As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 333-23939
File No. 811-08153
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X/
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 1 / X/
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X/
ACT OF 1940 ---
Amendment No. 2 / X/
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(Check appropriate box or boxes)
MENTOR VARIABLE INVESTMENT PORTFOLIOS
(Exact name of registrant as specified in charter)
901 East Byrd Street
Richmond, Virginia 23219
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code (804) 782-3647
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PAUL F. COSTELLO, President
901 East Byrd Street
Richmond, Virginia 23219
(Name and address of agent for service)
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Copy to:
TIMOTHY W. DIGGINS, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
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It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [date] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on March 1, 1999 pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
This Amendment relates only to the High Yield Total Return Portfolio of
the Registrant. No information relating to any other portfolios is amended,
deleted, or superseded hereby.
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PROSPECTUS DATED: April , 1999
MENTOR VARIABLE INVESTMENT PORTFOLIOS
Mentor VIP High Income Portfolio
Mentor VIP High Income Portfolio seeks high current income. Capital growth
is a secondary objective when consistent with the objective of seeking high
current income. The Portfolio is a series of shares of Mentor Variable
Investment Portfolios. Mentor Variable Investment Portfolios (the "Trust")
offers shares of beneficial interest in six separate investment portfolios
(collectively, the "Portfolios") for purchase by separate accounts of insurance
companies.
The Portfolio invests primarily in lower-rated bonds, commonly known as
"junk bonds." Investments of this type are subject to a greater risk of loss of
principal and non-payment of interest. Investors should carefully assess the
risks associated with an investment in the Portfolio. The Portfolio may also
trade securities for short-term profits. For a description of these strategies
and the related risks, see "Investment objectives and policies" in this
Prospectus. The Portfolio may use "leverage" -- that is, it may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices and Risk Factors."
This Prospectus sets forth concisely what you should know before investing
in the Portfolio 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 APRIL , 1999 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED FROM TIME
TO TIME. FOR A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION, CALL
MENTOR SERVICES COMPANY, INC. AT 1-800-869-6042. 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 PORTFOLIO 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.
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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MENTOR VARIABLE INVESTMENT PORTFOLIOS
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
shares in its High Yield Portfolio. The Investment Objective and Policies of
the Portfolio are described below. For more information about the investment
strategies employed by the Portfolio, see "Other Investment Practices". The
investment objective and policies of the Portfolio may, unless otherwise
specifically stated, be changed by the Trustees without a vote of shareholders.
The Portfolio is not intended to be a complete investment program, and there is
no assurance that the Portfolio will achieve its objective. The Portfolio is a
diversified mutual fund.
Any percentage limitation on the Portfolio's investments will apply only
at the time of investment; the 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, the Portfolio will not necessarily
dispose of a security when its rating is reduced below any applicable minimum
rating, although Mentor Investment Advisors, LLC ("Mentor Advisors"), the
Portfolio's investment adviser, 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.
THE PORTFOLIO
The Portfolio's investment objective is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
seeking high current income.
Van Kampen Management, Inc. ("Van Kampen") serves as the sub-adviser to
the Portfolio. Van Kampen purchases and sells securities for the Portfolio, and
otherwise manages the investments of the Portfolio, subject to the overall
supervision of Mentor Advisors.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in certain securities because they offer high
current income. The Portfolio may invest in other securities because Mentor
Advisors expects them to appreciate in value as a result of declines in
long-term interest rates or of favorable developments affecting the business or
prospects of the issuer which may improve the issuer's financial condition and
credit rating.
The Portfolio may invest in securities of any maturity. Van Kampen will
adjust the expected average life of the investments held in the Portfolio from
time to time, depending on its assessment of relative yields and risks of
securities of different maturities and its expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of their
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies: Baa or lower by Moody's or BBB or
lower by Standard & Poor's. The Portfolio may invest any portion of its assets
(and normally will invest at least 65% of its assets) in such securities and in
unrated securities determined by Van Kampen to be of comparable quality. The
Portfolio will normally invest a substantial portion of its assets in
securities rated below Baa by Moody's or BBB by Standard & Poor's and in
unrated securities determined by Van Kampen to be of comparable quality.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
considered to be predominantly speculative with
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respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. Securities in the lowest rating categories may have
extremely poor prospects of attaining any real investment standing and may be
in default. The rating services' descriptions of securities in the lower rating
categories, including their speculative characteristics, are set forth in the
Appendix to this Prospectus. See "Other Investments Practices and Risk Factors
- -- lower-rated securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Mentor
Advisors to be of comparable quality, if Van Kampen believes that there are
prospects for an upgrade in a security's rating or a favorable conversion of a
security into other securities. The Portfolio might also invest in such
securities if Mentor Advisors were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
The Portfolio seeks its secondary objective of capital growth, when
consistent with its primary objective of seeking high current income, by
investing in securities which may be expected to appreciate in value as a
result of declines in long-term interest rates or of favorable developments
affecting the business or prospects of the issuer which may improve the
issuer's financial condition and credit rating.
At times, Van Kampen may judge 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 Van Kampen may temporarily
use alternative strategies, primarily designed to reduce fluctuations in the
value of the Portfolio's assets. In implementing these "defensive" strategies,
the Portfolio may invest without limitation in money market instruments and in
U.S. Government or agency obligations, or invest in any other fixed-income
security Van Kampen considers consistent with such defensive strategies. It is
impossible to predict when, or for how long, the Portfolio will use such
alternative strategies.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Van Kampen to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell such securities at any time when Van Kampen deems it
advisable to do so or at prices prevailing for comparable securities that are
more widely held.
OTHER INVESTMENT PRACTICES
The Portfolio 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.
LOWER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY
TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN
LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN
INVESTMENT IN THE PORTFOLIO. The lower ratings of lower-rated securities held
by the 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 the 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. It is
possible that legislation may be adopted in the future limiting the ability of
certain financial institutions to purchase lower-rated securities; such
legislation may adversely affect the liquidity of such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the
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fair market value of such securities. The rating assigned to a security by
Moody's or Standard & Poor's does not reflect an assessment of the volatility
of the security's market value or of the liquidity of an investment in the
security. For more information about the rating services' descriptions of
lower-rated securities, see the Appendix to this Prospectus.
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 values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect the Portfolio's net asset value. The
Portfolio will not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Mentor Advisors will monitor
the investment to determine whether continued investment in the security will
assist in meeting the Portfolio's investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which the Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
The Portfolio may invest in lower-rated securities which trade
infrequently or in more limited volume than higher-rated securities (including
illiquid securities), or which are restricted as to resale. In addition, a
substantial portion of the Portfolio's assets may at times be invested in
securities as to which the Portfolio, by itself or together with other accounts
managed by Mentor Advisors and its affiliates hold a major portion or all of
such securities, which may limit the liquidity of such securities. The
Portfolio could find it difficult or impossible to sell illiquid securities
when Mentor Advisors believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in
the event of a default under securities in cases where the Portfolio holds a
major portion or all of the outstanding issue, the Portfolio may be required to
take possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. The Portfolio may also be limited in
its ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
The Portfolio may at times invest in so-called "payment-in-kind" bonds.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Payment-in-kind
bonds allow an issuer 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, the 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, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the 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.
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Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on its adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. The 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 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 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 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 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.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests.
"Residual" interests represent the right to any excess cash flow remaining
after all other payments are made among the various tranches of interests
issued by structured mortgage-backed vehicles. The values of such interests are
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgages. In the event of a significant change in
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interest rates or other market conditions, the value of an investment by the
Portfolio in such interests could be substantially reduced and the Portfolio
may be unable to dispose of the interests at prices approximating the values
the Portfolio had previously assigned to them or to recoup its initial
investment in the interests. The Portfolio may invest in new types of
mortgage-related securities that may be developed and marketed from time to
time. If the Portfolio was to invest in such newly developed securities,
shareholders would, where appropriate, be notified and this Prospectus would be
revised accordingly.
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.
Mentor Advisors 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 the 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, Mentor Advisors 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 Mentor Advisors 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 the Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
ZERO-COUPON BONDS. The Portfolio 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 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, the 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, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolio 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 the 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, the Portfolio may
recognize a capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. The Portfolio 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, the Portfolio may
at times seek to hedge against fluctuations in net asset value. In addition, to
the extent consistent with applicable law, the Portfolio may buy and sell
futures contracts and related options to increase investment return.
The Portfolio 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
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the index between the time when the Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase investment return.
The 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 the 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 Mentor Advisors to forecast
market movements correctly. Other risks arise from the Portfolio's potential
inability to close out futures or options positions. Although the 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 the 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 the Portfolio to segregate assets to cover its outstanding positions.
