<PAGE>
THE MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 30, 1995, AS REVISED JULY 26, 1995
The Mentor Funds (the "Trust") is a diversified, open-end series
investment company. This Statement of Additional Information is not a
prospectus and should be read in conjunction with the prospectus of the
Trust dated May 30, 1995 and the prospectus of Mentor Balanced Portfolio
dated May 30, 1995. A copy of either prospectus can be obtained upon
request by writing to Mentor Distributors, Inc., the Trust's distributor,
at P.O. Box 1357, Richmond, Virginia 23286-0109, or by calling Mentor
Distributors at 1-800-382-0016.
This Statement is in three parts. Part I contains information with
respect to the Mentor/Cambridge Growth Portfolio, Mentor Capital Growth
Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income
Portfolio, Mentor Income and Growth Portfolio, and Mentor Perpetual Global
Portfolio. Shares of the Mentor/Cambridge Growth Portfolio currently are
not being offered to the public. Part II contains information with respect
to the Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor Short-
Duration Income Portfolio, and Mentor Balanced Portfolio, which are the
successors to Mentor Growth Fund, Mentor Strategy Fund, Mentor Short-
Duration Income Fund, and Mentor Balanced Fund, respectively, each of which
was previously a series of shares of Mentor Series Trust, a diversified,
open-end series investment company. Part III provides general information
with respect to the Trust and all of the Portfolios.
Table of Contents
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
MENTOR/CAMBRIDGE GROWTH PORTFOLIO . . . . . . . . . . . . . . . . . . . . 1
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . 11
CERTAIN INVESTMENT TECHNIQUES . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ADMINISTRATIVE SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 40
SHAREHOLDER SERVICING PLAN . . . . . . . . . . . . . . . . . . . . . . 41
BROKERAGE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 42
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DETERMINING NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . 48
REDEMPTIONS IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . 49
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 54
TRANSFER AGENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 55
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 55
YIELD AND TAX-EQUIVALENT YIELD . . . . . . . . . . . . . . . . . . . . 57
PERFORMANCE COMPARISONS . . . . . . . . . . . . . . . . . . . . . . . . 60
SHAREHOLDER LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 65
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 66
INTRODUCTION
The Mentor Funds (formerly Cambridge Series Trust) was established as a
Massachusetts business trust on January 20, 1992. As of the date of this
Statement, the Trust consists of the following ten portfolios
(collectively, the "Portfolios" and each individually, the "Portfolio"):
Mentor/Cambridge Growth Portfolio (the "Mentor/Cambridge Growth
Portfolio"); Mentor Capital Growth Portfolio (the "Capital Growth
Portfolio"); Mentor Quality Income Portfolio (the "Quality Income
Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income
Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth
Portfolio"); Mentor Perpetual Global Portfolio (the "Global Portfolio");
Mentor Growth Portfolio (the "Growth Portfolio"); Mentor Strategy Portfolio
(the "Strategy Portfolio"); Mentor Short-Duration Income Portfolio (the
"Short-Duration Income Portfolio"); and Mentor Balanced Portfolio (the
"Balanced Portfolio"). With the exception of the Balanced Portfolio, which
has only one class of shares, each Portfolio has two classes of shares of
beneficial interest, Class A and Class B shares.
PART I
THE FOLLOWING INFORMATION RELATES TO THE MENTOR/CAMBRIDGE GROWTH, CAPITAL
GROWTH, QUALITY INCOME, MUNICIPAL INCOME, INCOME AND GROWTH, AND THE GLOBAL
PORTFOLIOS, EXCEPT WHERE OTHERWISE NOTED.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be
changed without approval by the holders of a majority of the outstanding
shares of a Portfolio:
1. The Portfolios will not issue senior securities except that a
Portfolio (other than the Municipal Income Portfolio) may borrow money
directly or through reverse repurchase agreements in amounts of up to
one-third of the value of its net assets, including the amount
borrowed; and except to the extent that a Portfolio may enter into
futures contracts. The Municipal Income Portfolio may borrow money
from banks for temporary purposes in amounts of up to 5% of its total
assets. The Portfolios will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the Portfolio by enabling it to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Portfolios will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding. During the period any reverse repurchase agreements
are outstanding, the Quality Income Portfolio will restrict the
purchase of portfolio securities to money market instruments maturing
on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse
repurchase agreements. Notwithstanding this restriction, the
Portfolios may enter into when-issued and delayed delivery
transactions.
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The
deposit or payment by a Portfolio of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios
may pledge assets having a value of 10% of assets taken at cost. For
purposes of this restriction, (a) the deposit of assets in escrow in
connection with the writing of covered put or call options and the
purchase of securities on a when-issued basis; and (b) collateral
arrangements with respect to (i) the purchase and sale of stock
options (and options on stock indexes) and (ii) initial or variation
margin for futures contracts, will not be deemed to be pledges of a
Portfolio's assets. Margin deposits for the purchase and sale of
futures contracts and related options are not deemed to be a pledge.
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets.
(The Municipal Income Portfolio will not lend portfolio securities.)
This shall not prevent a Portfolio from purchasing or holding U.S.
government obligations, money market instruments, variable amount
demand master notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a
Portfolio's investment objective, policies and limitations or
Declaration of Trust. The Municipal Income Portfolio will not make
loans except to the extent the obligations the Portfolio may invest in
are considered to be loans.
5. The Portfolios (other than the Quality Income Portfolio) will not
invest more than 10% of the value of their net assets in restricted
securities; the Quality Income Portfolio will not invest more than 15%
of the value of its net assets in restricted securities.
6. None of the Portfolios will invest in commodities, except to the
extent that the Portfolios may engage in transactions involving
futures contracts or options on futures contracts, and except to the
extent the securities the Municipal Income Portfolio invests in are
considered interests in commodities or commodities contracts or to the
extent the Portfolio exercises its rights under agreements relating to
such municipal securities.
7. None of the Portfolios will purchase or sell real estate, including
limited partnership interests, except to the extent the securities the
Income and Growth Portfolio and Municipal Income Portfolio may invest
in are considered to be interests in real estate or to the extent the
Municipal Income Portfolio exercises its rights under agreements
relating to such municipal securities (in which case the Portfolio may
liquidate real estate acquired as a result of a default on a
mortgage), although the Portfolios may invest in securities of issuers
whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real
estate.
8. With respect to 75% of the value of its respective total assets, a
Portfolio will not purchase securities issued by any one issuer (other
than cash or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities), if as a result more
than 5% of the value of its total assets would be invested in the
securities of that issuer. A Portfolio will not acquire more than 10%
of the outstanding voting securities of any one issuer.
9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the
U.S. Government, its agencies or instrumentalities). As described in
the Trust's Prospectus, the Municipal Income Portfolio may from time
to time invest more than 25% of its assets in a particular segment of
the municipal bond market; however, that Portfolio will not invest
more than 25% of its assets in industrial development bonds in a
single industry except as described in the Trust's Prospectus.
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.
In addition, the following practices are contrary to the current policy of
each of the Portfolios (except as otherwise noted), and may be changed
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
1. The Portfolios will not invest more than 15% of the value of their
respective net assets in aliquot securities, including repurchase
agreements providing for settlement more than seven days after notice;
over-the-counter options; certain restricted securities not determined
by the Trustees to be liquid; and non-negotiable fixed income time
deposits with maturities over seven days.
