Portfolio may incur costs in connection
with conversion between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact of
foreign taxes on the net yield available to the Portfolio and its shareholders.
Income received by a Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Portfolio's assets to be invested
in various countries is not known, and tax laws and their interpretations may
change from time to time and may change without advance notice. Any such taxes
paid by a Portfolio will reduce its net income available for distribution to
shareholders.
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Foreign Currency Transactions
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, a Portfolio may purchase put or call options
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on foreign currency and foreign currency futures contracts and buy or sell
forward contracts and foreign currency futures contracts. A Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency a Portfolio is obligated to deliver and if a
decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
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Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
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There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Settlement Procedures. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and
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resold them in custodial receipt programs with a number of different names,
including Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual
on Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective and policies, not
for investment leverage, but a Portfolio may sell such securities prior to
settlement date if such a sale is considered to be advisable. No income accrues
to a Portfolio on securities in connection with such transactions prior to the
date the Portfolio actually takes delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause a
Portfolio to miss a price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred.
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However, liquid assets of a Portfolio sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
Bank Instruments
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the U.S.; and
Yankee Certificates of Deposit ("Yankee CDS"), which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held in the
U.S.
Dollar Rolls and Reverse Repurchase Agreements
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. A
Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the
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general risks involved in leveraging, dollar rolls and reverse repurchase
agreements involve the risk that, in the event of the bankruptcy or insolvency
of the Portfolio's counterparty, the Portfolio would be unable to recover the
security which is the subject of the agreement, the amount of cash or other
property transferred by the counterparty to the Portfolio under the agreement
prior to such insolvency or bankruptcy is less than the value of the security
subject to the agreement, or the Portfolio may be delayed or prevented, due to
such insolvency or bankruptcy, from using such cash or property or may be
required to return it to the counterparty or its trustee or receiver.
Convertible Securities
A Portfolio 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. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's 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 Portfolio's 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.
Warrants
A Portfolio 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
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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. Warrants acquired in units or attached to securities may be deemed to be
without value for purposes of a Portfolio's policy.
Swaps, Caps, Floors and Collars
A Portfolio may enter into interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
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Lower-rated Securities
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the investment
to determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
Indexed Securities
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
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Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "Dmark"), the Portfolio holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars.
Eurodollar Instruments
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A
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Portfolio might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
Segregation of Assets
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such segregated
account will be maintained by the Trust's custodian and may contain cash, U.S.
government securities, liquid high grade debt obligations, or other appropriate
assets.
MANAGEMENT OF THE TRUST
Officers and Trustee
The officers and Trustee of the Trust are listed below, along with
their addresses, principal occupations, and present positions, including any
positions held with affiliated persons or Mentor Distributors, LLC.
<TABLE>
<CAPTION>
Positions with
Name, Age and Address the Trust Principal Occupations During Past Five Years
<S> <C>
Daniel J. Ludeman* (40) Chairman and Trustee Chairman and Chief Executive Officer, Mentor
901 East Byrd Street Investment Group, LLC; Managing Director, Wheat, First
Richmond, Virginia 23219 Securities, Inc.; Director, Wheat First Butcher
Singer, Inc.; Chairman and Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.; Chairman and Trustee,
Cash Resource Trust, Mentor Funds, and Mentor
Institutional Trust.
Paul F. Costello (37) President Managing Director, Wheat First Butcher Singer, Inc. and
901 East Byrd Street Mentor Investment Group, LLC; President, Cash Resource
Richmond, Virginia 23219 Trust, Mentor Income Fund, Inc., Mentor Funds,
Mentor Institutional Trust and America's Utility Fund, Inc.;
Managing Director, Mentor Investment Advisors, LLC;
Director, Mentor Perpetual Advisors, LLC and Mentor Trust Company.
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Terry L. Perkins (50) Treasurer Senior Vice President, Mentor Investment Group, LLC;
901 East Byrd Street Treasurer, Cash Resource Trust, Mentor Income Fund,
Richmond, Virginia 23219 Inc., Mentor Institutional Trust, Mentor Funds, and
America's Utility Fund; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.
Michael Wade (31) Assistant Treasurer Vice President, Mentor Investment Group, LLC; Assistant
901 East Byrd Street Treasurer, Cash Resource Trust, Mentor Income Fund, Inc.,
Richmond, Virginia 23219 Mentor Institutional Trust, Mentor Funds, and America's
Utility Fund; formerly, Senior Accountant, Wheat First
Butcher Singer, Inc.; Audit Senior, BDO Seidman.
John M. Ivan (41) Clerk Managing Director, Director of Compliance,
901 East Byrd Street and Assistant General Counsel, Wheat, First Securities, Inc.; Managing
Richmond, Virginia 23219 Director and Assistant Secretary, Wheat First Butcher Singer, Inc.
(formerly WFS Financial Corporation); Clerk, Cash Resource Trust,
Mentor Institutional Trust; Secretary, Mentor Income Fund, America's
Utility Fund and Mentor Funds.
Peter J. Quinn, Jr. (37) (*) Trustee President, Mentor
901 E. Byrd Street Distributors, LLC; Managing
Richmond, Virginia 23219 Director, Mentor Investment
Group, LLC and Wheat First
Butcher Singer, Inc.;
formerly, Senior Vice
President/Director of Mutual
Funds, Wheat First Butcher
Singer, Inc.; Trustee, Cash
Resource Trust and Mentor Funds.