For more information, see the Statement of Additional Information. Federal tax
considerations may also limit the Portfolio's ability to engage in options and
futures transactions.
The Portfolio's options and futures transactions will generally be
conducted on recognized exchanges. However, the Portfolio may purchase and sell
options in transactions in the over-the-counter markets. The 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. The 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.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolios' assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend
portfolio securities and may enter into repurchase agreements with banks,
broker/dealers, and other recognized financial institutions. The 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 Portfolio may borrow money to invest in additional portfolio
securities to see current income. The Portfolio 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 Portfolio had borrowed money.
The use of borrowed money, known as "leverage," increases the Portfolio's
market exposure and risk and may result in losses. 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 their portfolios. 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, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including lever-
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age to the extent employed by the Portfolio through "reverse repurchase
agreements," "dollar-roll" transactions, and "forward commitments," described
below) that can exist at any one time will not exceed one-third of the value of
a Portfolio's total assets (less all liabilities of the Portfolio other than
the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements on up to one-third of its assets.
"Reverse" repurchase agreements generally involve the sale by the Portfolio of
securities held by it and an agreement to repurchase the securities at an
agreed-upon price, date, and interest payment. The Portfolio also may enter
into forward commitments, in which the Portfolio buys securities for future
delivery. Reverse repurchase agreements and forward commitments involve
leverage, and may increase the 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 Portfolio may engage in dollar-roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, the 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 the Portfolio may result in losses. See "Leverage," above.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the value of the 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 the 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 the 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 the Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. The 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.
The 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 the
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. The 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").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
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. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with transaction
hedging.
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The 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, the Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
The 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, the 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, the 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,
the 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 Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the 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. The 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 Mentor Advisors 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 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 Portfolio is generally managed in style
similar to another open-end investment company which is managed by Mentor
Advisors and whose shares are generally offered to the public. This other
Mentor portfolio may, however, employ different investment practices and may
invest in securities different from those in which its counterpart Portfolio
invests, and consequently will not have an identical portfolio or experience
identical investment results.
PORTFOLIO TURNOVER. The length of time the 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 the 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
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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, Mentor
Advisors expects that turnover rates for the Portfolio will not exceed [200%].
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 the Portfolios and 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 $234 billion in assets and $17
billion in total stockholders' equity as of December 31, 1998. Mentor Advisors
has over $14 billion in assets under management.
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 $[ ] 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 thirty-three separate investment portfolios in the Mentor Family of Funds,
including that 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.
The Portfolio pays management fees to Mentor Advisors monthly at the
following annual rate (expressed as a percentage of the applicable Portfolio's
average daily net assets) of 0.70%. Mentor Advisors 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, Van Kampen manages the
Portfolio's investments in accordance with the stated policies of the
Portfolio. Van Kampen makes investment decisions for a Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. Mentor
Advisors 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, Van Kampen may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Advisors may consider sales of the
Portfolio (and, if permitted by law, of the other funds in the Mentor family)
as a factor in the selection of broker-dealers. Mentor Advisors may at times
cause the Portfolio to pay commissions to broker-dealers affiliated with Mentor
Advisors.
Administrative Services, Mentor Investment Group, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, provides the 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 the Portfolio at an annual rate of 0.10% of the Portfolio's average
net assets.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that
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it believes are reasonably designed to address this potential "Year 2000"
problem and to obtain satisfactory assurances that comparable steps are being
taken by the Portfolio's other major service providers. There can be no
assurance, however, that these steps will be sufficient to avoid any adverse
impact on the Portfolio from this problem.
HOW THE PORTFOLIO VALUES ITS SHARES
The Trust calculates the net asset value of a share of the 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 the Portfolio's shares even though there 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 Portfolio with
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio 43219.
Mentor Distributors offers shares of the 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 the 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 Portfolio 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 the 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 if the Portfolio is
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
The Portfolio 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. The Portfolio does not 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 Portfolio's 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
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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 the 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 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 daily and paid monthly. The 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.
The 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. The Portfolio 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, the
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 the Portfolio's income distributions to
constitute a return of capital for tax purposes or require the 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 the 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.
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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 dividend 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 six
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 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 comparing a Portfolio's
investment results to those of other mutual funds and other investment
vehicles.
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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.
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APPENDIX
MOODY'S INVESTORS SERVICE, INC., BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, (I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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 principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
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BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S NOTE RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
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:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
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STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety 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.
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THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION (SAI) AND ANNUAL AND
SEMI-ANNUAL REPORTS TO SHAREHOLDERS INCLUDE ADDITIONAL INFORMATION ABOUT THE
PORTFOLIO. THE SAI AND THE FINANCIAL STATEMENTS INCLUDED IN THE PORTFOLIO'S
MOST RECENT ANNUAL REPORT TO SHAREHOLDERS IS INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS, WHICH MEANS IT IS PART OF THIS PROSPECTUS FOR LEGAL PURPOSES.
THE PORTFOLIO'S ANNUAL REPORT DISCUSSES THE MARKET CONDITIONS AND INVESTMENT
STRATEGIES THAT SIGNIFICANTLY AFFECTED THE PORTFOLIO'S PERFORMANCE DURING ITS
LAST FISCAL YEAR. YOU MAY GET FREE COPIES OF THESE MATERIALS, REQUEST OTHER
INFORMATION ABOUT A PORTFOLIO, OR MAKE SHAREHOLDER INQUIRIES BY CALLING
1-800-382-0016.
YOU MAY REVIEW AND COPY INFORMATION ABOUT THE TRUST, INCLUDING ITS SAI,
AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE ROOM IN
WASHINGTON, D.C. YOU MAY CALL THE COMMISSION AT 1-800-SEC-0330 FOR INFORMATION
ABOUT THE OPERATION OF THE PUBLIC REFERENCE ROOM. YOU MAY ALSO ACCESS REPORTS
AND OTHER INFORMATION ABOUT THE TRUST ON THE COMMISSION'S INTERNET SITE AT
HTTP://WWW.SEC.GOV. YOU MAY GET COPIES OF THIS INFORMATION, UPON PAYMENT OF
COPYING COSTS, BY WRITING THE PUBLIC REFERENCE SECTION OF THE COMMISSION,
WASHINGTON, D.C. 20549-6009. YOU MAY NEED TO REFER TO THE TRUST'S FILE NUMBER
UNDER THE INVESTMENT COMPANY ACT, WHICH IS 811-8484.
MENTOR VARIABLE
INVESTMENT
PORTFOLIOS
HIGH INCOME PORTFOLIO
--------------------------
PROSPECTUS
--------------------------
April , 1999
[MENTOR LOGO]
<PAGE>
<PAGE>
MENTOR VARIABLE INVESTMENT PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
April , 1999
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the applicable prospectus of the Trust dated
April , 1999. 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).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Introduction .................................... 3
Investment Restrictions ......................... 3
Certain Investment Practices .................... 4
Management of the Trust ......................... 22
Principal Holders of Securities ................. 24
Investment Advisory Services .................... 24
Administrative Services ......................... 26
Brokerage Transactions .......................... 27
How to Buy Shares ............................... 29
Distribution .................................... 29
Determining Net Asset Value ..................... 29
Redemptions in Kind ............................. 31
Taxes ........................................... 31
Independent Accountants ......................... 34
Custodian ....................................... 34
Performance Information ......................... 34
Performance Comparisons ......................... 35
Members of Investment Management Teams .......... 40
Shareholder Liability ........................... 44
</TABLE>
<PAGE>
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 six 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"); Mentor VIP High Income (the "High Income
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 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.
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(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.
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.
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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 market rise. Any profits from a closing purchase transaction may
be offset by a d ecline 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
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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.
A Portfolio may also purchase put and sell options to increase its current
return.
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 securities when it has the necessary cash, but
expects the rate of return a vailable 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.
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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
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).
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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.
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.
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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.
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.
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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 securities. In
addition, the prices of futures, for a number of reasons, may not c orrelate
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 repurchase and the Portfolio to resell such
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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 by whole loans or
private pass-through certificates (such collateral c ollectively 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,
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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.
RESIDUAL INTERESTS. Residual interests are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans. The cash flow generated by the
mortgage assets underlying a series of mortgage securities is applied first to
make required payments of principal of and interest on the mortgage securities
and second to pay the related administrative expenses of the issuer. The
residual generally represents the right to any excess cash flow remaining after
making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital.
The amount of residual cash flow resulting from a series of mortgage securities
will depend on, among other things, the characteristics of the mortgage assets,
the coupon rate of each class of the mortgage securities, prevailing interest
rates, the amount of administrative expenses, and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on residual interests
may be extremely sensitive to prepayments on the related underlying mortgage
assets in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of
the index upon which interest rate adjustments are based. In certain
circumstances, there may be little or no excess cash flow payable to residual
holders. The Portfolio may fail to recoup fully its initial investment in a
residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently
may not have the liquidity of other more established securities trading in
other markets. Residuals may be subject to certain restrictions on
transferability.