2. The Portfolios will limit their respective investments in other
investment companies to no more than 3% of the total outstanding
voting stock of any investment company, invest no more than 5% of
total assets in any one investment company, or invest more than 10% of
total assets in investment companies in general. The Portfolios will
purchase securities of closed-end investment companies only in open
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. It should be noted that investment companies incur certain
expenses such as management fees, and therefore any investment by a
Portfolio in shares of another investment company would be subject to
duplicative expenses.
3. Except for the Municipal Income Portfolio, no Portfolio will invest
more than 5% of the value of its respective total assets in securities
of issuers which have records of less than three years of continuous
operations, including the operation of any predecessor.
The Municipal Income Portfolio will not invest more than 5% of its total
assets in industrial development bonds where the payment of principal and
interest is the responsibility of companies with less than three years of
operating history.
4. A Portfolio will not purchase or retain the securities of any issuer
if the officers and Trustees of the Trust, the investment adviser, or
sub-adviser own individually more than 1/2 of 1% of the issuer's
securities or together own more than 5% of the issuer's securities.
5. A Portfolio will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may purchase
the securities of issuers which invest in or sponsor such programs and
except pursuant to the exercise by the Municipal Income Portfolio of
its rights under agreements relating to municipal securities
6. A Portfolio will not enter into transactions for the purpose of
engaging in arbitrage.
7. A Portfolio will not purchase securities of a company for the purpose
of exercising control or management, except to the extent that
exercise by the Municipal Income Portfolio of its rights under
agreements related to municipal securities would be deemed to
constitute such control or management.
None of the Portfolios (except for the Quality Income Portfolio) borrowed
money (including through use of reverse repurchase agreements) or loaned
portfolio securities in excess of 5% of the value of its net assets during
the last fiscal year, and no Portfolio (except for the Quality Income
Portfolio) has the intention of doing so in the coming fiscal year.
Except with respect to the Portfolios' policy of borrowing money, if a
percentage limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in value or
net assets will not result in a violation of such restriction.
The Portfolios (1) will limit the aggregate value of the assets underlying
covered call options or put options written by a Portfolio to not more than
25% of its net assets, (2) will limit the premiums paid for options
purchased by a Portfolio to 5% of its net assets, (3) will limit the margin
deposits on futures contracts entered into by a Portfolio to 5% of its net
assets, and (4) will limit investment in warrants to 5% of its net assets
to meet certain state registration requirements. No more than 2% will be
warrants which are not listed on the New York or American Stock Exchange.
Also, the Mentor/Cambridge Growth Portfolio, Capital Growth Portfolio, and
Income and Growth Portfolio will limit their investment in restricted
securities to 5% of total assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)
MENTOR/CAMBRIDGE GROWTH PORTFOLIO
Below is information concerning the Mentor/Cambridge Growth Portfolio.
Shares of this Portfolio currently are not being offered by the Trust for
sale to the public. Except for the sections "How to Buy Shares" in this
Statement and in the Trust's Prospectus, the information contained in the
Trust's Prospectus and in Part I and III of this Statement applies to the
Mentor/Cambridge Growth Portfolio, except where otherwise noted.
The investment objective of the Portfolio is growth of capital through
professional management and diversification of investments in securities it
believes to have potential of capital appreciation. The Portfolio will be
invested primarily in securities which Commonwealth Advisors, Inc., the
Portfolio's investment adviser, believes offer the potential for capital
appreciation. The Portfolio invests primarily in common stocks but can
invest in any securities with potential for capital growth. The investment
objective of the Portfolio is a fundamental policy and may not be changed
without shareholder approval.
In seeking to obtain capital appreciation, the Portfolio may trade to some
degree in securities for the short term. To this extent, the Portfolio
will be engaged in trading operations based on short-term market
considerations as distinct from long-term investment based upon fundamental
valuation of securities. However, the Portfolio will emphasize fundamental
research in attempting to identify under-valued situations which are
anticipated will appreciate over the longer term.
In seeking to achieve its objective, it will be the Portfolio's policy to
invest primarily in securities which it believes will offer the potential
for increasing the Portfolio's total asset value. While it is anticipated
that most investments will be in common stocks of companies with above-
average growth prospects, investments may also be made to a limited degree
in other common stocks and in convertible securities, such as bonds and
preferred stocks. There may be times when a significant portion of the
Portfolio's assets may be held temporarily in cash or defensive-type
securities, depending upon Commonwealth Advisor's analysis of business and
economic conditions and the outlook for security prices. For these
purposes, defensive-type securities include high-grade debt securities
(rated "A"or above); securities issued by the U.S. Government, its agencies
or instrumentalities; and high-quality money market instruments, including
repurchase agreements. Some of the factors Commonwealth Advisors will
consider in making investments for the Portfolio are patterns of increasing
growth in sales and earnings, the development of new or improved products
or services, favorable outlooks for growth in the industry, the probability
of increased operating efficiencies, emphasis on research and development,
cyclical conditions, or other signs that a company is expected to show
greater than average capital appreciation and earnings growth.
PART II
THE FOLLOWING INFORMATION RELATES TO THE GROWTH, STRATEGY, SHORT-DURATION
INCOME, AND BALANCED PORTFOLIOS, EXCEPT WHERE OTHERWISE NOTED. THESE
PORTFOLIOS ARE THE SUCCESSORS TO MENTOR GROWTH FUND, MENTOR STRATEGY FUND,
MENTOR SHORT-DURATION INCOME FUND, AND MENTOR BALANCED FUND, RESPECTIVELY,
EACH OF WHICH WAS PREVIOUSLY A SERIES OF MENTOR SERIES TRUST.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:
1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of
the Portfolios other than the Growth Portfolio and the Strategy
Portfolio may borrow money to the extent contemplated by Restriction 4
below.
2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments in connection with transactions in
futures contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin for this
purpose.)
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the
same issue as, and equal in amount to, the securities sold short
("short sale against-the-box"), and unless not more than 25% of the
Portfolio's net assets (taken at current value) is held as collateral
for such sales at any one time.
4. (Growth Portfolio and Strategy Portfolio) Borrow money or pledge its
assets except that a Portfolio may borrow from banks for temporary or
emergency purposes (including the meeting of redemption requests which
might otherwise require the untimely disposition of securities) in
amounts not exceeding 10% (taken at the lower of cost or market value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; provided that a Portfolio will not
purchase additional portfolio securities when such borrowings exceed
5% of its total assets. (Collateral or margin arrangements with
respect to options, futures contracts, or other financial instruments
are not considered to be pledges.)
(all other Portfolios) 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.
5. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.
6. Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old or (in the case of Growth Portfolio) in equity securities for
which market quotations are not readily available.
7. (as to the Growth Portfolio only) Purchase any security if as a result
the Portfolio would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a single
class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
8. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5%
of the Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25% of
the Portfolio's total assets (taken at current value) would be
invested in a single industry; provided that the restriction set out
in (i) above shall apply, in the case of each Portfolio other than the
Growth Portfolio, only as to 75% of such Portfolio's total assets.
9. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Charter, Commonwealth or
Wellesley, as the case may be, owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and Trustees
who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of
companies that invest or deal in real estate (or, in the case of any
Portfolio other than the Growth Portfolio, real estate or limited
partnership interests). (For purposes of this restriction,
investments by a Portfolio in mortgage-backed securities and other
securities representing interests in mortgage pools shall not
constitute the purchase or sale of real estate or interests in real
estate or real estate mortgage loans.)
11. Make investments for the purpose of exercising control or management.
12. (as to the Growth Portfolio only) Participate on a joint or a joint
and several basis in any trading account in securities.
13. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.