Louis W. Moelchert, Jr. (56) Trustee Vice President for
University of Richmond Investments, University of
Richmond, Virginia 23173 Richmond; Trustee, Cash
Resource Trust, Mentor
Institutional Trust and Mentor
Funds; Director, America's Utility
Fund, Inc.
Thomas F. Keller (66) Trustee Professor of Business
Fuqua School of Business Administration and former
Duke University Dean, Fuqua School of
Durham, North Carolina 27706 Business, Duke University;
Trustee, Cash Resource Trust,
Mentor Funds and Mentor
Institutional Trust.
Arnold H. Dreyfuss (69) Trustee Chairman, Eskimo Pie
P.O. Box 18156 Corporation; formerly,
Richmond, Virginia 23226 Chairman and Chief Executive
Officer, Hamilton
Beach/Proctor-Silex, Inc.
Trustee, Cash Resource Trust,
Mentor Funds and Mentor Institutional
Trust.
Troy A. Peery, Jr. (51) Trustee President, Heilig-Meyers
2235 Staples Mill Road Company. Trustee, Cash
Richmond, Virginia 23230 Resource Trust, Mentor Funds
and Mentor Institutional Trust.
</TABLE>
<TABLE>
<S> <C>
Arch T. Allen, III (57) Trustee Attorney; Formerly Director,
1214 Cowper Drive America's Utility Fund; Formerly
Raleigh, North Carolina 27608 Vice Chancellor for Development
University of North Carolina at
Chapel Hill
Weston E. Edwards (63) Trustee President, Weston Edwards &
361 Forest Avenue, Suite 205 Associates; Director, Mentor
Laguna Beach, California 92651 Income Fund, Inc.; Founder and
Chairman, The Housing
Roundtable; formerly President of
Smart Mortgage Access, Inc.
Jerry R. Barrentine (63) Trustee President, J.R. Barrentine &
17716 River Ford Drive Associates. Director, Mentor
Davidson, North Carolina 28036 Income Fund; formerly, Executive
Vice President and CFO, Barclays
American/Mortgage Director
Corporation and Managing Partner,
Barrentine Lott & Associates, Inc.
J. Garnett Nelson (58) Trustee Consultant, Mid-Atlantic Holdings,
101 Shockoe Slip LLC; Director, Mentor Income
Richmond, Virginia 23219 Fund; Director, GE Investment
Funds, Inc. and Lawyers Title
Corporation; Member of the
Investment Advisory Committee
Virginia Retirement Systems;
formerly, Senior Vice President,
The Life Insurance Company of
Virginia
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
Trustees' Compensation
The Trustees do not receive pension or retirement benefits from the
Trust.
The Trust's Declaration of Trust provides that the Trustees will be
liable for their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
PRINCIPAL HOLDERS OF SECURITIES
At the time of filing of the Registration Statement of which this
Statement of Additional Information is a part, no Portfolio had any shares
outstanding.
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to each Portfolio other than the International Portfolio.
Mentor Perpetual Advisors, LLC ("Mentor Perpetual") serves as investment adviser
to the International Portfolio.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment
Group, LLC, ("Mentor Investment Group") and its affiliates. Mentor Investment
Group which is a subsidiary of Wheat First Butcher Singer, Inc. ("WFBS"), which
is in turn a wholly owned subsidiary of First Union Corp. Mentor Perpetual is
owned equally by Mentor Advisors and Perpetual plc, a diversified financial
services holding company. EVEREN Capital Corporation has a 20% ownership in
Mentor Investment Group and may acquire additional ownership based principally
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on the amount of Mentor Investment Group's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
Subject to the general oversight of the Trustees, each investment
adviser manages the applicable Portfolio in accordance with the stated policies
of that Portfolio and of the Trust. Each makes investment decisions for the
Portfolio and places the purchase and sale orders for portfolio transactions.
The investment advisers bear all their expenses in connection with the
performance of their services (except as may be approved from time to time by
the Trustees) and pay the salaries of all officers and employees who are
employed by them and the Trust.
Each Portfolio's investment adviser provides the Trust with investment
officers who are authorized to execute purchases and sales of securities.
Investment decisions for the Trust and for the other investment advisory clients
of the investment advisers and their affiliates are made with a view to
achieving their respective investment objectives. Investment decisions are the
product of many factors in addition to basic suitability for the particular
client involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In some instances, one
client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the investment adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. There may be circumstances when
purchases or sales of securities for one or more clients will have an adverse
effect on other clients. In the case of short-term investments, the Treasury
area of Mentor Investment Group handles purchases and sales under guidelines
approved by investment officers of the Trust. Each investment adviser employs
professional staffs of portfolio managers who draw upon a variety of resources
for research information for the Trust.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, compensation paid under a Portfolio's 12b-1
plan, fees to Trustees who are not officers, directors, stockholders, or
employees of Wheat, First Securities, Inc. and its subsidiaries, SEC fees and
related expenses, state Blue Sky qualification fees, charges of the custodian
and transfer and dividend disbursing agents, outside auditing, accounting, and
legal services, charges for the printing of prospectuses and statements of
additional information for regulatory purposes or for distribution, and certain
costs incurred by Mentor Investment Group in responding to shareholder inquiries
as approved by the Trustees from time to time, to shareholders, certain
shareholder report charges and charges relating to corporate matters are borne
by the Portfolio.