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.
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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.
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 f
orward 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.
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
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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.
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.
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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 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.
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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. However, liquid
assets of a Portfolio sufficient to make payment for the s ecurities 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
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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 general risks involved in leveraging, dollar
rolls and reverse repurchase a greements 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 or decrease in the market
price of the warrant may tend to be greater than the p ercentage 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.
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<PAGE>
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.
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.
20
<PAGE>
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.
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
21
<PAGE>
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 Portfolio
might use Eurodollar futures contracts and options thereon to hedge a gainst
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>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- -------------- --------------------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman (41)* Chairman Chairman and Chief Executive Officer Mentor Investment
c/o Mentor Funds and Trustee Group, Inc.; Chairman and Director Mentor Income Fund,
901 E. Byrd Street Inc., and America's Utility Fund, Inc.; Chairman and
Richmond, VA 23219 Trustee, Cash Resource Trust, Mentor Funds and Mentor
Institutional Trust.
Arnold H. Dreyfuss (70) Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Funds and Mentor Institutional Trust; Director,
Richmond, Virginia 23226 Mentor Income Fund, Inc. and America's Utility Fund, Inc.;
formerly, Chairman and Chief Executive Officer, Hamilton
Beach/Proctor-Silex, Inc.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- -------------- --------------------------------------------------------------
<S> <C> <C>
Thomas F. Keller (67) Trustee R.J. Reynolds Industries Professor of Business Adminis-
Fuqua School of Business tration and Former Dean of Fuqua School of Business, Duke
Duke University University; Director of LADD Furniture, Inc., Wendy's
Durham, NC 27706 International, Inc., American Business Products, Inc., Dimon,
Inc., and Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income Term Trust
2003, Inc., Nations Government Income Term Trust 2004,
Inc., Hatteras Income Securities, Inc., Nations Institutional
Reserves, Nations Fund Trust, Nations Fund, Inc., Nations
Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc.
Trustee, Cash Resource Trust, Mentor Funds and Mentor
Institutional Trust; Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of Richmond;
(57) Trustee, Cash Resource Trust, Mentor Funds and Mentor
University of Richmond Institutional Trust; Director, Mentor Income Fund, Inc. and
Richmond, VA 23173 America's Utility Fund, Inc.
Troy A. Peery, Jr. (52) Trustee Trustee, Cash Resource Trust, Mentor Funds and Mentor
Heilig-Meyers Company Institutional Trust; Director, Mentor Income Fund, Inc. and
2235 Staples Mill Road America's Utility Fund, Inc. Formerly, President of
Richmond, Virginia 23230 Heilig-Meyers Company.
Peter J. Quinn, Jr. (38)* Trustee Managing Director, Mentor Investment Group, LLC, and
c/o Mentor Funds Mentor Services Company, Inc.; Trustee, Cash Resource
901 E. Byrd Street Trust, Mentor Funds and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility Fund, Inc.
Arch T. Allen, III (58) Trustee Attorney at law, Raleigh, North Carolina; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Funds and Mentor Institutional
901 E. Byrd Street Trust; Director, Mentor Income Fund, Inc. and America's
Richmond, VA 23219 Utility Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University of North
Carolina at Chapel Hill.
Weston E. Edwards (64) Trustee President, Weston Edwards & Associates; Trustee Cash
c/o Mentor Funds Resource Trust, Mentor Funds and Mentor Institutional
901 E. Byrd Street Trust; Director, Mentor Income Fund, Inc. and America's
Richmond, VA 23219 Utility Fund, Inc.; Founder and Chairman, The Housing
Roundtable; formerly, President, Smart Mortgage Access,
Inc.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- -------------- -------------------------------------------------------------
<S> <C> <C>
Jerry R. Barrentine (64) Trustee President, J.R. Barretine & Associates; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Funds and Mentor Institutional
901 E. Byrd Street Trust; Director, Mentor Income Fund, Inc. and America's
Richmond, VA 23219 Utility Fund, Inc.; formerly, Executive Vice President and
Chief Financial Officer, Barclays/American Mortgage
Director Corporation; Managing Partner, Barrentine Lott &
Associates.
J. Garnett Nelson (59) Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Funds and Mentor Institutional
901 E. Byrd Street Trust; Director, Mentor Income Fund, Inc., America's Utility
Richmond, VA 23219 Fund, Inc., GE Investment Funds, Inc., and Lawyers Title
Corporation; Member, Investment Advisory Committee,
Virginia Retirement System; formerly, Senior Vice President,
The Life Insurance Company of Virginia.
Paul F. Costello (38) President Managing Director, Mentor Investment Group, LLC;
c/o Mentor Funds President, Cash Resource Trust, Mentor Income Fund, Inc.,
901 E. Byrd Street Mentor Institutional Trust, Mentor Funds and America's
Richmond, VA 23219 Utility Fund, Inc.; Director, Mentor Perpetual Advisors,
LLC.
Terry L. Perkins (51) Treasurer, Senior Vice President and Treasurer, Mentor Investment
c/o Mentor Funds Secretary Group, LLC; Treasurer, Mentor Institutional Trust, Cash
901 E. Byrd Street Resource Trust, Mentor Funds, Mentor Income Fund, Inc.
Richmond, VA 23219
Michael Wade (32) Assistant Vice President and Controller, Mentor Investment Group,
c/o Mentor Funds Treasurer LLC Assistant Treasurer, Mentor Income Fund, Inc., Cash
901 E. Byrd Street Resource Trust, Mentor Institutional Trust, Mentor Funds
Richmond, VA 23219 and America's Utility Fund.
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as
defined in t he Investment Company Act of 1940.
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<PAGE>
TRUSTEES' COMPENSATION
The table below shows the fees paid to each Trustee by the Trust for the
1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1998 calendar year.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM ALL
FROM THE TRUST COMPLEX FUNDS (29 FUNDS)
(FISCAL YEAR END 1998) (CALENDAR YEAR 1998)
------------------------ ----------------------------
<S> <C> <C>
Daniel J. Ludeman ............... $0 $ 0
Arnold H. Dreyfuss .............. $0 $32,000
Thomas F. Keller ................ $0 $32,000
Louis W. Moelchert, Jr. ......... $0 $32,000
J. Garnett Nelson ............... $0 $40,000
Troy A. Peery, Jr. .............. $0 $32,000
Peter J. Quinn, Jr. ............. $0 $ 0
Jerry R. Barrentine ............. $0 $40,000
Weston E. Edwards ............... $0 $42,000
Arch T. Allen III ............... $0 $35,000
</TABLE>
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, the Portfolio had no 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. Van Kampen Management, Inc. ("Van Kampen") serves
as subadviser to the High Income 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 on the
amount of Mentor Investment Group's revenues derived from assets a ttributable
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
25
<PAGE>
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 and/or subadviser 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/subadvisers 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 and subadviser'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 and makes investment
decisions on behalf of the Portfolio. Subject to the c ontrol 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
26
<PAGE>
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.
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
27
<PAGE>
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 because its
investment adviser or any of its affiliates receive these services e ven 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.
28
<PAGE>
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.
The Trustees have determined that portfolio transactions for the Trust may
be effected through Wheat, First Securities, Inc. ("Wheat"), First Union
Brokerage Services ("FUBS"), 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, FUBS, 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, FUBS, 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
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat, FUBS, and EVEREN in over-the-counter
securities in which Wheat, FUBS, or EVEREN makes a market.
Under rules adopted by the SEC, Wheat, FUBS, 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, FUBS, 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
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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 of a
majority of the outstanding voting securities of the affected Portfolio or b y
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 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
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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 used in such calculation. If events materially affecting
the value of such s ecurities 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.
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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 regulated investment companies) of any issuer or of two or more
issuers which t he 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."
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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 income), and thereafter as a return of capital or as
gain from the sale or e xchange 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.
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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 include rents and
royalties received by the foreign corporation from active b usiness 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
[ 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
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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.
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.
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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 criteria customarily
employed by rating agencies such as Standard & Poor's C orporation 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
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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 and bonds with a minimum
outstanding principal of $1 million and a minimum m aturity 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.
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
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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 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
38
<PAGE>
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
States. The funds receive a composite past performance rating, which weighs the
i ntermediate 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.
39
<PAGE>
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 results for current three-year and five-year
performance. Fourth, the fund must e ither 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.
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
40
<PAGE>
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.