14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open
market involving only customary brokerage commissions and as a result
of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
15. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common
stocks of companies that invest in or sponsor such programs.
16. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer
than 7 days together with other illiquid assets being limited to 10%
of the Portfolio's assets,) and (ii) loans of portfolio securities
(limited to 33% of the Portfolio's total assets).
17. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository
Receipts listed on exchanges or otherwise traded in the United States
and certificates of deposit, bankers' acceptances and other
obligations of foreign banks and foreign branches of U.S. banks if,
giving effect to such purchase, such obligations would constitute less
than 10% of the Trust's total assets (at current value).
18. (as to the Growth Portfolio only) Purchase warrants if as a result the
Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.
19. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.
20. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total
assets (taken at current value), or through the lending of its
portfolio securities with respect to not more than 25% of its total
assets.
In addition, it is contrary to the current policy of each of the
Portfolios, other than the Growth Portfolio, which policy may be changed
without shareholder approval, to:
1. Invest in warrants (other than warrants acquired by the Portfolio as
a part of a unit or attached to securities at the time of purchase)
if as a result such investment (valued at the lower of cost or market
value) would exceed 5% of the value of the Portfolio's net assets,
provided that not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York or American Stock
Exchanges.
2. Purchase or sell commodities or commodity contracts, except that
a Portfolio may purchase or sell financial futures contracts,
options on financial futures contracts, and futures contracts,
forward contracts, and options with respect to foreign
currencies, and may enter into swap transactions.
3. Purchase securities restricted as to resale if as a result (i)
more than 10% of the Portfolio's total assets would be invested
in such securities or (ii) more than 5% of the Portfolio's total
assets (excluding any securities eligible for resale under Rule
144A under the Securities Act of 1933) would be invested in such
securities.
4. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale,
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 then be invested in the aggregate
in securities described in (a), (b), and (c) above.
5. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary
brokerage commissions and as a result of which not more than 5%
of its total assets (taken at current value) would be invested in
such securities, or except as part of a merger, consolidation, or
other acquisition.
6. Purchase puts, calls, straddles, spreads, or any combination
thereof (other than futures contracts, options on futures
contracts or indices, and options on foreign currencies), if, by
reason of such purchase, the value of its aggregate investment
therein will exceed 5% of its total assets.
7. Invest in real estate limited partnerships.
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 above as
fundamental or to the extent designated as such in a Prospectus, the other
investment policies described in this Statement or in the Prospectus are
not fundamental and may be changed by approval of the Trustees. As a
matter of policy, the Trustees would not materially change a Portfolio's
investment objective without shareholder approval.
The Investment Company Act of 1940 (the "1940 Act") provides that a
"vote of a majority of the outstanding voting securities" of the Portfolio
means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, 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.
Notwithstanding the provisions of clauses 3 and 16 above, the Growth
Portfolio has no intention during the coming year to make short sales of
securities or to maintain a short position in any security.
Notwithstanding the provisions of clause 14 above, the Growth Portfolio has
no intention during the coming year to invest in the securities of other
registered investment companies.
Shares of beneficial interest in the Mentor Balanced Portfolio have been
registered only in the Commonwealth of Virginia. These shares may not be
offered or sold in any other state without being registered or exempt from
registration.
PART III
THE FOLLOWING INFORMATION RELATES TO ALL OF THE PORTFOLIOS OF THE TRUST,
EXCEPT WERE OTHERWISE NOTED.
All of the information with respect to the fees, expenses and performance
of the portfolios is based on a portfolio's fiscal year end. The
Mentor/Cambridge Growth, Capital Growth, Quality Income, Municipal Income,
Income and Growth, and Global Portfolios each have a september 30 fiscal
year end. The Growth, Strategy, Short-Duration Income, and Balanced
Portfolios each have a December 31 fiscal year end. Certain information
with respect to certain Portfolios is given for partial fiscal years.
Information concerning the commencement of operations of each of the
Portfolios, with the exception of the Mentor/Cambridge Growth Portfolio, is
contained in the Trust's Prospectus in the Section "Financial Highlights."
For the Mentor/Cambridge Growth Portfolio, information for 1992 includes
information from April 29, 1992 through September 30, 1992.
MANAGEMENT OF THE TRUST
Officers and Trustees
The officers and Trustees are listed below with their addresses, principal
occupations, and present positions, including any positions held with
affiliated persons or Mentor Distributors, Inc.
<TABLE>
POSITIONS WITH
NAME AND ADDRESS THE TRUST PRINCIPAL OCUPATIONS DURING PAST FIVE YEARS
<S> <C> <C>
Daniel J. Ludeman(1)(2) Chairman and Trustee Chairman and Chief Executive Officer since July 1991,
901 East Byrd Street Mentor Investment Group, Inc.; Managing Director of
Richmond, Virginia 23219 Wheat, First Securities, Inc. since August 1989;
Managing Director of Wheat First Butcher Singer, Inc.
since June 1991; Director, Mentor Income Fund, Inc.;
Chairman and Trustee, Cash Resource Trust and Mentor
Institutional Trust.
Peter J. Quinn, Jr.(1)(2) Trustee President, Mentor Distributors, Inc.;
901 E. Byrd Street Managing Director, Mentor Investment
Richmond, Virginia 23219 Group, Inc.; Managing Director, Wheat First Butcher
Singer, Inc.; formerly, Senior Vice
President/Director of Mutual Funds, Wheat First
Butcher Singer, Inc..
Stanley F. Pauley Trustee Chairman and Chief Executive Officer, E.R. Carpenter
P. O. Box 27205 Company Incorporated; Trustee, Cash Resource Trust
Richmond, Virginia 23261 and Mentor Institutional Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business and Finance, University of
University of Richmond Richmond; Trustee, Cash Resource Trust and Mentor
Richmond, Virginia 23173 Institutional Trust.
Thomas F. Keller Trustee Dean, Fuqua School of Business, Duke University;
Duke University Trustee, Cash Resource Trust and Mentor Institutional
Durham, North Carolina Trust.
27706
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Arnold H. Dreyfuss Trustee Retired. Formerly, Chairman and Chief Executive
5100 Cary Street Road Officer, Hamilton Beach/Proctor-Silex, Inc. Trustee,
Richmond, Virginia 23225 Cash Resource Trust and Mentor Institutional Trust.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company. Trustee, Cash
2235 Staples Mill Road Resource Trust and Mentor Institutional Trust.
Richmond, Virginia 23230
Paul F. Costello President Managing Director, Mentor Investment Group, Inc. and Wheat
901 East Byrd Street First Butcher Singer, Inc.; President, Cash Resource
Richmond, Virginia 23219 Trust, Mentor Income Fund, Inc., and Mentor
Institutional Trust; Senior Vice President,
Commonwealth Advisors, Inc. formerly, President,
Mentor Series Trust; Director, President and Chief
Executive Officer, First Variable Life Insurance
Company; President and Chief Financial Officer,
Variable Investors Series Trust; President and
Treasurer, Atlantic Capital & Research, Inc.; Vice
President and Treasurer, Variable Stock Fund, Inc.,
Monarch Investment Series Trust, and GEICO Tax
Advantage Series Trust; Vice President, Monarch Life
Insurance Company, GEICO Investment Services Company,
Inc., Monarch Investment Services Company, Inc., and
Springfield Life Insurance Company.
Terry L. Perkins Treasurer Vice President, Mentor Investment Group, Inc.;
901 East Byrd Street Treasurer, Cash Resource Trust; Treasurer, Mentor
Richmond, Virginia 23219 Income Fund, Inc.; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.;
Treasurer, Mentor Series Trust.