Under the applicable Management Contract with the Trust in respect of
each Portfolio, subject to such policies as the Trustees may determine, Mentor
Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes
continuously an investment program for the Portfolio
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and makes investment decisions on behalf of the Portfolio. Subject to the
control of the Trustees, Mentor Advisors or Mentor Perpetual, as the case may
be, also manages, supervises and conducts the other affairs and business of the
Portfolio, furnishes office space and equipment, provides bookkeeping and
clerical services (including determination of the Portfolio's net asset value,
but excluding shareholder accounting services) and places all orders for the
purchase and sale of the Portfolio's portfolio securities. Mentor Advisors or
Mentor Perpetual, as the case may be, may place portfolio transactions with
broker-dealers which furnish Mentor Advisors or Mentor Perpetual, without cost
to it, certain research, statistical and quotation services of value to Mentor
Advisors or Mentor Perpetual and their affiliates in advising the Portfolio and
other clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a
Portfolio to pay greater brokerage commissions than it might otherwise pay.
Each Management Contract provides that Mentor Advisors or Mentor
Perpetual, as the case may be, shall not be subject to any liability to a
Portfolio or to any shareholder of a Portfolio for any act or omission in the
course of or connected with rendering services to a Portfolio in the absence of
its willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties.
Each of the Management Contracts is subject to annual approval by (i)
the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the affected Portfolio, provided that in either
event the continuance is also approved by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust or the investment
adviser in question, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Management Contracts are terminable without
penalty, on not more than sixty days' notice and not less than thirty days'
notice, by the Trustees, by vote of the holders of a majority of the affected
Portfolio's shares, or by the applicable investment adviser. Each terminates
automatically in the event of its assignment (as defined in the 1940 Act).
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement.
Pursuant to the Administration Agreement, Mentor Investment Group
provides continuous business management services to the Portfolios and, subject
to the general oversight of the Trustees, manages all of the business and
affairs of the Portfolios subject to the provisions of the Trust's Declaration
of Trust, By-laws and the 1940 Act, and other policies and instructions the
Trustees may from time to time establish. Mentor Investment Group pays the
compensation of all officers and executive employees of the Trust (except those
employed by or serving at the request of an investment adviser or sub-adviser)
and makes available to the Trust the services of its directors, officers, and
employees as elected by the Trustees or officers of the Trust. In addition,
Mentor Investment Group provides all clerical services relating to the
Portfolios' business. As compensation for its services, Mentor Investment Group
receives a fee from each Portfolio calculated daily at the annual rate of .10%
of a Portfolio's average daily net assets.
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<PAGE>
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may be
terminated at any time without penalty on 30 days notice by Mentor Investment
Group, or immediately in respect of any Portfolio upon notice by the Trustees or
by vote of a majority of the outstanding voting securities of that Portfolio.
The Agreement terminates automatically in the event of any assignment (as
defined in the 1940 Act).
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Trust usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Trust includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
It is anticipated that most purchases and sales of securities by funds investing
primarily in certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, those funds would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser may receive brokerage and research services
and other similar services from many broker-dealers with which such investment
adviser places a Portfolio's portfolio transactions and from third parties with
which these broker-dealers have arrangements. These services include such
matters as general economic and market reviews, industry and company reviews,
evaluations of investments, recommendations as to the purchase and sale of
investments, newspapers, magazines, pricing services, quotation services, news
services and personal computers utilized by the investment adviser's managers
and analysts. Where the services referred to above are not used exclusively by
the investment adviser for research purposes, the investment adviser, based upon
its own allocations of expected use, bears that portion of the cost of these
services which directly relates to its non-research use. Some of these services
are of value to the investment adviser and its affiliates in advising various of
its clients (including the Portfolios), although not all of these services are
necessarily useful and of value in managing all or any of the Portfolios. The
management fee paid by a Portfolio is not reduced
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<PAGE>
because its investment adviser or any of its affiliates receive these services
even though the investment adviser might otherwise be required to purchase some
of these services for cash.
A Portfolio's investment adviser places all orders for the purchase and
sale of portfolio investments for the Portfolio and buys and sells investments
for the Portfolio through a substantial number of brokers and dealers. The
investment adviser seeks the best overall terms available for the Portfolio,
except to the extent the investment adviser may be permitted to pay higher
brokerage commissions as described below. In doing so, the investment adviser,
having in mind the Portfolio's best interests, considers all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security or other investment, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
As permitted by Section 28(e) of the 1934 Act, and by the relevant
advisory agreement, a Portfolio's investment adviser may cause the Portfolio to
pay a broker-dealer which provides "brokerage and research services" (as defined
in the 1934 Act) to that adviser an amount of disclosed commission for effecting
securities transactions on stock exchanges and other transactions for the
Portfolio on an agency basis in excess of the commission which another
broker-dealer would have charged for effecting that transaction. An investment
adviser's authority to cause a Portfolio to pay any such greater commissions is
also subject to such policies as the Trustees may adopt from time to time. It is
the position of the staff of the Securities and Exchange Commission that Section
28(e) does not apply to the payment of such greater commissions in "principal"
transactions. Accordingly, each investment adviser will use its best efforts to
obtain the best overall terms available with respect to such transactions, as
described above.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser may consider sales of shares of a Portfolio
(and, if permitted by law, of the other funds in the Mentor family) as a factor
in the selection of broker-dealers to execute portfolio transactions for a
Portfolio.