DENNIS F. CLARY, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Clary joined Mentor in 1998 and has over 20 years of investment management
experience. Prior to joining Mentor's Fixed Income Team, he worked for three
years as a Vice President and Senior Portfolio Manager for First America
Investment Corporation. He previously was employed for four years as a Vice
President and Portfolio Manager at CSI Asset Management, Inc. and prior to that
for four years in a similar role by Investment & Capital Management
Corporation. Mr. Clary received his BA and MBA degrees from Ohio State
University.
TIMOTHY ANDERSON, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Anderson has 8 years of investment management experience. He joined Mentor
in June, 1998. Prior to joining Mentor's Fixed-Income Team, he worked for two
years as a Senior Fixed Income Analyst at Investment Advisors, Inc. Previous to
that he was employed for five years as a Senior Investment Analyst at St. Paul
Fire & Marine Insurance Company and for two years as an Analyst for Duff &
Phelps Credit Rating Company. He received a BS degree from DePaul University
and an MBA degree from the University of Chicago.
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
41
<PAGE>
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 for 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 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
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.
42
<PAGE>
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.
43
<PAGE>
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.
44
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements and Supporting Schedules:
Not applicable
<TABLE>
<CAPTION>
(b) Exhibits
<S> <C>
(1) Agreement and Declaration of Trust(1)
(2) Bylaws(1)
(3) Not applicable
(4) (A) Portions of Agreement and Declaration of Trust Relating to
Shareholders' Rights(1)
(B) Portions of Bylaws Relating to Shareholders' Rights(1)
(5) (A) Form of Management Contract with Mentor Perpetual(2)
(B) Form of Management Contract with Mentor Advisors(2)
(C) Form of Management Contract for High Income Portfolio(3)
(D) Form of Subsidiary Agreement for High Income Portfolio(5)
(6) Form of Distribution Agreement(2)
(7) Not applicable
(8) (A) Form of Custody Agreement(2)
(B) Form of Administration Agreement(3)
(9) Form of Transfer Agency Agreement(2)
(10) Opinion and Consent of Ropes & Gray(2)
(11) Not applicable
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Plan of Distribution pursuant to Rule 12b-1 (3)
(16) Not applicable
(17) Not applicable
(18) Not applicable
</TABLE>
- -----------------
(1) Incorporated by reference from the Registrant's initial Registration
Statement under the Securities Act of 1933 and the Investment
Company Act of 1940, filed with the Commission on March 25, 1997.
(2) Incorporated by reference from the Registrant's Pre-Effective Amendment
No. 1 on Form N-1A filed January 12, 1998.
(3) Filed herewith.
-1-
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Record Holders of Securities as of December 31, 1998.
VIP Growth 611
VIP Capital Growth 812
VIP Perpetual
International 797
Item 27. Indemnification
Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil, criminal, administrative or investigative, and any
appeal therefrom, before any court or administrative or legislative body, in
which such Covered Person may be or may have been involved as a party or
otherwise or with which such Covered Person may be or may have been threatened,
while in office or thereafter, by reason of being or having been such a Covered
Person except with respect to any matter as to which such Covered Person shall
have been finally adjudicated in any such action, suit or other proceeding (a)
not to have acted in good faith in the reasonable belief that such Covered
Person's action was in the best interest of the Trust or (b) to be liable to the
Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office.
Expenses, including counsel fees so incurred by any such Covered Person
(but excluding amounts paid in satisfaction of judgments, in compromise or as
fines or penalties), may be paid from time to time by the Trust in advance of
the final disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that (a) such Covered
Person shall have provided appropriate security for such undertaking, (b) the
Trust shall be insured against losses arising from any such advance payments, or
(c) either a majority of the disinterested Trustees acting on the matter
(provided that a majority of the disinterested Trustees then in office act on
the matter), or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed to a full
trial-type inquiry) that there is reason to believe that such Covered Person
ultimately will be entitled to indemnification.
-2-
<PAGE>
Section 2. As to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication by a
court, or by any other body before which the proceeding was brought, that such
Covered Person either (a) did not act in good faith in the reasonable belief
that his or her action was in the best interest of the Trust or (b) is liable to
the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office, indemnification shall be provided if (a) approved as in the best
interest of the Trust, after notice that it involves such indemnification, by at
least a majority of the disinterested Trustees acting on the matter (provided
that a majority of the disinterested Trustees then in office act on the matter)
upon a determination, based upon a review of readily available facts (as opposed
to a full trial-type inquiry) that such Covered Person acted in good faith in
the reasonable belief that his or her action was in the best interest of the
Trust and is not liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial-type inquiry) to the effect that
such Covered Person appears to have acted in good faith in the reasonable belief
that his or her action was in the best interest of the Trust and that such
indemnification would not protect such Covered Person against any liability to
the Trust to which he or she would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
Any approval pursuant to this Section shall not prevent the recovery
from any Covered Person of any amount paid to any Covered Person in accordance
with this Section as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good faith
in the reasonable belief that such Covered Person's action was in the best
interests of the Trust or to have been liable to the Trust or its Shareholders
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's office.
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which any Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act (or who has been exempted from being an
"interested person" by any rule, regulation or order of the Securities and
Exchange Commission) and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person.
-3-
<PAGE>
Section 4. In case any Shareholder or former Shareholder shall be held
to be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representative or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
such liability, but only out of the assets of the particular series of Shares of
which he or she is or was a Shareholder.
---------------------------
Reference is made to the Distribution Agreement, to be filed as an
amendment to this Registration Statement, which contains provisions for the
indemnification by Mentor Distributors, LLC of the Registrant and Trustees and
officers and controlling persons of the Registrant under certain circumstances.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
Trustee, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Adviser
The business and other connections of each director, officer, or partner
of the entities below in which such director, officer, or partner is or has
been, at any time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner, or trustee are set
forth in the following tables.
(a) The following is additional information with respect to the
directors and officers of Mentor Investment Advisors, LLC:
Business, Profession,
Vocation or Employment
Position with during the past
Name Investment Adviser two fiscal years
John G. Davenport Managing Director Managing Director,
Mentor Investment
Group, LLC.
R. Preston Nuttall Managing Director Managing Director,
Mentor Investment
Group, LLC.
Paul F. Costello Managing Director Managing Director,
Mentor Investment Group,
LLC; President, Mentor
Funds, Mentor
Institutional Trust, Cash
Resource Trust, Mentor
Income Fund, Inc.; and
America's Utility Fund,
Inc.; Senior Vice
President, Mentor
Distributors, LLC;
Managing Director, Mentor
Perpetual Advisors, LLC.
Theodore W. Price Managing Director Managing Director,
Mentor Investment
Group, LLC.
P. Michael Jones Managing Director Managing Director,
Mentor Investment
Group, LLC.
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
-4-
<PAGE>
Daniel J. Ludeman Chairman Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC.
Karen H. Wimbish Managing Director Managing Director,
Mentor Investment
Group, LLC.
Terry L. Perkins Treasurer Senior Vice President,
Secretary Mentor Investment Group,
L.L.C.
Michael A. Wade Controller Vice President, Mentor
Investment Group, L.L.C.
(b) The following is additional information with respect to the directors and
officers of Mentor Perpetual Advisors, LLC ("Mentor Perpetual"):
<TABLE>
Other Substantial
Position with the Business, Profession,
Name Investment Advisor Vocation or Employment
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited.
Martyn Arbib Managing Director Chairman, Perpetual
Portfolio Management
Limited.
Roger C. Cormick Managing Director Deputy Chairman -
Marketing, Perpetual
Portfolio Management
Limited.
Paul F. Costello Managing Director Managing Director, Mentor
Investment Group, LLC
and Mentor Investment
Advisors, LLC; President,
Mentor Funds, Mentor
Institutional
Trust, Cash Resource
Trust, Mentor Income
Fund, Inc., and America's
Utility Fund, Inc.;
Daniel J. Ludeman Managing Director Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC;
David S. Mossop Managing Director Director, Perpetual
Portfolio Management
Limited
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
Roderick A. Smyth Managing Director Managing Director,
Mentor Investment
Group, LLC.
* The address of Mentor Investment Group, LLC, Wheat, First Securities,
Inc., Wheat First Butcher Singer, Inc., Mentor Funds, Mentor Income
Fund, Inc., Mentor Investment Advisors, LLC, and Mentor Perpetual
Advisors, LLC is 901 East Byrd Street, Richmond, VA 23219. The address
of Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000
Broken Land Parkway, Columbia, MD 21044. The address of Perpetual
Portfolio Management Limited is 48 Hart Street, Henley-on-Thames, Oxon,
England, RG92AZ.
</TABLE>
(c) Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers
and partners of Wellington Management, together with any information as to
any business profession, vocation or employment of a substantial nature
engaged in by such officers and partners during the past two years, is
incorporated herein by reference from Schedules B and D of Form ADV filed
by Wellington Management pursuant to the Advisers Act (SEC File No.