John M. Ivan Secretary Managing Director since October 1992, Director of
901 East Byrd Street Compliance since October 1992, Senior Vice President
Richmond, Virginia 23219 from 1990 to October 1992, and Assistant General
Counsel since 1985, Wheat, First Securities, Inc.;
Clerk, Cash Resource Trust, Mentor Institutional Trust;
formerly, Clerk, Mentor Series Trust.
</TABLE>
(1) This Trustee is deemed to be an "interested person" of the Trust as defined
in the Investment Company Act of 1940.
(2) Members of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
PRINCIPAL HOLDERS OF SECURITIES
The officers and Trustees of the Trust own as a group less than 1% of the
outstanding Class A and B shares of each Portfolio. To the knowledge of
the Trust, no person owns more than 5% of the outstanding shares of any
Portfolio as of March 10, 1995, except that Bank of New York, as Trustee
for the Wheat First Butcher Singer 401(k) Plan, owned of record 865,425
(5.53%) of the shares of the Growth Portfolio and Wheat First Butcher
Singer Foundation owed beneficially 218,504 (92.04%) of the shares of the
Balanced Portfolio.
The Trust's Agreement Declaration of Trust provides that the Trustees will
not be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques in
which one or more of the Portfolios may engage, and certain of the risks
they may entail. Certain of the investment techniques may not be available
to a Portfolio. See "Investment objectives and policies" in the Trust's
Prospectus and "Investment objective and policies" in the Portfolio
prospectuses for a description of the investment techniques generally
applicable to each Portfolio.
Options
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes
in market prices.
Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of
premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a
decline in the price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times
while obligated as a writer, either owns the underlying securities (or
comparable securities satisfying the cover requirements of the securities
exchanges), or has the right to acquire such securities through immediate
conversion of securities.
In return for the premium received when it writes a covered call option, a
Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option
during the life of the option. The Portfolio retains the risk of loss
should the price of such securities decline. If the option expires
unexercised, the Portfolio realizes a gain equal to the premium, which may
be offset by a decline in price of the underlying security. If the option
is exercised, the Portfolio realizes a gain or loss equal to the difference
between the Portfolio's cost for the underlying security and the proceeds
of sale (exercise price minus commissions) plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may
enter into closing purchase transactions in order to free itself to sell
the underlying security or to write another call on the security, realize a
profit on a previously written call option, or protect a security from
being called in an unexpected market rise. Any profits from a closing
purchase transaction may be offset by a decline in the value of the
underlying security. Conversely, because increases in the market price of
a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by unrealized appreciation of
the underlying security owned by the Portfolio.
Covered put options. A Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as
a limited form of hedging against an increase in the price of securities
that the Portfolio plans to purchase. A put option gives the holder the
right to sell, and obligates the writer to buy, a security at the exercise
price at any time before the expiration date. A put option is "covered" if
the writer segregates cash and high-grade short-term debt obligations or
other permissible collateral equal to the price to be paid if the option is
exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio
assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security later appreciates
in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction
may be partially or entirely offset by the premium received on the
terminated option.
Purchasing put and call options. A Portfolio may also purchase put options
to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise
price regardless of any decline in its market price. In order for a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs that the Portfolio must pay. These costs will reduce any
profit the Portfolio might have realized had it sold the underlying
security instead of buying the put option.
A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the
Portfolio, as holder of the call option, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the
market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs. These costs
will reduce any profit the Portfolio might have realized had it bought the
underlying security at the time it purchased the call option.
A Portfolio may also purchase put and call options to enhance its current
return.
Options on foreign securities. The Trust may, on behalf of a Portfolio,
purchase and sell options on foreign securities if in the opinion of its
investment advisor 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 investment adviser or
sub-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 investment adviser or sub-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 investment adviser or sub-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 Trust'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 Trust and other clients of the Portfolios' investment
adviser or sub-advisers may be considered such a group. These position
limits may restrict the Trust'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 Trust's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes each
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, each 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 the Portfolio's 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 the Trust'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 the Portfolio 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 more
certainly than would otherwise be possible the effective rate of return on
portfolio 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 portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio
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
Trust expects to purchase for the Portfolio particular securities when it
has the necessary cash, but expects the rate of return available in the
securities markets at that time to be less favorable than rates currently
available in the futures markets. If the anticipated rise in the price of
the securities should occur (with its concomitant reduction in yield), the
increased cost to the Portfolio of purchasing the securities may be offset,
at least to some extent, by the rise in the value of the futures position
taken in anticipation of the subsequent securities purchase.
Successful use by a Portfolio of futures contracts on debt securities is
subject to its investment adviser's or sub-adviser's ability to predict
correctly movements in the direction of interest rates and other factors
affecting markets for debt securities. For example, if a Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the market prices of debt securities held by it and the
prices of such securities increase instead, the Portfolio will lose part or
all of the benefit of the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it
may have to sell securities to meet daily margin maintenance requirements.
The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option. As with options on securities, the holder
or writer of an option may terminate his position by selling or purchasing
an option of the same series. There is no guarantee that such closing
transactions can be effected. A Portfolio will be required to deposit
initial margin and maintenance margin with respect to put and call options
on futures contracts written by it pursuant to brokers' requirements, and,
in addition, net option premiums received will be included as initial
margin deposits. See "Margin Payments" below. Compared to the purchase or
sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to a Portfolio because the maximum
amount at risk is the premium paid for the options plus transactions costs.
However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when
the purchase or sale of the futures contracts would not, such as when there
is no movement in the prices of debt securities. The writing of a put or
call option on a futures contract involves risks similar to those risks
relating to the purchase or sale of futures contracts.
Index Futures Contracts and Options. A Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units
of a specified debt index at a specified future date at a price agreed upon
when the contract is made. A unit is the current value of the index.
(Debt index futures in which the Portfolios are presently expected to
invest are not now available, although 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.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index is
composed of 100 selected common stocks, most of which are listed on the New
York Stock Exchange. The S&P 100 Index assigns relative weightings to the
common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100
Index, contracts are to buy or sell 100 units. Thus, if the value of the
S&P 100 Index were $180, one contract would be worth $18,000 (100 units x
$180). The stock index futures contract specifies that no delivery of the
actual stocks making up the index will take place. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement
being the difference between the contract price and the actual level of the
stock index at the expiration of the contract. For example, if a Portfolio
enters into a futures contract to buy 100 units of the S&P 100 Index at a
specified future date at a contract price of $180 and the S&P 100 Index is
at $184 on that future date, the Portfolio will gain $400 (100 units x gain
of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180
and the S&P 100 Index is at $182 on that future date, the Portfolio will
lose $200 (100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of
the Portfolio's securities.
Options on 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.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the
underlying indexes themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and
the writer undertakes the obligation to sell or buy (as the case may be),
units of an index at a stated exercise price during the term of the option.
Instead of giving the right to take or make actual delivery of securities,
the holder of an index option has the right to receive a cash "exercise
settlement amount". This amount is equal to the amount by which the fixed
exercise price of the option exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the
date of the exercise, multiplied by a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to close
out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index
involves risks similar to those risks relating to the purchase or sale of
index futures contracts.