Portfolio transactions for the Trust may be effected through Wheat,
First Securities, Inc. ("Wheat"), and EVEREN Securities, Inc. ("EVEREN"),
broker-dealers affiliated with Mentor Advisors and Mentor Perpetual. The
Trustees have adopted certain policies incorporating the standards of Rule 17e-l
issued by the SEC under the 1940 Act which requires, among other things, that
the commissions paid to Wheat and EVEREN must be reasonable and fair compared to
the commissions, fees, or other remuneration received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. Wheat and EVEREN will not participate in brokerage
commissions given by a Portfolio to other brokers or dealers. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and
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executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat and EVEREN in over-the-counter securities in
which Wheat or EVEREN makes a market. The foregoing policies would be
applicable to any portfolio transactions effected by the Portfolios
through any member of the First Union group of companies.
Under rules adopted by the SEC, Wheat and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for execution
and arranging for the performance of this function by members of the exchange
not associated with them. Wheat and EVEREN will be required to pay fees charged
to those persons performing the floor brokerage elements out of the brokerage
compensation they receive from a Portfolio. The Trust has been advised by Wheat
that on most transactions, the floor brokerage generally constitutes from 5% and
10% of the total commissions paid.
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, shares of the Portfolios are sold at their
net asset value on days the New York Stock Exchange is open for business. The
procedure for purchasing shares of the Portfolios is explained in the relevant
prospectus under the section entitled "Sales and Redemptions".
DISTRIBUTION
Mentor Distributors, LLC is the principal underwriter of shares of the
Trust, which are continuously offered, and shares of the other continuously
offered funds in the Mentor family. Mentor Distributors is not obligated to sell
any specific amount of shares of the Trust and will purchase shares for resale
only against orders for shares.
The Trust, on behalf of each Portfolio, has adopted a Distribution Plan
and Agreement pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). The
purpose of each Plan is to permit each Portfolio to compensate Mentor
Distributors and participating insurance companies for services provided and
expenses incurred by it in promoting the sale of shares of the Portfolio,
reducing redemptions, or maintaining or improving services provided to
shareholders and separate account holders. Each Plan provides for payments by
each Portfolio to Mentor Distributors at the annual rate of up to 0.25% of a
Portfolio's average daily net assets, subject to the authority of the Trustees
to reduce the amount of payments or to suspend a Plan as to any Portfolio or
such periods as they may determine. Mentor Distributors may remit some or all of
such payments to participating insurance companies which offer shares of the
relevant Portfolio. Subject to these limitations, the amount of such payments
and the specific purposes for which they are made shall be determined by the
Trustees.
Continuance of a Plan is subject to annual approval by a vote of the
Trustees, including a majority of the Trustees who are not interested persons of
the Trust, and have no direct or indirect financial interest in the operation of
a Plan and related agreements (the "Qualified Trustees"), cast in person at a
meeting called for that purpose. All material amendments to a Plan must be
likewise approved by the Trustees and the Qualified Trustees.
A Plan may not be amended in order to increase materially the costs
which a Portfolio may bear for distribution pursuant to the Plan without also
being approved by a majority of the outstanding voting securities of that
Portfolio. Each Plan terminates automatically in the event of its assignment and
may be terminated as to any Portfolio without penalty, at any time, by a vote
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of a majority of the outstanding voting securities of the affected Portfolio or
by a vote of a majority of the Qualified Trustees.
DETERMINING NET ASSET VALUE
The Trust determines the net asset value per share of each Portfolio
once each day the New York Exchange (the "Exchange") is open as of the close of
regular trading on the Exchange. Currently, the Exchange is closed Saturdays,
Sundays and the following holidays: New Year's Day, Martin L. King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued
at prices which, in the opinion of a Portfolio's investment adviser, most nearly
represent the market values of such securities. Currently, such prices are
determined using the last reported sale price or, if no sales are reported (as
in the case of some securities traded over-the-counter), the last reported bid
price, except that certain U.S. Government securities are stated at the mean
between the last reported bid and asked prices. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value following procedures approved by the Trustees. Liabilities are
deducted from the total, and the resulting amount is divided by the number of
shares of the class outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutionalsize trading units
of such securities using methods based on market transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser determines their fair values. The fair value of
such securities is generally determined as the amount which a Portfolio could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and
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to the nature of the restrictions on disposition of the securities (including
any registration expenses that might be borne by the Portfolio in connection
with such disposition). In addition, specific factors are also generally
considered, such as the cost of the investment, the market value of any
unrestricted securities of the same class (both at the time of purchase and at
the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser is typically able
to obtain dealer quotations for each of the securities on at least a weekly
basis. On any day when it is not practicable for the investment adviser to
obtain an actual dealer quotation for a security, the investment adviser may
reprice the securities based on changes in the value of a U.S. Treasury security
of comparable duration. When the next dealer quotation is obtained, the
investment adviser compares the dealer quote against the price obtained by it
using its U.S. Treasury-spread calculation, and makes any necessary adjustments
to its calculation methodology. The investment adviser attempts to obtain dealer
quotes for each security at least weekly, and on any day when there has been an
unusual occurrence affecting the securities which, in the investment adviser's
view, makes pricing the securities on the basis of U.S. Treasuries unlikely to
provide a fair value of the securities.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of a Portfolio's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value following procedures approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which a Portfolio's net asset value is not calculated. A Portfolio
calculates net asset value per share, and therefore effects sales, redemptions
and repurchases of its shares, as of the close of the Exchange once on each day
on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities
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used in such calculation. If events materially affecting the value of such
securities occur between the time when their price is determined and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value as determined in good faith by procedures approved as required by
the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio 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 its investment portfolio. Redemptions
in kind will be made in conformity with applicable SEC rules, taking such
securities at the same value employed in determining net asset value and
selecting the securities in a manner that the Trustees determine to be fair and
equitable. The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Portfolio is obligated to redeem shares for
any one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class's net asset value during any 90-day period.