801-15908).
(d) The following is additional information with respect to the directors
and officers of Van Kampen American Capital Management Inc., located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486:
Other Substantial
Position with Business, Profession,
Name Investment Advisor Vocation or Employment
---- ------------------ ----------------------
Don G. Powell Chairman and Director Chairman and Director,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management, Inc., Van
Kampen American Capital
Investment Advisory
Corp., and Van
Kampen American Capital
Advisors, Inc.
Philip N. Duff Chief Executive Officer President and Chief
Executive Officer,
VK/AC Holding, Inc.
and Van Kampen American
Capital, Inc.
Dennis J. McDonnell President and Chief Executive Vice
Operating Officer President, VK/AC
Holding, Inc. and Van
Kampen American
Capital, Inc.;
President and Chief
Operating Officer, Van
Kampen American
Capital Advisors, Inc.,
Van Kampen American
Capital Asset
Management, Inc.,
and Van Kampen
American Capital
Investment Advisory
Corp.
Ronald A. Nyberg Executive Vice President Executive Vice
and General Counsel President and General
Counsel, VK/AC Holding,
Inc., Van Kampen
American Capital, Inc.,
Van Kampen American
Capital Distributors,
Inc., Van Kampen
American Asset
Management, Inc., Van
Kampen American
Investment Advisory
Corp., and Van Kampen
American Capital
Advisors, Inc.
William R. Rybak Executive Vice President Executive Vice
and Chief Financial President and Chief
Officer Financial Officer,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management Inc., Van
Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Peter W. Hegel Executive Vice President Executive Vice
President, Van Kampen
American Capital Asset
Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Alan T. Sachtleben Executive Vice President Executive Vice
President, Van Kampen
American Capital
Asset Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Item 29. Principal Underwriters:
(a) Mentor Distributors, LLC, the Fund's principal underwriter, acts as
principal underwriter for the following investment companies:
The Mentor Funds
o Mentor Growth Portfolio
o Mentor Short-Duration Income Portfolio
o Mentor Balanced Portfolio
o Mentor Capital Growth Portfolio
o Mentor Perpetual Global Portfolio
o Mentor High Income Portfolio
o Mentor Income and Growth Portfolio
o Mentor Quality Income Portfolio
o Mentor Municipal Income Portfolio
o Mentor U.S. Government Money Market Portfolio
o Mentor Money Market Portfolio
o Mentor Tax-Exempt Money Market Portfolio
o Mentor Global Emerging Companies Portfolio
o Mentor High Yield Portfolio
Cash Resource Trust
o Cash Resource Money Market Fund
o Cash Resource U.S. Government Money Market Fund
o Cash Resource Tax-Exempt Money Market Fund
o Cash Resource California Tax-Exempt Money Market Fund
o Cash Resource New York Tax-Exempt Money Market Fund
o Cash Resource North Carolina Tax-Exempt Money Market Fund
o Cash Resource Pennsylvania Tax-Exempt Money Market Fund
o Cash Resource Virginia Tax-Exempt Money Market Fund
Mentor Institutional Trust
o Mentor U.S. Government Cash Management Portfolio
o Mentor Fixed-Income Portfolio
o Mentor Perpetual International Portfolio
Mentor Investment Group
o Mentor Income Fund
o America's Utility Fund
Mentor Variable Investment Portfolios
o Mentor VIP Growth Portfolio
o Mentor VIP Strategy Portfolio
o Mentor VIP Balanced Portfolio
o Mentor VIP Capital Growth Portfolio
o Mentor VIP Perpetual International Portfolio
o Mentor VIP High Income Portfolio
(b) Information concerning officers of Mentor Distributors, LLC:
-5-
Name And Principal Positions And Offices Positions And Offices
Business Address* With Underwriter With Registrant
- ----------------- -------------------- ---------------------
Lynn Mangum Chairman Inapplicable
D'Ray Moore President Inapplicable
Dennis Sheehan Executive Vice President Inapplicable
William J. Tomko Senior Vice President Inapplicable
Mark J. Rybarczyk Senior Vice President Inapplicable
Kevin J. Dell Vice President and Inapplicable
Secretary
Michael D. Burns Vice President Inapplicable
David Blackmore Vice President Inapplicable
Robert L. Tuch Assistant Secretary Inapplicable
Steven Ludwig Compliance Officer Inapplicable
*Principal Address for all Officers:
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-8000
(c) Inapplicable.
-6-
<PAGE>
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and
other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the Rules promulgated thereunder are
Registrant's Clerk, [ ]; Registrant's investment adviser,
Mentor Investment Advisors LLC, and Registrant's transfer agent and
custodian, Investors Fiduciary Trust Company. The address of the Clerk
and Mentor Advisors is 901 East Byrd Street, Richmond, Virginia 23219.
The address of the transfer agent and custodian is 127 West 10th Street,
Kansas City, Missouri.
Item 31. Management Services
None.
Item 32. Undertakings
(a) The Registrant undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding shares
of beneficial interest, to call a meeting of shareholders for
the purpose of voting upon the question of removal of a
Trustee or Trustees and to assist in communications with other
shareholders as required by Section 16(c) of the Investment
Company Act of 1940.
(b) The Registrant undertakes to furnish to each person to whom a
prospectus of the Registrant is delivered a copy of the
Registrant's latest annual report to shareholders, upon
request and without charge.
NOTICE
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Registrant by an officer of the Registrant as an officer and not individually
and that the obligations of or arising out of this instrument are not binding
upon any of the Trustees, officers, or shareholders individually but are binding
only upon the assets and property of the Registrant.
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on behalf of the
undersigned, thereunto duly authorized, in the City of Richmond, and the
Commonwealth of Virginia, on this day of January, 1999.
MENTOR VARIABLE
INVESTMENT PORTFOLIOS
By:/s/ Paul F. Costello
-------------------------
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the
following persons in the capacities indicated on the day of January,
1999.
<TABLE>
<CAPTION>
Signature Title
--------- --------
<S> <C>
*
- -----------------------
Daniel J. Ludeman Chairman; Trustee
* Trustee
- -----------------------
Arnold H. Dreyfuss
*
- -----------------------
Thomas F. Keller Trustee
* Trustee
- -----------------------
Louis W. Moelchert, Jr.
* Trustee
- -----------------------
Troy A. Peery, Jr.
* Trustee
- -----------------------
Peter J. Quinn, Jr.
*
- -----------------------
Arch T. Allen, III Trustee
*
- -----------------------
Weston E. Edwards Trustee
*
- -----------------------
Jerry R. Barrentine Trustee
*
- -----------------------
J. Garnett Nelson Trustee
/s/ Paul F. Costello President; Principal Executive
- --------------------- Officer
Paul F. Costello
/s/ Terry L. Perkins Treasurer; Principal Financial
- --------------------- Officer; Principal Accounting Officer
Terry L. Perkins
By: /s/ Paul F. Costello
---------------------
Paul F. Costello
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ------------ --------
(5)(C) Form of Management Contract for the
High Income Portfolio
(5)(D) Form of Subsidiary Agreement for High Income Portfolio
(8)(B) Form of Administration Agreement
(15) Plan of Distribution
(24) Powers of Attorney
Exhibit 5 (c)
MENTOR VARIABLE INVESTMENT PORTFOLIOS
MANAGEMENT CONTRACT
This Management Contract dated as of February 10, 1999 between MENTOR
VARIABLE INVESTMENT PORTFOLIOS, a Massachusetts business trust (the "Trust"),
and MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for a certain series of the Trust, Mentor VIP High Income
Portfolio (referred to herein as the "Portfolio"), will determine what
investments shall be purchased, held, sold, or exchanged by the Portfolio and
what portion, if any, of the assets of the Portfolio shall be held uninvested
and shall make changes in the Portfolio's investments. In the performance of its
duties, the Manager will comply with the provisions of the Agreement and
Declaration of Trust and Bylaws of the Portfolio and the Portfolio's stated
investment objectives, policies, and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Portfolio and to comply with other
policies which the Trustees may from time to time determine and shall exercise
the same care and diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability
<PAGE>
of the broker or dealer involved, and the quality of service rendered by the
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of 0.70% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after
<PAGE>
such date of termination, shall be based on the average daily net assets of the
Portfolio in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of the Portfolio shall in all cases
be based only on business days and be computed as of the time of the regular
close of business of the New York Stock Exchange, or such other time as may be
determined by the Trustees. Each such payment shall be accompanied by a report
of the Trust prepared either by the Trust or by a reputable firm of independent
accountants which shall show the amount properly payable to the Manager under
this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter for a period of two
years from the date hereof (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the affected Portfolio.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Contract, this
Contract shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
<PAGE>
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or officers of the
Trust or shareholders of any Portfolio of the Trust but are binding only upon
the assets and property of the relevant Portfolio of the Trust.