Margin Payments. When a Portfolio purchases or sells a futures contract,
it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage
of the amount of the futures contract. This amount is known as "initial
margin". The nature of initial margin is different from that of margin in
security transactions in that it does not involve borrowing money to
finance transactions. Rather, initial margin is similar to a performance
bond or good faith deposit that is returned to a Portfolio upon termination
of the contract, assuming a Portfolio satisfies its contractual
obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying debt 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 Trust 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 investment
adviser or sub-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 Portfolio's portfolio securities
sought to be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to its investment adviser's or sub-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 correlate perfectly with movements in the
underlying securities or index due to certain market distortions. First,
all participants in the futures market are subject to margin deposit
requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous
than margin requirements in the securities markets in general, and as a
result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets
may also cause temporary price distortions. Due to the possibility of
price distortion, even a correct forecast of general market trends by a
Portfolio's investment adviser or sub-adviser may still not result in a
successful hedging transaction over a very 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 investment adviser or sub-
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 for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which
are collateralized by the securities subject to repurchase. Each
Portfolio's investment adviser or sub-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 of any
Portfolio 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. Before a Portfolio enters into a loan, its
investment adviser or sub-adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. 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
collectively hereinafter referred to as "Mortgage Assets"). CMOs may be
issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in multiple
classes. Each class of CMOs is issued at a specific fixed or floating rate
coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on most classes of the CMOs on a
monthly, quarterly, or semi-annual basis. The principal of and interest on
the mortgage assets may be allocated among the several classes of a series
of a CMO in innumerable ways. In a CMO, payments of principal, including
any principal prepayments, on the mortgage assets are applied to the
classes of the series in a pre-determined sequence.
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 due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse
political or economic developments. Foreign companies may not be subject
to auditing and financial reporting standards and requirements comparable
to those which apply to U.S. companies. Foreign brokerage commissions and
other fees are generally higher than in the United States. It may be more
difficult to obtain and enforce a judgment against a foreign issuer.
In addition, to the extent that a Portfolio's foreign investments are not
United States dollar-denominated, the Portfolio may be affected favorably
or unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
investment adviser or sub-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
A Portfolio may engage in currency exchange transactions to protect against
uncertainty in the level of future foreign currency exchange rates. A
Portfolio may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, a Portfolio 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 portfolio 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 also 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 investment adviser or sub-adviser, the pricing
mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.
When it engages in position hedging, a Portfolio 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 on foreign currency and foreign currency futures
contracts and buy or sell forward contracts and foreign currency futures
contracts. A Portfolio may also purchase or sell foreign currency on a
spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values
of those securities between the dates the currency exchange transactions
are entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's portfolio 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 portfolio 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.
A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts,
and by purchasing and selling foreign currency forward contracts.
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
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 investment adviser or sub-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 a Portfolio
investments in foreign securities and to a Portfolio's 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 the Portfolio's domestic investments. For
example, settlement of transactions involving foreign securities or foreign
currency may occur within a foreign country, and the Portfolio may be
required to accept or make delivery of the underlying securities or
currency in conformity with any applicable U.S. or foreign restrictions or
regulations, and may be required to pay any fees, taxes or charges
associated with such delivery. Such investments may also involve the risk
that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should a
Portfolio desire to resell that currency to the dealer.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity,
and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from
their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. As a
result, the net asset value of shares of a Portfolio investing in zero-
coupon securities may fluctuate over a greater range than shares of other
mutual Portfolios 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.
Zero-coupon securities allow an issuer to avoid the need to generate cash
to meet current interest payments. Even though zero-coupon securities do
not pay current interest in cash, a Portfolio is nonetheless required to
accrue interest income on them and to distribute the amount of that
interest at least annually to shareholders. Thus, a Portfolio could be
required at times to liquidate other investments in order to satisfy its
distribution requirement.
No more than 5% of the net assets of the Income and Growth Portfolio will
be invested in CATS, TIGRS or STRIPS.
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 portfolio 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 the Portfolios on
securities in connection with such transactions prior to the date the
Portfolios actually take 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
securities to be purchased are segregated at the trade date. These
securities are marked to market daily and are maintained until the
transaction is settled. As a matter of policy, the Portfolios, other than
the Municipal Income Portfolio, do not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of their respective assets.
Bank Instruments
The Portfolios 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, the Portfolios may invest in:
(bullet) Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches
of U.S. or foreign banks;
(bullet) Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
(bullet) Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the U.S.; and
(bullet) 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.
Restricted Securities
The Portfolios may invest in restricted securities. Restricted securities
are any securities in which each Portfolio may otherwise invest pursuant to
its investment objective and policies but which are subject to restriction
on resale under federal securities law.
The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive, safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under the Rule. The
Trust, on behalf of the Portfolios, believes that the Staff of the SEC has
left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trust's
Board of Trustees. The Board of Trustees considers the following criteria
in determining the liquidity of certain restricted securities.
(bullet) the frequency of trades and quotes for the security;
(bullet) the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
(bullet) dealer undertakings to make a market in the security; and
(bullet) the nature of the security and the nature of the marketplace trades.
Lower-Grade Securities
In normal circumstances, at least 80% of the Municipal Income Portfolio's
total assets will be invested in investment-grade tax-exempt municipal
securities and up to 20% of the Municipal Income Portfolio's total assets
may be invested in lower-grade tax-exempt municipal securities. The amount
of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate
issuers with publicly traded securities, and the market for tax-exempt
municipal securities is considered to be generally less liquid than the
market for corporate debt obligations and the market for investment grade
tax-exempt municipal securities. Liquidity relates to the ability of a
Portfolio to sell a security in a timely manner at a price which reflects
the value of that security. Further, municipal securities in which the
Municipal Income Portfolio may invest include special obligation bonds,
lease obligations, participation certificates and variable rate
instruments. The market for such securities may be particularly less
liquid. The relative illiquidity of some of the Municipal Income
Portfolio's securities may adversely affect the ability of the Municipal
Income Portfolio to dispose of such securities in a timely manner and at a
price which reflects the value of such security in the Trust's judgment.
Although the issuer of some such municipal securities may be obligated to
redeem such securities at face value, such redemption could result in
capital losses to the Municipal Income Portfolio to the extent that such
municipal securities were purchased by the Municipal Income Portfolio at a
premium to face value. The market for less liquid securities tends to be
more volatile than the market for more liquid securities, and market values
of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market
values of higher grade, more liquid securities.
The Municipal Income Portfolio's net asset value will change with changes
in the value of its portfolio securities. Because the Municipal Income
Portfolio will invest primarily in fixed income municipal securities, the
Municipal Income Portfolio's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline,
the value of a portfolio invested in fixed income securities can be
expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested in fixed income securities can be expected to decline.
Net asset value and market value may be volatile due to the Municipal
Income Portfolio's investment in lower-grade and less liquid municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
To the extent that there is no established retail market for some of the
securities in which the Municipal Income Portfolio may invest, there may be
relatively inactive trading in such securities and the ability of the Trust
to accurately value such securities may be adversely affected. During
periods of reduced market liquidity and in the absence of readily available
market quotations for securities held in the Municipal Income Portfolio,
the responsibility of the Trust to value the Municipal Income Portfolio's
securities becomes more difficult and the Trust's judgment may play a
greater role in the valuation of the Municipal Income Portfolio's
securities due to the reduced availability of reliable objective data. To
the extent that the Municipal Income Portfolio invests in illiquid
securities and securities which are restricted as to resale, the Municipal
Income Portfolio may incur additional risks and costs. Illiquid and
restricted securities are particularly difficult to dispose of. When
determining whether municipal leases purchased by the Municipal Income
Portfolio will be classified as a liquid or illiquid security, the Board of
Trustees has directed the sub-adviser to consider the following factors:
the frequency of trades and quotes for the security; the volatility of
quotations and trade prices for the security; the number of dealers willing
to purchase or sell the security and the number of potential purchases;
dealer undertaking to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer); the rating of the security and the financial condition and
prospects of the issuer of the security; whether the lease can be
terminated by the lessee; the potential recovery, if any, from a sale of
the leased property upon termination of the lease; the lessee's general
credit strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will
discontinue appropriating funding for the leased property because the
potential property is no longer deemed essential to its operations (e.g.,
the potential for an "event of nonappropriation"); any credit enhancement
or legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to the
Portfolio's ability to dispose of the security.