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. A Portfolio will not under present law be subject
to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies; and (b) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market value
of its total assets consists of cash and cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities limited
generally with respect to any one issuer to not more than 5% of the value of its
total assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities (other than those of the U.S. Government or other
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regulated investment companies) of any issuer or of two or more issuers which
the Portfolio controls and which are engaged in the same, similar, or related
trades or businesses. In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of the sum of its taxable net investment
income, its net tax-exempt income and the excess, if any, of net short-term
capital gains over net long-term capital losses for such year.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all
of its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31, plus any retained amount
from the prior year, the Portfolio will be subject to a 4% excise tax on the
undistributed amounts. A Portfolio is exempt from this distribution requirement
and excise tax if at all times during the calendar year each shareholder in the
Portfolio was "a segregated asset account of a life insurance company held in
connection with variable contracts."
Distributions from a Portfolio will be taxable to shareholders as
ordinary income to the extent derived from the Portfolio's investment income and
net short-term gains. Pursuant to the Taxpayer Relief Act of 1997 (the "1997
Act"), two different tax rates apply to net capital gains (that is, the excess
of net gains from capital assets held for more than one year over net losses
from capital assets held for not more than one year). One rate (generally 28%)
applies to net gains on capital assets held for more than one year but not more
than 18 months (28% rate gains) and a second, preferred rate (generally 20%)
applies to the balance of such net capital gains ("adjusted net capital gains").
Distributions of net capital gains will be treated in the hands of shareholders
as 28% rate gains to the extent designated by the Portfolio as deriving from net
gains from assets held for more than one year but not more than 18 months, and
the balance will be treated as adjusted net capital gains. Distributions of 28%
rate gains and adjusted net capital gains will be taxable to shareholders as
such, regardless of how long a shareholder has held the shares in the Portfolio.
Hedging transactions. If a Portfolio engages in transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital losses.
These rules could therefore affect the amount, timing and character of
distributions to shareholders. A Portfolio will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interests of the Portfolio.
Certain of a Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and its
taxable income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Portfolio's remaining earnings and profits (including earnings and
profits arising from tax-exempt
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income), and thereafter as a return of capital or as gain from the sale or
exchange of a capital asset, as the case may be. If a Portfolio's book income is
less than its taxable income, the Portfolio could be required to make
distributions exceeding book income to qualify as a regulated investment company
that is accorded special tax treatment.
Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of capital to
the extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you or your shares.
Securities issued or purchased at a discount. A Portfolio's investment
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
Foreign currency-denominated securities and related hedging
transactions. A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts, and forward contacts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
With respect to investment income and gains received by a Portfolio
from sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes to which a Portfolio will be subject depends on the specific countries in
which its assets will be invested and the extent of the assets invested in each
such country and therefore cannot be determined in advance.
Foreign securities. Investment by a Portfolio in certain "passive
foreign investment companies" ("PFICs") could subject the Portfolio to a U.S.
federal income tax (including interest charges) on distributions received from
the company or on proceeds received from the disposition of shares in the
company, which tax cannot be eliminated by making distributions to Portfolio
shareholders. However, the Portfolio may elect to treat a passive foreign
investment company as a "qualified electing fund," in which case the Portfolio
will be required to include its share of the company's income and net capital
gain annually, regardless of whether it receives any distribution from the
company. The Portfolio also may make an election to mark the gains (and to a
limited extent losses) in such holdings "to the market" as though it had sold
and repurchased its holdings in those PFICs on the last day of the Portfolio's
taxable year. Such gains and losses are treated as ordinary income and loss. The
qualified electing fund and mark-to-market elections may have the effect of
accelerating the recognition of income (without the receipt of cash) and
increase the amount required to be distributed for the Portfolio to avoid
taxation. Making either of these elections therefore may require a Portfolio to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect a Portfolio's total return.