IN WITNESS WHEREOF, MENTOR VARIABLE INVESTMENT PORTFOLIOS and MENTOR
INVESTMENT ADVISORS, LLC, have each caused this instrument to be signed on its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR VARIABLE INVESTMENT PORTFOLIOS
On Behalf of Mentor VIP High Income Portfolio
By:_____________________________________
Title:
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
Title:
Exhibit 5 (d)
MENTOR FUNDS
SUB-ADVISORY AGREEMENT
[February 10, 1999]
Van Kampen American Capital Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Dear Sirs:
Under an agreement (the "Management Agreement") between Mentor Variable
Investment Portfolios, a Massachusetts business trust (the "Trust"), and Mentor
Investment Advisors, LLC, a Virginia limited liability company (the "Adviser"),
the Adviser serves as the Trust's investment adviser to Mentor VIP High Income
Portfolio, a series of shares of the Trust (the "Portfolio").
The Adviser hereby confirms its agreement with Van Kampen American
Capital Management, Inc. (the "Sub-Adviser") and the Trust with respect to the
Sub-Adviser's serving as the sub-adviser of the Portfolio as follows:
Section 1. Investment Description; Appointment
(a) The Trust desires to employ the Portfolio's capital by investing
and reinvesting in investments of the kind and in accordance with the investment
objectives, policies and limitations specified in the prospectus (the
"Prospectus") and in the statement of additional information (the "Statement of
Additional Information") filed with the Securities and Exchange Commission (the
"SEC") as part of the Trust's Registration Statement on Form N-1A, as amended
from time to time (the "Registration Statement"). The Adviser has herewith
furnished the Sub-Adviser copies of the Trust's Prospectus, Statement of
Additional Information, Declaration of Trust and By-Laws as currently in effect
and agrees during the continuance of the Agreement to furnish the Sub-Adviser
copies of any amendments or supplements thereto before or at the time the
amendments or supplements become effective. The Sub-Adviser will be entitled to
rely on all such documents furnished to it by the Adviser or the Trust.
(b) The Adviser, with the approval of the Trust, hereby appoints the
Sub-Adviser to act as investment adviser to the Portfolio for the periods and on
the terms set forth in this
-1-
<PAGE>
Agreement, and with respect to the assets of the Portfolio designated by the
Adviser to the Sub-Adviser from time to time (the "Designated Assets"). The
Sub-Adviser accepts such appointment and agrees to furnish the services herein
set forth for the compensation herein provided.
Section 2. Portfolio Management Duties
(a) Subject to the supervision of the Adviser and the Trust's Board of
Trustees, the Sub-Adviser will (i) manage the Designated Assets in accordance
with the Portfolio's investment objectives, policies and limitations as stated
in the Trust's Prospectus and Statement of Additional Information; (ii) make
investment decisions for the Portfolio in respect of the Designated Assets; and
(iii) place orders to purchase and sell securities and (where appropriate)
commodity futures contracts for the Portfolio in respect of the Designated
Assets.
(b) The Sub-Adviser will keep the Trust and the Adviser informed of
developments materially affecting the Portfolio and shall, on the Sub-Adviser's
own initiative and as reasonably requested by the Adviser or the Trust, furnish
to the Trust and the Adviser from time to time whatever information the Adviser
reasonably believes appropriate for this purpose.
(c) The Sub-Adviser agrees that, in the performance of the duties
required of it by this Agreement, it will comply with the Investment Company Act
of 1940, as amended (the "Act"), and all rules and regulations thereunder, all
applicable federal and state laws and regulations and with any applicable
procedures adopted by the Trust's Board of Trustees and identified in writing to
the Sub-Adviser. The Adviser will provide to the Sub-Adviser any specific
procedures that must be followed in the performance of Sub-Adviser's duties
hereunder by reason of the affiliation of other sub-advisers or service
providers with the Trust.
Section 3. Brokerage
(a) The Sub-Adviser agrees that it will place orders pursuant to its
investment determinations for the Portfolio either directly with the issuer or
with brokers or dealers selected by the Sub-Adviser in accordance with the
standards specified in paragraphs (b) and (c) of this Section 3. Until notified
to the contrary by the Adviser, the Sub-Adviser may place orders for the
Portfolio with affiliates of the Adviser in accordance with Section 11(a) of the
Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, Section 17(e) of
the Act and Rule 17e-1 thereunder and other applicable laws and regulations. The
Sub-Adviser will identify to the Adviser in writing any brokers or dealers which
are affiliates of the Sub- Adviser. The Adviser will identify to the Sub-Adviser
in writing any brokers and dealers which are affiliates of the Adviser and will
forward to each Sub-Adviser information provided by the other Sub-Advisers with
respect to affiliated broker-dealers of such Sub-Advisers.
-2-
<PAGE>
(b) In placing orders with brokers and dealers, the Sub-Adviser will
seek the best overall terms available. In assessing the best overall terms
available for any portfolio transaction, the Sub-Adviser will consider all
factors it deems relevant including, but not limited to, the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of any
commission for the specific transaction and on a continuing basis.
(c) Subject to the requirements of subsections (a) and (b) above, in
selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, the Adviser shall have the right to
request in writing that transactions giving rise to brokerage commissions shall
be executed by brokers and dealers that provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to the Trust or will be of value to the Trust in the management of its
assets or the Adviser's performance of its management services provided to the
Trust. In addition, subject to the requirements of subsections (a) and (b) above
and the applicable Rules of Fair Practice of the National Association of
Securities Dealers, Inc., the Trust shall have the right to request that such
transactions be executed by brokers and dealers by or through whom sales of
shares of the Trust are made.
Section 4. Information Provided to the Adviser and the Trust
(a) The Sub-Adviser agrees that it will make available to the Adviser
and the Trust promptly upon their request copies of all of its records with
respect to the Portfolio to assist the Adviser and the Trust in monitoring
compliance with the Act and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), as well as other applicable laws. The Sub- Adviser will furnish
the Trust's Board of Trustees with respect to the Portfolio such periodic and
special reports as the Adviser and the Board of Trustees may reasonably request.
(b) The Sub-Adviser agrees that it will immediately notify the Adviser
and the Trust in the event that the Sub-Adviser or any of its affiliates: (i)
becomes subject to a statutory disqualification that prevents the Sub-Adviser
from serving as investment advisor pursuant to this Agreement; or (ii) if it is
or expects to become the subject of an administrative proceeding or enforcement
action by the SEC or other regulatory authority. The Sub-Adviser has provided
the information about itself set forth in the Registration Statement and
acknowledges that, as of the date hereof, it is true and correct and contains no
material misstatement or omission, and the Sub-Adviser further agrees to notify
the Adviser immediately of, (i) any material fact known to the Sub-Adviser
respecting or relating to the Sub-Adviser that is not contained in the
Prospectus or Statement of Additional Information of the Trust, or any amendment
or supplement thereto, if the omission of such would make such document
misleading, (ii) any statement contained therein relating to the Sub-Adviser
that becomes untrue in any material respect, or (iii) any material change in the
investment objective and policies of the mutual fund advised by the Sub-Adviser
and identified in the Prospectus as being a model for the Portfolio.
-3-
<PAGE>
(c) The Sub-Adviser represents that it is an investment adviser
registered under the Advisers Act and other applicable laws and that the
statements contained in the Sub-Adviser's registration under the Advisers Act on
Form ADV, as of the date hereof, are true and correct and do not omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. The Sub-Adviser agrees to maintain the
completeness and accuracy of its registration on Form ADV in accordance with all
legal requirements relating to that Form. The Sub-Adviser acknowledges that it
is an "investment advisor" to the Portfolio within the meaning of the Act and
the Advisers Act.
Section 5. Books and Records
In compliance with the requirements of Rule 31a-3 under the Act, the
Sub-Adviser hereby agrees that all records that it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
copies of any such records upon the Trust's request. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the Act the
records with respect to the Sub-Adviser's duties hereunder required to be
maintained by Rule 31a-1 under the Act and to preserve the records required by
Rule 204-2 under the Advisers Act for the period specified in that Rule.
Section 6. Compensation
(a) In consideration of services rendered pursuant to this Agreement,
the Adviser will pay the Sub-Adviser a fee that is computed daily and paid
monthly at the annual rate set forth in Appendix I to this Agreement (the
"Portfolio Advisory Fee"). From time to time the Sub-Adviser may agree to
reimburse the Trust additional expenses or waive a portion or all of its fee, in
the sole discretion of the Sub-Adviser.