Lower-grade tax-exempt municipal securities generally involve greater
credit risk than higher-grade municipal securities. A general economic
downturn or a significant increase in interest rates could severely disrupt
the market for lower-grade tax-exempt municipal securities and adversely
affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade tax-exempt municipal
securities to repay principal and to pay interest, to meet projected
financial goals and to obtain additional financing may be adversely
affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the lower-
grade tax-exempt municipal securities in the Municipal Income Portfolio
and, thus, the Portfolio's net asset value. The secondary market prices of
lower-grade tax-exempt municipal securities are less sensitive to changes
in interest rates than are those for higher rated tax-exempt municipal
securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investors'
perceptions, whether or not based on rational analysis, may also affect the
value and liquidity of lower-grade tax-exempt municipal securities.
Yields on the Municipal Income Portfolio's securities can be expected to
fluctuate over time. In addition, periods of economic uncertainty and
changes in interest rates can be expected to result in increased volatility
of the market prices of the lower-grade tax-exempt municipal securities in
the Municipal Income Portfolio's portfolio and, thus, in the net asset
value of the Portfolio. Net asset value and market value may be volatile
due to the Municipal Income Portfolio's investment in lower-grade and less
liquid municipal securities. Volatility may be greater during periods of
general economic uncertainty. The Municipal Income Portfolio may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of interest or a repayment of principal on its
portfolio holdings, and the Municipal Income Portfolio may be unable to
obtain full recovery thereof. In the event that an issuer of securities
held by the Municipal Income Portfolio experiences difficulties in the
timely payment of principal or interest, and such issuer seeks to
restructure the terms of its borrowings, the Municipal Income Portfolio may
incur additional expenses and may determine to invest additional capital
with respect to such issuer or the project or projects to which the
Municipal Income Portfolio's securities relate. Recent and proposed
legislation may have an adverse impact on the market for lower-grade tax-
exempt municipal securities. Recent legislation requires federally-insured
savings and loan associations to divest their investments in lower-grade
bonds. Other legislation has, from time to time, been proposed which, if
enacted, could have an adverse impact on the market for lower-grade tax-
exempt municipal securities.
The Municipal Income Portfolio will rely on the sub-adviser's judgment,
analysis, and experience in evaluating the creditworthiness of an issue.
In this evaluation, the sub-adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The sub-adviser also may consider,
although it does not rely primarily on, the credit ratings of Standard &
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"),
in evaluating tax-exempt municipal securities. Such ratings evaluate only
the safety of principal and interest payments, not market value risk.
Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings,
the sub-adviser continuously monitors the issuers of tax-exempt municipal
securities held in the Municipal Income Portfolio. The Municipal Income
Portfolio may, if deemed appropriate by the sub-adviser, retain a security
whose rating has been downgraded below B- by S&P or below B3 by Moody's, or
whose rating has been withdrawn.
Because issuers of lower-grade tax-exempt municipal securities frequently
choose not to seek a rating of their municipal securities, the sub-adviser
will be required to determine the relative investment quality of many of
the municipal securities in the Municipal Income Portfolio. Further,
because the Municipal Income Portfolio may invest up to 20% of its total
assets in these lower-grade municipal securities, achievement by the
Municipal Income Portfolio of its investment objective may be more
dependent upon the sub-adviser's investment analysis than would be the case
if the Municipal Income Portfolio were investing exclusively in higher-
grade municipal securities. The relative lack of financial information
available with respect to issuers of municipal securities may adversely
affect the sub-adviser's ability to successfully conduct the required
investment analysis.
Dollar Rolls and Reverse Repurchase Agreements
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls
involving mortgage-related securities, the mortgage-related securities that
are purchased typically will be of the same type and will have the same or
similar interest rate and maturity as those sold, but will be supported by
different pools of mortgages. The Portfolio forgoes principal and interest
paid during the roll period on the securities sold in a dollar roll, but it
is compensated by the difference between the current sales price and the
price for the future purchase as well as by any interest earned on the
proceeds of the securities sold. A Portfolio could also be compensated
through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that
the Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement,
while it will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous if the interest
cost to the Portfolio of the reverse repurchase transaction is less than
the cost of otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements involve the risk that the
market value of the securities that the Portfolio is obligated to
repurchase under the agreement may decline below the repurchase price. In
the event a Portfolio's counterparty under a dollar roll or reverse
repurchase agreement becomes bankrupt or insolvent, the Portfolio's use of
the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.
When effecting reverse repurchase agreements, liquid assets of the
Portfolio, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and are maintained until the
transaction is settled.
The Portfolios that may not use such transactions for leveraging purposes
will segregate cash, U.S. Government securities or other high grade debt
obligations in an amount sufficient to meet their purchase obligations
under the transactions. These Portfolios will also maintain asset coverage
of at least 300% for all outstanding firm commitments, dollar rolls and
other borrowings.
Since, as noted above, the counterparty is required to deliver a similar,
but not identical, security to a Portfolio, the security which a Portfolio
is required to buy under the dollar roll may be worth less than an
identical security. Finally, there can be no assurance that the a
Portfolio's use of the cash that it receives from a dollar roll will
provide a return that exceeds borrowing costs.
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
investment adviser's or sub-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 investment adviser or sub-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 investment
adviser or sub-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
percentage increase or decrease in the market price of the optioned common
stock. Warrants acquired in units or attached to securities may be deemed
to be without value for purposes of a Portfolio's policy.
Swaps, Caps, Floors and Collars
A Portfolio may enter into interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. A Portfolio expects
to enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. A Portfolio would use these transactions as
hedges and not as speculative investments and would not sell interest rate
caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by a Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles
the purchaser to receive payments on a notional principal amount from the
party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap
and a floor that preserves a certain return within a predetermined range of
interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. A Portfolio
will not enter into any swap, cap, floor or collar transaction unless, at
the time of entering into such transaction, the unsecured long-term debt of
the counterparty, combined with any credit enhancements, is rated at least
A by S&P or Moody's or has an equivalent rating from a NRSRO or is
determined to be of equivalent credit quality by the Portfolio's investment
adviser or sub-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.
High Yield, High Risk Debt Securities
A Portfolio may invest a portion of its assets in securities rated Baa/BBB
or lower and in unrated securities of equivalent quality in the investment
adviser's or sub-adviser's judgment. A Portfolio may invest in debt
securities which are rated as low as C by Moody's or D by S&P. Such
securities may be in default with respect to payment of principal or
interest.
Below investment grade securities (rated below Baa by Moody's and below BBB
by S&P) or unrated securities of equivalent quality in the investment
adviser's or sub-adviser's judgment, carry a high degree of risk (including
the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of
principal and income, and may be less liquid, than securities in the higher
rating categories and are considered speculative. The lower the ratings of
such debt securities, the greater their risks render them like equity
securities. See the Appendix to the Prospectus for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of
such obligations than on higher quality debt securities. During an
economic downturn or period of rising interest rates, highly leveraged
issues may experience financial stress which could adversely affect their
ability to service their principal and interest payment obligations.