A "passive foreign investment company" is any foreign corporation: (i)
75 percent or more of the income of which for the taxable year is passive
income, or (ii) the average percentage of the assets of which (generally by
value, but by adjusted tax basis in certain cases) that produce or are held for
the production of passive income is at least 50 percent. Generally, passive
income for this purpose means dividends, interest (including income equivalent
to interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign currency
gains. Passive income for this purpose does not
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include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
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This discussion of federal income tax treatment of the Trust and its
shareholders is based on the law as of the date of this Statement of Additional
Information.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick located at 99 High Street, Boston, Massachusetts
02110 are the Trust's independent accountants, providing audit services, tax
return review and other tax consulting services and assistance and consultation
in connection with the review of various Securities and Exchange Commission
filings.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of foreign assets. A custodian's responsibilities
include generally safeguarding and controlling a Portfolio's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION
Total return for the one-, five-, and ten-year periods for each class
of shares (or for the life of a class, if shorter) is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in a
Portfolio at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total return for a
period of one year is equal to the actual return of the Portfolio during that
period. Total return calculations assume reinvestment of all Portfolio
distributions at net asset value on their respective reinvestment dates. Total
return also may be presented for other periods.
A Portfolio's yield is presented for a specified thirty-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate amount of dividends and interest earned by the Portfolio during the
base period less expenses accrued for that period, and (ii) dividing that amount
by the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
net asset value per share on the last day of the base period. The result is
annualized on a compounding basis to determine the yield. For this calculation,
interest earned on debt obligations held by a Portfolio is generally calculated
using the yield to maturity (or first expected call date) of such obligations
based on their market values (or, in the case of receivables-backed securities
such as GNMA's, based on costs). Dividends on equity securities are accrued
daily at their stated dividend rates.
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All data are based on past performance and do not predict future results.
At times, a Portfolio's investment adviser may reduce its compensation
or assume expenses of the Portfolio in order to reduce the Portfolio's expenses.
Any such fee reduction or assumption of expenses would increase a Portfolio's
yield and total return during the period of the fee reduction or assumption of
expenses.
The performance of shares of each Portfolio depends upon such variables
as: portfolio quality; average portfolio maturity; type of instruments in which
the particular Portfolio is invested; changes in the expenses of a particular
Portfolio; and various other factors.
The performance of each Portfolio's shares fluctuates on a daily basis
largely because net earnings and net asset value per share fluctuate daily. Both
net earnings and net asset value per share are factors in the computation of
yield and total return for each class of shares of the Portfolios.
Performance information presented for the Portfolios should not be
compared directly with performance information of other insurance products
without taking into account insurance-related charges and expenses payable under
their variable annuity contracts. These charges and expenses are not reflected
in the Portfolio's performance and would reduce an investor's return under the
annuity contract.
PERFORMANCE COMPARISONS
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on
their own criteria rather than on the standardized performance measures
described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified period of
time. From time to time, a Portfolio will quote its Lipper ranking in
advertising and sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year total
return performance (if available) reflecting deduction of expenses and sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective
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criteria customarily employed by rating agencies such as Standard & Poor's
Corporation and Moody's Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public utilities,
and transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 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 listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
Consumer Price Index is generally considered to be a measure of
inflation.
CDA Mutual Fund Growth Index is a weighted performance average of other
mutual funds with growth of capital objectives.
Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc.,
an independent mutual fund rating service.
Lehman Brothers Government/Corporate (total) Index is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers Inc., the index calculates total returns for one month,
three month, twelve month and ten year periods and year-to-date.
Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes
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and bonds with a minimum outstanding principal of $1 million and a minimum
maturity of one year are included.
Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index is
comprised of the Shearson Lehman Government Bond Index, Corporate Bond Index,
Mortgage-Backed Securities Index, and Yankee Bond Index. These indices include:
U.S. Treasury obligations, including bonds and notes; U.S. agency obligations,
including those of the Federal Farm Credit Bank, Federal Land Bank, and the Bank
for Cooperatives; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the Aggregate
Bond Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or
a minimum Fitch rating of BBB.
Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
29,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of their classes of shares
compared to similar funds or portfolios using certain indices, reporting
services, and financial publications. These may include the following: Morgan
Stanley Capital International World Index, The Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) index, J.P. Morgan Global
Traded Bond Index, Salomon Brothers World Government Bond Index, and the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). A Portfolio also
may compare its performance to the performance of unmanaged stock and bond
indices, including the total returns of foreign government bond markets in
various countries. All index returns are translated into U.S. dollars. The total
return calculation for these unmanaged indices may assume the reinvestment of
dividends and any distributions, if applicable, may include withholding taxes,
and generally do not reflect deductions for administrative and management costs.
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Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when comparing
a Portfolio's performance to any index, conditions such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing portfolios using reporting
services, or total return and yield, investors should take into consideration
any relevant differences in portfolios, such as permitted portfolio compositions
and methods used to value portfolio securities and compute net asset value.
Advertisements and other sales literature for a Portfolio 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 a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market funds
using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its shareholders or to
potential investors. The following illustrates the types of information provided
by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all distributions.
They do not reflect deduction of any sales charges. Funds are not categorized;
they compete in a large universe of over 2,000 funds. The source for rankings is
data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year to
3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that
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the fund has performed within the top 5% of a general universe of over 2000
funds; an A rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper mutual
fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset classes. "Large
funds" may be those with assets in excess of $25 million; "small funds" may be
those with less than $25 million in assets.