(b) The Portfolio Advisory Fee for the period from the date that the
Portfolio commences investment operations to the end of the month during which
the Portfolio commences investment operations shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such part
of that month shall be prorated according to the proportion that such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
(c) For the purposes of determining fees payable to the Sub-Adviser,
the value of the Trust's net assets shall be computed at the times and in the
manner specified in the Trust's Prospectus and/or the Statement of Additional
Information.
Section 7. Costs and Expenses
-4-
<PAGE>
During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it and its staff in connection with the performance of its
services under this Agreement, including the payment of salaries of all officers
and employees who are employed by it, but not including expenses to be paid by
the Trust or the Adviser such as brokerage fees and commissions and custodian
charges. The Trust shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Trust's securities or other property, for
keeping its books of account, for any other charges of the custodian, and for
calculating the net asset value of the Trust as provided in the prospectus of
the Trust. The Sub-Adviser shall not be required to pay and the Trust (or the
Adviser) shall assume and pay the charges and expenses of the Trust's
operations, including compensation of the trustees, charges and expenses of
independent auditors, of legal counsel, of any transfer or dividend disbursing
agent, and of any registrar of the Trust, costs of acquiring and disposing of
portfolio securities, interest, if any, on obligations incurred by the Trust,
costs of share certificates and of reports, membership dues in the Investment
Company Institute or any similar organization, costs of reports and notices to
shareholders, other like miscellaneous expenses and all taxes and fees payable
to federal, state or other governmental agencies on account of the registration
of securities issued by the Trust, filing of trust documents or otherwise.
Section 8. Standard of Care
The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Adviser or the Trust in
connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Sub-Adviser against any liability to the Adviser or the Trust to which the
Sub-Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or by
reason of the Sub-Adviser's reckless disregard of its obligations and duties
under this Agreement.
Section 9. Services to Other Companies or Accounts
(a) Except as otherwise agreed between the Adviser and the Sub-Adviser,
it is understood that the services of the Sub-Adviser are not exclusive, and
nothing in this Agreement shall prevent the Sub-Adviser from providing similar
services to other investment companies (whether or not their investment
objectives and policies are similar to those of the Trust) or from engaging in
other activities.
(b) When the Sub-Adviser recommends the purchase or sale of a security
for other investment companies and other clients, and at the same time the
Sub-Adviser recommends the purchase or sale of the same security for the Trust,
it is understood that in light of its fiduciary duty to the Trust, such
transactions will be executed on a basis that it is fair and equitable to the
Trust.
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<PAGE>
(c) The Trust and the Adviser understand and acknowledge that the
persons employed by the Sub-Adviser to assist in the performance of its duties
under this Agreement will not devote their full time to that service; nothing
contained in this Agreement will be deemed to limit or restrict the right of the
Sub-Adviser or any affiliate of the Sub-Adviser to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature,
except as otherwise agreed between the Adviser and the Sub-Adviser.
Section 10. Duration and Termination
(a) The Trust represents that this Agreement has been approved by the
Trust's Board of Trustees and shareholders pursuant to Section 15 of the Act.
This Agreement shall become effective on the date hereof and shall continue for
two years from that date, and thereafter shall continue automatically for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Trust's Board of Trustees or (ii) a vote of a majority
of the Portfolio's outstanding voting securities (as defined in the Act),
provided that the continuance is also approved by a majority of the Trustees who
are not "interested persons" (as defined in the Act) of the Trust, by vote cast
in person at a meeting called for the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated (i)
by the Adviser at any time without penalty, upon 60 days' written notice to the
Sub-Adviser and the Trust, (ii) at any time without penalty by the Trust, upon
the vote of a majority of the Trust's Trustees or by vote of the majority of the
Trust's outstanding voting securities, upon 60 days' written notice to the
Sub-Adviser and the Adviser, or (iii) by the Sub-Adviser at any time without
penalty, upon 60 days' written notice to the Adviser and the Trust.
(c) This Agreement will terminate automatically in the event of its
assignment (as defined in the Act and in rules adopted under the Act).
Section 11. Amendments
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved in
accordance with applicable law.
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<PAGE>
Section 12. Limitations of Liability of Trustees, Officers, Employees, Agents
and Shareholders of the Trust
The Sub-Adviser is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust and agrees that the
obligations assumed by the Trust pursuant to this Agreement shall be limited in
any case to the Trust and its assets and that the Sub-Adviser shall not seek
satisfaction of any such obligations from the shareholders of the Trust, the
Trustees, officers, employees or agents of the Trust, or any of them.
Section 13. Miscellaneous
(a) This Agreement shall be governed by the laws of the Commonwealth of
Virginia, provided that nothing herein shall be construed in a manner
inconsistent with the Act, the Advisers Act, or rules or orders of the SEC
thereunder.
(b) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Sub-Adviser
as an agent of the Trust or the Adviser.
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<PAGE>
If the terms and conditions described above are in accordance with your
understanding, kindly indicate your acceptance of this Agreement by signing and
returning to us the enclosed copy of this Agreement.
MENTOR INVESTMENT ADVISORS, LLC
By:_________________________
Name:
Title:
MENTOR VARIABLE INVESTMENT
PORTFOLIOS
By:__________________________
Name:
Title:
Accepted:
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC.
By:_________________________
Name:
Title:
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<PAGE>
APPENDIX I
The Adviser pays the Sub-Adviser an annual fee not to exceed the following
percentage of Portfolio assets as follows:
SUB-ADVISER'S RATE
OF FEE IN
ACCORDANCE WITH
SECTION 6 OF THE
THE MENTOR FUNDS AGREEMENT
Mentor VIP High Income Portfolio .20% of average net assets of
the Portfolio
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Exhibit 8 (b)
MENTOR VARIABLE INVESTMENT PORTFOLIOS
901 East Byrd Street
Richmond, Virginia 23219
February 1, 1998, as amended
February 10, 1999
Mentor Investment Group, LLC
901 East Byrd Street
Richmond, Virginia 23219
Re: Administration Agreement
Dear Gentlemen:
Mentor Variable Investment Portfolios, a Massachusetts business trust
(the "Trust"), is engaged in the business of an investment company. The Trust
desires that you act as administrator of one or more series specified by the
Trustees from time to time on Exhibit A hereto (each, a "Specified Series") of
the Trust, and you are willing to act as such administrator and to perform such
services under the terms and conditions hereinafter set forth. Accordingly, the
Trust agrees with you as follows:
1. Delivery of Trust Documents. The Trust has furnished you with
copies properly certified or authenticated of each of the following:
(a) Agreement and Declaration of Trust of the Trust.
(b) By-laws of the Trust as in effect on the date hereof.
(c) Resolutions of the Trustees of the Trust selecting you as
administrator and approving the form of this Agreement.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
2. Administrative Services. You will continuously provide business
management services to each of the Specified Series and will generally, subject
to the general oversight of the Trustees and except as provided in the next
following paragraph, manage all of the business and affairs of each of the
Specified Series, subject always to the provisions of the
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<PAGE>
Trust's Declaration of Trust and By-laws and of the Investment Company Act of
1940, as amended (the "1940 Act"), and subject, further, to such policies and
instructions as the Trustees may from time to time establish. You shall, except
as provided in the next following paragraph, advise and assist the officers of
the Trust in taking such steps as are necessary or appropriate to carry out the
decisions of the Trustees and the appropriate committees of the Trustees
regarding the conduct of the business of each of the Specified Series.
Notwithstanding any provision of this Agreement, you will not at any
time provide, or be required to provide, to the Trust or to any person with
respect to the Trust investment research, advice, or supervision, or in any way
advise the Trust or any person acting on behalf of the Trust as to the value of
securities or other investments or as to the advisability of investing in,
purchasing, or selling securities or other investments.
3. Allocation of Charges and Expenses. You will pay the compensation
and expenses of all officers and executive employees of the Trust (other than
such persons who serve as such and who are employees of or serve at the request
of any investment adviser to the Trust) and will make available, without expense
to the Trust, the services of such of your directors, officers, and employees as
may duly be elected Trustees or officers of the Trust, subject to their
individual consent to serve and to any limitations imposed by law. You will
provide all clerical services relating to the business of each of the Specified
Series. You will not be required to pay any expenses of the Trust other than
those specifically allocated to you in this paragraph 3. In particular, but
without limiting the generality of the foregoing, you will not be required to
pay: clerical salaries not relating to the services described in paragraph 2
above; fees and expenses incurred by the Trust in connection with membership in
investment company organizations; brokers' commissions; payment for portfolio
pricing services to a pricing agent, if any; legal, auditing, or accounting
expenses; taxes or governmental fees; the fees and expenses of the transfer
agent of the Trust; the cost of preparing share certificates or any other
expenses, including clerical expenses, incurred in connection with the issue,
sale, underwriting, redemption, or repurchase of shares of the Trust; the
expenses of and fees for registering or qualifying securities for sale; the fees
and expenses of Trustees of the Trust who are not affiliated with you; the cost
of preparing and distributing reports and notices to shareholders; public and
investor relations expenses; or the fees or disbursements of custodians of the
Trust's assets, including expenses incurred in the performance of any
obligations enumerated by the Agreement and Declaration of Trust or By-Laws of
the Trust insofar as they govern agreements with any such custodian.