Prices and yields of high yield securities will fluctuate over time and,
during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Portfolio's net asset value. In addition,
investments in high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market. A thin trading market may
limit the ability of a Portfolio to accurately value high yield securities
in its portfolio and to dispose of those securities. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities. These securities may also involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these
reasons, it is the policy of the investment adviser or sub-adviser not to
rely exclusively on ratings issued by established credit rating agencies,
but to supplement such ratings with its own independent and on-going review
of credit quality. The achievement of a Portfolio's investment objective
by investment in such securities may be more dependent on the investment
adviser's or sub-adviser's credit analysis than is the case for higher
quality bonds. Should the rating of a portfolio security be downgraded,
the investment adviser or sub-adviser will determine whether it is in the
best interest of a Portfolio to retain or dispose of such security.
Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this
type of security. Also, recent legislation restricts the issuer's tax
deduction for interest payments on these securities. Such legislation may
significantly depress the prices of outstanding securities of this type.
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 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 the investment adviser
or sub-adviser considers that the Austrian schilling is linked to the
German deutschemark (the "D-mark"), the Portfolio holds securities
denominated in schillings and investment adviser or sub-adviser believes
that the value of schillings will decline against the U.S. dollar, the
investment adviser or sub-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 against changes in LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
INVESTMENT ADVISORY SERVICES
Commonwealth Advisors, Inc. (formerly Cambridge Investment Advisors,
Inc.) serves as investment adviser to the Mentor/Cambridge Growth, Capital
Growth, Quality Income, Income and Growth, and Municipal Income Portfolios.
Cambridge has entered into sub-advisory arrangements with respect to
certain of the Portfolios. Van Kampen/American Capital Management, Inc.
("Van Kampen") serves as sub-adviser to the Municipal Income Portfolio;
Wellington Management Company ("WMC") serves as sub-adviser to the Income
and Growth Portfolio. Each of these sub-advisers has complete discretion
to purchase and sell portfolio securities for its respective Portfolio
within the particular Portfolio's investment objective, restrictions, and
policies. Charter Asset Management, Inc. ("Charter") serves as investment
adviser and administrator to the Growth Portfolio. Wellesley Advisors,
Inc. ("Wellesley") serves as investment adviser to the Strategy Portfolio.
Commonwealth Investment Counsel, Inc. ("Commonwealth") serves as investment
adviser to the Balanced and Short-Duration Income Portfolios. Mentor
Perpetual Advisors, L.C. ("Mentor Perpetual") serves as investment adviser
to the Global Portfolio. Mentor Investment Group, Inc. ("Mentor")
(formerly Investment Management Group, Inc.) serves as administrator to all
of the Portfolios. Each of Cambridge, Charter, Commonwealth, and Wellesley
is a wholly-owned subsidiary of Mentor, which is a wholly-owned subsidiary
of Wheat First Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned
equally by Mentor and Perpetual plc, a diversified financial services
holding company.
Subject to the supervision and direction of the Trustees, each
investment adviser and sub-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. Mentor furnishes each of the
Portfolios with certain statistical and research data, clerical help, and
certain accounting, data processing, and other services required by the
Portfolios, assists in preparation of certain reports to shareholders of
the Portfolios, tax returns, and filings with the SEC and state Blue Sky
authorities, and generally assists in all aspects of the Portfolios'
operations. The investment advisers, sub-advisers, and Mentor, as the case
may be, bear all their expenses in connection with the performance of their
services and pay the salaries of all officers and employees who are
employed by them and the Trust.
Each Portfolio's investment adviser or sub-adviser provides the Trust
with investment officers who are authorized to execute purchases and sales
of securities. Investment decisions for the Trust and for the other
investment advisory clients of the investment advisers and sub-advisers and
their affiliates are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client
involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at
the same time. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling the security. In
some instances, one client may sell a particular security to another
client. It also sometimes happens that two or more clients simultaneously
purchase or sell the same security, in which event each day's transactions
in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the investment
adviser's or sub-adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio 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 handles purchases and
sales under guidelines approved by investment officers of the Trust. Each
investment adviser and sub-adviser employs professional staffs of portfolio
managers who draw upon a variety of resources for research information for
the Trust.
MANAGEMENT FEES
For performing its responsibilities, the investment adviser of each
Portfolio receives an annual management fee from each Portfolio (as
described in the relevant prospectus) which may then be paid in whole or in
part to a Portfolio's sub-adviser, if any.
During fiscal 1992, 1993, and 1994, the Portfolios paid the following in
investment advisory fees (reflecting fee waivers):
<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $58,221 $298,293 $410,955
Capital Growth Portfolio . . . . . . . . 92,507 535,270 590,693
Quality Income Portfolio . . . . . . . . -- 658,652 893,139
Municipal Income Portfolio . . . . . . . -- 4,130 387,074
Income and Growth Portfolio . . . . . . . -- 45,081 374,462
Global Portfolio . . . . . . . . . . . . -- -- 69,515
Growth Portfolio . . . . . . . . . . . . 811,189 1,105,694 1,327,384
Strategy Portfolio . . . . . . . . . . . -- 147,585 1,368,325
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --
</TABLE>
During fiscal 1992, Commonwealth Advisors waived management fees in the
following amounts: Mentor/Cambridge Growth Portfolio, $3,881; Capital Growth
Portfolio, $6,167; Quality Income Portfolio, $145,774; Municipal Income
Portfolio, $64,430. During fiscal 1993, Commonwealth Advisors waived management
fees in the following amounts: Mentor/Cambridge Growth Portfolio, $18,450;
Capital Growth Portfolio, $35,435; Quality Income Portfolio, $230,311; Municipal
Income Portfolio, $374,138. During fiscal 1994, Commonwealth Advisors waived
management fees of $81,713 and $69,515 in respect of the Municipal Income
Portfolio and the Global Portfolio, respectively. Also during fiscal 1994,
Commonwealth waived management fees of $48,884 and $11,536 in respect of the
Short-Duration Income Portfolio and the Balanced Portfolio, respectively.
If in any year the aggregate expenses of a Portfolio (including investment
advisory fees but excluding interest, taxes, brokerage and distribution
fees, and extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over that Portfolio, its investment adviser's
compensation may be reduced. The most stringent state expense limitation
applicable to the Trust presently requires reimbursement of expenses in any
year that such expenses exceed the sum of 2.5% of the first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily net
assets, and 1.5% of average daily net assets over $100 million. If a
Portfolio's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount of expenses to be borne by an investment adviser or
sub-adviser will be limited, in any single fiscal year, by the amount of
the investment advisory fee.
ADMINISTRATIVE SERVICES
Mentor Investment Group, Inc. serves as administrator to each of the
Portfolios; prior to June 1, 1994, Cambridge Administrative Services
("CAS"), a subsidiary of Federated Advisers, provided administrative
services to the Mentor/Cambridge Growth, Capital Growth, Quality Income,
Municipal Income, and Income and Growth Portfolios.