The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays 4-
week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock or
bond fund categories (for example, aggressive growth stock funds, growth stock
funds, small company stock funds, junk bond funds, Treasury bond funds etc.),
with the top-10 stock funds and the top-5 bond funds appearing in the rankings.
The rankings are based on 3-year annualized total return reflecting changes in
net asset value and reinvestment of distributions and not reflecting sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for five-year
risk adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
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States. The funds receive a composite past performance rating, which weighs the
intermediate and long-term past performance of each fund versus its category, as
well as taking into account its risk, reward to risk, and fees. An A+ rated fund
is one of the best, while a D- rated fund is one of the worst. The source for
Financial World rating is Schabacker investment management in Rockville,
Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive an
A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in "up"
markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also
provides a risk-adjusted grade in both rising and falling markets. Funds are
graded against others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5 and
10 years and the last six bear markets. Total return reflects changes in net
asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three years
the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong
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results for current three-year and five-year performance. Fourth, the fund must
either possess, in Mr. Williamson's judgment, "excellent" risk-adjusted return
or "superior" return with low levels of risk. Each of the 100 funds is ranked in
five categories: total return, risk/volatility, management, current income and
expenses. The rankings follow a five-point system: zero designates "poor"; one
point means "fair"; two points denote "good"; three points qualify as a "very
good"; four points rank as "superior"; and five points mean "excellent."
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolios'
investment advisers, as indicated.
Mentor Investment Advisors, LLC
Large Capitalization Quality Equity Growth
John G. Davenport, CFA -- Managing Director, Chief Equity Officer
Mr. Davenport has 11 years of investment management experience. He joined the
firm after leading equity research at the investment management firm of Lowe,
Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University
of Richmond and has an MBA from the University of Virginia.
Richard H. Skeppstrom II -- Vice President, Portfolio Manager
Mr. Skeppstrom has six years of investment management experience. Before
joining the firm he was a global portfolio analyst for Saudi International Bank
Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit
analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate
degree and an MBA from the University of Virginia.
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Christopher W. Rusbuldt, CFA -- Vice President, Portfolio Manager
Mr. Rusbuldt joined the firm in 1995 and has five years' investment experience.
Previously, he was an equity research analyst for Wheat First Butcher Singer. He
began his career as a banker in the corporate group at NationsBank. Mr.
Rusbuldt is a graduate of the University of Virginia.
Richard L. Rice -- Vice President, Portfolio Manager
Mr. Rice has twenty-five years' experience in the securities industry. Before
joining Mentor, he was a partner in Parata Analytics Research. Prior
responsibilities include research for Signet Asset Management, senior research
analyst for Capitoline Investment Services, and positions in research at Atlanta
Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the University
of Florida and has completed graduate work at Georgia State University.
Steven A. Certo -- Portfolio Manager
Mr. Certo joined the firm in 1997, from the equity research department of Wheat
First Butcher Singer where he was a research analyst following the software
industry. Mr. Certo served five years as an intelligence officer in the US Navy.
His professional background also includes a year as an investment representative
for Edward Jones and Co. He is a graduate of Iona College and is a level III
candidate in the CFA program.
Active Fixed-Income
P. Michael Jones, CFA -- Managing Director, Chief Fixed-Income Officer
Mr. Jones has 10 years of investment management experience. He is the manager
of Mentor Short-Duration Income Portfolio and Mentor Quality Income Portfolio,
as well as Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones
is responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
is enrolled in the Wharton School of the University of Pennsylvania.
Steven C. Henderson -- Vice President, Portfolio Manager
Mr. Henderson has seven years of investment management experience. He is a
portfolio manager for Mentor Short-Duration Income Portfolio, Mentor Quality
Income Portfolio, and Mentor Income Fund. Prior to joining the firm, Mr.
Henderson was senior portfolio analyst at Ryland Capital Management, Inc. Before
Ryland Capital Management, Mr. Henderson was a financial analyst at Ryland
Mortgage Company. Mr. Henderson is a graduate of the University of Richmond and
received an MBA from George Washington University.
Stephen R. McClelland, CFA -- Vice President, Portfolio Manager
Mr. McClelland has six years of investment management experience. He is
responsible for managing institutional total-return portfolios and corporate
bond portfolios. Prior to joining
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Mentor, Mr. McClelland was a budget analyst for three years at Wheat First
Butcher Singer. He is a certified public accountant. Mr. McClelland graduated
from Iowa State University and earned an MBA from Virginia Commonwealth
University.
B. Keith Wantling -- Associate Vice President, Sector Specialist
Mr. Wantling has four years of investment experience. He is responsible for
monitoring and evaluating opportunities in the mortgage-backed securities
market. He designs and maintains spread tracking systems, prepayment data bases
and other tools necessary to determine relative value in the mortgage sector.
Prior to assuming his current duties, Mr. Wantling was instrumental in the
construction of the fixed-income department's proprietary analytical system.
E. Marc Cheatham III -- Systems/Research Analyst
Mr. Cheatham has primary responsibility for the fixed-income team's decision
support system. He builds proprietary analytical software based on
specifications provided by portfolio managers and analysts. In addition, he
builds and maintains the extensive historical databases used to monitor economic
and market conditions. Mr. Cheatham holds an undergraduate degree in computer
science from the University of Richmond.