4. Compensation. As compensation for the services performed and the
facilities furnished and expenses assumed by you, including the services of any
consultants retained by you, each Specified Series shall pay you, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of .10 of 1% of the Specified Series average daily net assets.
The first payment of the fee shall be made as promptly as possible at
the end of the month next succeeding the effective date of this Agreement in
respect of such Specified
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<PAGE>
Series, and shall constitute a full payment of the fee due you for all services
prior to that date. If this Agreement is terminated as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of the Specified
Series in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of a Specified Series shall in all
cases be based only on business days and be computed as of the time of the
regular close of business of the New York Stock Exchange, or such other time as
may be determined by the Trustees. Each such payment shall be accompanied by a
report of the Trust prepared either by the Trust or by a reputable firm of
independent accountants which shall show the amount properly payable to you
under this Agreement and the detailed computation thereof.
5. Limitation of Liability. You shall not be liable for any error of
judgement or mistake of law or for any loss suffered by the Trust in connection
with the matters to which this Agreement relates except a loss resulting from
willful misfeasance, bad faith, or gross negligence on your part in the
performance of your duties, or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Trust shall
be deemed, when acting within the scope of his or her employment by the Trust,
to be acting in such employment solely for the Trust and not as your employee or
agent.
6. Duration and Termination of this Agreement. This Agreement shall
remain in force for two years from the date first above written and continue
from year to year thereafter, but only so long as such continuance is
specifically approved at least annually with respect to each Specified Series by
the vote of a majority of the Trustees who are not interested persons of you or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval and by a vote of the Trustees. This Agreement may, on 30 days
notice, be terminated at any time without the payment of any penalty by you,
and, immediately upon notice, by the Trustees or, as to a Specified Series, by
vote of a majority of the outstanding voting securities of that Specified
Series. This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act, as modified by rule 18f-2 under the
Act (particularly the definitions of "interested person", "assignment", and
"majority of the outstanding voting securities"), as from time to time amended,
shall be applied, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission by any rule, regulation, or order.
7. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge, or termination is sought, and no amendment of this Agreement shall be
effective as to a Specified Series until approved by the Trustees, including a
majority of the Trustees who are
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<PAGE>
not interested persons of you or of the Trust, cast in person at a meeting
called for the purpose of voting on such approval.
8. Miscellaneous. The captions in this Agreement are included for
convenience or reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction of effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
9. Limitation of Liability of the Trustees and Shareholders. A copy of
the Agreement and Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Trust as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers, or shareholders individually but are binding
only upon the assets and property of the appropriate Series.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Yours very truly,
MENTOR VARIABLE
INVESTMENT PORTFOLIOS
By: ___________________________
Title:
The foregoing Agreement is hereby accepted as of the date thereof.
MENTOR INVESTMENT GROUP, LLC
By: _____________________________
Title:
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<PAGE>
EXHIBIT A
Mentor VIP Balanced Portfolio
Mentor VIP Capital Growth Portfolio
Mentor VIP Growth Portfolio
Mentor VIP International Portfolio
Mentor VIP Strategy Portfolio
Mentor VIP High Income Portfolio
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Exhibit 15
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
MENTOR VARIABLE INVESTMENT PORTFOLIOS
This constitutes the PLAN OF DISTRIBUTION of Mentor Variable Investment
Portfolios (the "Trust") on behalf of the series of shares of beneficial
interest of the Trust identified on Exhibit A attached hereto and made a part
hereof (each, a "Portfolio").
1. Each Portfolio shall pay to the principal underwriter of the
Portfolio's shares (the "Distributor") a fee for services performed and expenses
incurred in respect of the distribution of shares of the Portfolio, or, where
applicable, of a class of shares of the Portfolio specified in Exhibit A, at the
annual rate set forth opposite the Portfolio's name on Exhibit A of such
Portfolio's average daily net assets attributable to its shares, or to such
class of shares, such fee to be calculated and accrued daily and paid monthly.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
the Distributor's services as distributor of the shares of each Portfolio (or of
the applicable class of shares of any such Portfolio, as the case may be) in
accordance with the Distribution Agreement between the Distributor and the Trust
and may be spent by the Distributor or its agents on any activities or expenses
related to the sale and repurchase of the shares of the Portfolio (or any such
class of shares, as the case may be), including, but not limited to, commissions
and other compensation to persons who engage in or support distribution and
repurchase of shares; printing of prospectuses and reports for other than
existing
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<PAGE>
shareholders; advertising; preparation and distribution of sales literature; and
overhead, travel, and telephone expenses.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees and
(b) those Trustees who are not "interested persons" of the Trust (as defined in
the Investment Company Act of 1940, as amended) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements.
5. This Plan shall continue in effect for successive periods of one
year from its execution for so long as such continuance is specifically approved
at least annually in the manner provided for approval of this Plan in paragraph
4.
6. Any person authorized to direct the disposition of monies paid or
payable by a Portfolio pursuant to this Plan or any related agreement shall
provide to the Trustees and the Trustees shall review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
7. This Plan may be terminated at any time in respect of any or all of
the Portfolios by vote of a majority of the Rule 12b-1 Trustees or, in respect
of a Portfolio, by vote of that Portfolio's shares constituting a majority of
the outstanding voting securities of such Portfolio (or the class of shares in
question, as the case may be).
8. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in paragraph 1 hereof unless such amendment
is approved in the manner provided for initial approval in paragraph 3 hereof,
and no material
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<PAGE>
amendment to the Plan shall be made unless such amendment is approved in the
manner provided for initial approval in paragraph 4 hereof.
9. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Investment Company
Act of 1940, as amended) of the Trust shall be committed to the discretion of
the Trustees who are themselves not interested persons.
10. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof for a period of
not less than six years from the date of execution this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or officers of the
Trust or shareholders of any Portfolio of the Trust but are binding only upon
the assets and property of the relevant Portfolio of the Trust.
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<PAGE>
EXHIBIT A
12b-1 Fee
---------
Mentor VIP Balanced Portfolio 0.25%
Mentor VIP Capital Growth Portfolio 0.25%
Mentor VIP Perpetual International Portfolio 0.25%
Mentor VIP Growth Portfolio 0.50%
Mentor VIP Strategy Portfolio 0.25%
Mentor VIP High Income Portfolio 0.25%
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3270237.01
<PAGE>
Exhibit 24
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of Mentor Variable Investment
Portfolios (the "Trust"), hereby severally constitute and appoint Daniel J.
Ludeman, Paul F. Costello, and Terry L. Perkins, and each of them singly, our
true and lawful attorneys, with full power to them and each of them, to sign for
us, and in our names and in the capacities indicated below, the Registration
Statement on Form N-1A of the Trust and any and all amendments (including
post-effective amendments) to said Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
Signature Title Date
- --------- ----- -----
/s/ Arch T. Allen, III
- ----------------------- Trustee November 10, 1998
Arch T. Allen, III
/s/ Jerry R. Barrentine
- ----------------------- Trustee November 10, 1998
Jerry R. Barrentine
/s/ Arnold H. Dreyfuss
- ----------------------- Trustee November 10, 1998
Arnold H. Dreyfuss
/s/ Weston E. Edwards
- ----------------------- Trustee November 10, 1998
Weston E. Edwards
/s/ Thomas F. Keller
- ----------------------- Trustee November 10, 1998
Thomas F. Keller
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<PAGE>
/s/ Daniel J. Ludeman
- ----------------------- Chairman;Trustee November 10, 1998
Daniel J. Ludeman
/s/ Louis w. Moelchert, Jr.
- -------------------------- Trustee November 10, 1998
Louis W. Moelchert, Jr.
/s/ J. Garnett Nelson
- ----------------------- Trustee November 10, 1998
J. Garnett Nelson
/s/ Troy A. Peery, Jr.
- ----------------------- Trustee November 10, 1998
Troy A. Peery, Jr.
/s/ Peter J. Quinn, Jr.
- ----------------------- Trustee November 10, 1998
Peter J. Quinn, Jr.
/s/ Paul F. Costello
- ----------------------- President November 10, 1998
Paul F. Costello (Principal Executive
Officer)
/s/ Terry L. Perkins
- ----------------------- Treasurer November 10, 1998
Terry L. Perkins (Principal Financial
and Accounting Officer)
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