Todd C. Kuimjian -- Credit/Research Analyst
Mr. Kuimjian has three years of investment experience. He is responsible for
maintaining credit information on corporate issuers and assisting Mr. McClelland
in evaluating the risk/return characteristics of corporate securities. Prior to
assuming his current duties, Mr. Kuimjian served as an investment
accountant/systems analyst and later as a senior investment administrator within
Mentor's investment services group. He holds an undergraduate degree from
Virginia Polytechnic Institute and is also a CPA.
Small-to-Medium Capitalization Equity Growth
Theodore W. Price, CFA -- Managing Director, Chief Investment Officer
Prior to establishing the small/mid cap. management style, Mr. Price served for
10 years as vice chairman and portfolio manager of the investment management
subsidiary of Wheat First Butcher Singer. In 1985, he established the equity
retail mutual fund, Mentor Growth Portfolio, which today represents nearly $600
million in assets. He is a member of the Richmond Society of Financial Analysts.
Mr. Price earned both BA and MBA degrees from the University of Virginia.
Linda A. Ziglar, CFA -- Managing Director, Portfolio Manager
Ms. Ziglar joined the firm in 1991 after serving seven years as vice president
of Federal Investment Counseling and Federated Research Corporation in
Pittsburgh. While at Federated, Ms. Ziglar shared responsibility fro the
management of more than $300 million in mutual fund and separate account assets.
She is a member of the Richmond Society of Financial Analysts, the Financial
Analysts Federation, and a former officer of the Pittsburgh Society of Financial
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Analysts. Ms. Ziglar is a summa cum laude, Phi Beta Kappa graduate of
Randolph-Macon Woman's College. She earned an MBA from the University of
Pittsburgh.
Jeffrey S. Drummond, CFA -- Vice President, Portfolio Manager
Mr. Drummond joined the firm in 1993 after five years in investment strategy at
Wheat First Butcher Singer. While working with Wheat's chief investment
strategist, he shared responsibility for the management of the Strategic Sectors
Portfolio. He is a member of the Richmond Society of Financial Analysts. Mr.
Drummond graduated cum laude from the University of Richmond.
Edward Rick IV -- Research Analyst
Mr. Rick joined the firm in 1994 after his experience with Davenport & Co. of
Virginia, where he focused on research of insider ownership and past earnings
performance of their universe of companies. He also organized research data for
the firm's leading retail analysts. Mr. Rick is a magna cum laude graduate of
the University of Richmond where he served as a business analyst for the
University's investment club, and later as leading manager. He is a candidate in
the Chartered Financial Analyst program.
Tactical Asset Allocation
Don R. Hays -- President, Portfolio Manager
Mr. Hays has more than 27 years' experience in securities selection and analysis
of the markets. In addition to managing Mentor Strategy Portfolio, he is
director of investment strategy for Wheat First Butcher Singer, a position he
has held since 1984. He has also been a partner at J.C. Bradford, where he
served as investment strategist for the firm and chairman of the investment
policy committee. He began his investment career as a financial consultant at
J.C. Bradford. Mr. Hays holds an undergraduate degree from Tennessee
Polytechnic University.
Katherine A. Duggan -- Portfolio Analyst
Ms. Duggan joined Wheat First Butcher Singer in 1996 as part of the investment
strategy department. Her responsibilities within the Mentor Strategy Portfolio
team have focused primarily on the trading of the Portfolio and updating
information used in the tactical asset allocation model employed in its
management. Ms. Duggan received her BSBA from the University of Richmond in
1996.
William P. Ryder -- Research Analyst
Mr. Ryder joined Wheat First Butcher Singer in 1991 as a member of its
investment strategy group, working as a research analyst on its growth and
growth and income model portfolios. In 1995 he became part of the team
responsible for managing the Mentor Strategy Portfolio. In that capacity he
focuses primarily on conducting economic analysis, industry group studies, and
asset allocation modeling. Mr. Ryder attended Virginia Commonwealth University
and has five years' investment experience.
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Mentor Perpetual Advisors, LLC
Rod Smyth -- Managing Director, Mentor Perpetual Advisors
Mr. Smyth is headquartered in Richmond, Virginia and has 13 years of investment
experience. His previous employers include Baring Securities, Ulster Bank
Investment Managers, Citicorp Scrimgeour Vickers, and Nomura International. He
is a graduate of Dundee University.
Martin Arbib -- Chairman, Perpetual Portfolio Management
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A Charter Accountant, he has 22 years' investment management
experience.
Scott McGlashan -- Far East Team Leader
Mr. McGlashan is lead manager of Mentor Perpetual Global Portfolio. He has 19
years' management experience, 13 years specializing in the Far East, and 11
years' tenure at Perpetual. He is a graduate of Yale and Cambridge University.
Kathryn Langridge -- Southeast Asia Team Leader
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
Bob Yerbury -- American Team Leader
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
Stephen Whittaker -- UK Team Leader
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
Margaret Roddan -- Europe Team Leader
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She began
her career with the National Provident Institution. Ms. Roddan is a graduate of
the Investment Management Program at the London Business School. She studied
finance at City University and is a graduate of Bristol University.
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SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
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