During fiscal 1992, 1993, and 1994, the Portfolio's paid the following fees
for administrative services (reflecting fee waivers):
<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $4,662 $35,347 $57,626
Capital Growth Portfolio . . . . . . . . 7,397 68,158 92,278
Quality Income Portfolio . . . . . . . . -- 143,075 151,234
Municipal Income Portfolio . . . . . . . -- 62,849 97,653
Income and Growth Portfolio . . . . . . . -- 4,509 47,282
Global Portfolio . . . . . . . . . . . . -- -- 7,140
Strategy Portfolio . . . . . . . . . . . -- -- 29,422
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --
</TABLE>
During fiscal 1992, CAS waived administrative fees in the following amounts:
Mentor/Cambridge Growth Portfolio, $5,051; Capital Growth Portfolio,
$8,013; Quality Income Portfolio, $30,370; Municipal Income Portfolio,
$13,423. During fiscal 1993, CAS waived administrative fees in the
following amounts: Mentor/Cambridge Growth Portfolio, $20,121; Capital
Growth Portfolio, $36,269; Quality Income Portfolio, $41,518; Municipal
Income Portfolio, $34,261; Income and Growth Portfolio, $3,005. Also
during fiscal 1993, Mentor waived $17,363 in administrative fees in
respect of the Strategy Portfolio. During fiscal 1994, CAS waived
administrative fees in the following amounts: Mentor/Cambridge Growth
Portfolio, $6,569; Quality Income Portfolio, $23,563; Income and Growth
Portfolio, $15,033; Global Portfolio, $530. Also during fiscal 1994,
Mentor waived administrative fees of $131,557, $9,776, and $2,307 in
respect of the Strategy, Short-Duration Income and Balanced Portfolios,
respectively. For fiscal 1994, the Growth, Strategy, and Balanced
Portfolios reimbursed amounts of $24,000, $21,507, and $6,905,
respectively, to Mentor for certain accounting and operation related costs
not covered by their respective administration arrangements.
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors (formerly Mentor Distributors, Inc.) with respect
to each Portfolio. Pursuant to the Service Plan, financial institutions
will enter into shareholder service agreements with the Portfolios to
provide administrative support services to their customers who from time to
time may be owners of record or beneficial owners of shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding .25% of the average daily net assets of the Class A or Class B
shares of the particular Portfolio or Portfolios beneficially owned by the
financial institution's customers for whom it is holder of record or with
whom it has a servicing relationship. The Service Plan is designed to
stimulate financial institutions to render administrative support services
to the Portfolios and their shareholders. These administrative support
services include, but are not limited to, the following functions:
providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries regarding the Portfolios; assisting clients in changing dividend
options, account designations and addresses; and providing such other
services as the Portfolios reasonably request. Prior to June 1, 1995, the
Growth, Strategy, Short-Duration Income, and Balanced Portfolios were
parties to shareholder serving arrangements with Wheat, First Securities,
Inc. ("Wheat") pursuant to which each Portfolio made payments to Wheat at
the annual rate of 0.25% of the Portfolio's average net assets.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser,
and/or Mentor, or affiliates thereof, for providing administrative support
services to holders of Class A or Class B shares of the Portfolios. These
payments will be made directly by the investment adviser, a sub-adviser,
and/or Mentor, as applicable, and will not be made from the assets of any
of the Portfolios.
During fiscal 1994, the Portfolios incurred shareholder service fees under
their respective Service Plans as follows:
Mentor/Cambridge Growth Portfolio . . . . . . . . $128,423
Capital Growth Portfolio . . . . . . . . . . . . . 184,588
Quality Income Portfolio . . . . . . . . . . . . . 349,642
Municipal Income Portfolio . . . . . . . . . . . . 195,328
Income and Growth Portfolio . . . . . . . . . . . 124,821
Global Portfolio . . . . . . . . . . . . . . . . . 15,340
Growth Portfolio . . . . . . . . . . . . . . . . . 474,066
Strategy Portfolio . . . . . . . . . . . . . . . . 402,448
Short-Duration Income Portfolio . . . . . . . . . 24,442
Balanced Portfolio . . . . . . . . . . . . . . . . --
During 1994, Wheat waived $3,845 in shareholder service fees under its
agreement in respect of the Balanced Portfolio.
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions
in foreign investments often involve the payment of fixed brokerage
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by the Trust usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or
discount retained by the underwriter or dealer. It is anticipated that
most purchases and sales of securities by funds investing primarily in
certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, those funds would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive brokerage and research services (as defined in the
Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-
dealers that execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, each of the Portfolios'
investment adviser or sub-adviser receives brokerage and research services
and other similar services from many broker-dealers with which such
investment adviser or sub-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 or sub-adviser's managers
and analysts. Where the services referred to above are not used exclusively by
the investment adviser or sub-adviser for research purposes, the investment
adviser or sub-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
or sub-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 the Portfolios. The management fee paid by a Portfolio is
not reduced because the Portfolio's investment adviser or sub-adviser or any of
their affiliates receive these services even though the investment adviser or
sub-adviser might otherwise be required to purchase some of these services for
cash.
A Portfolio's investment adviser or sub-adviser, as the case may be, 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 investment adviser or sub-
adviser. The investment adviser or sub-adviser seeks the best overall
terms available for the Portfolio, except to the extent the investment
adviser or sub-adviser may be permitted to pay higher brokerage commissions
as described below. In doing so, the investment adviser or sub-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 Investment
Advisory and Management Agreements, a Portfolio's investment adviser or
sub-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. The investment
adviser's or sub-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, the
investment adviser and sub-adviser will use its best efforts to obtain the
best overall terms available with respect to such transactions, as
described above.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser or sub-adviser may consider sales of
shares of a Portfolio (and, if permitted by law, of the other funds in the
Mentor family funds) 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"). The Trustees
have adopted certain policies incorporating the 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 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 will
not participate in brokerage commissions given by the Trust 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. The Trust will in no event effect
principal transactions with Wheat in over-the-counter securities
in which Wheat makes a market.
Under rules adopted by the SEC, Wheat may not execute transactions for the Trust
on the floor of any national securities exchange, but may effect transactions
for the Trust by transmitting orders for execution and arranging for the
performance of this function by members of the exchange not associated with
Wheat. Wheat will be required to pay fees charged to those persons performing
the floor brokerage elements out of the brokerage compensation it receives from
the Trust. 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.
During fiscal 1992, 1993, and 1994, the Portfolios paid brokerage
commissions on brokerage transactions as follows:
<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $40,377 $173,167 $159,585
Capital Growth Portfolio . . . . . . . . 75,352 334,227 195,086
Quality Income Portfolio . . . . . . . . -- -- --
Municipal Income Portfolio . . . . . . . -- -- --
Income and Growth Portfolio . . . . . . . -- 25,668 116,782
Global Portfolio . . . . . . . . . . . . -- -- 45,449
Growth Portfolio . . . . . . . . . . . . 160,521 275,570 374,267
Strategy Portfolio . . . . . . . . . . . -- 159,275 651,172
Short-Duration Income Portfolio . . . . . -- -- 1,307
Balanced Portfolio . . . . . . . . . . . -- -- 1,641
</TABLE>
For fiscal 1992, 1993, and 1994, Wheat, First Securities, Inc., an affiliate
of Mentor, Commonwealth Advisors, and Mentor Distributors, received for fiscal
1993 and 1994 brokerage commissions for services performed on behalf of
certain of the Portfolios, as follows:
<TABLE>
1992 1993 1994
<S> <C> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . $42,656 $ 3,297 $ 588
Capital Growth Portfolio . . . . . . . . -- 113,126 78,085
Income and Growth Portfolio . . . . . . . -- 4,303 22,606
Global Portfolio . . . . . . . . . . . . -- -- --
Growth Portfolio . . . . . . . . . . . . 35,821 71,806 34,881
Strategy Portfolio . . . . . . . . . . . -- 159,275 651,172
Short-Duration Income Portfolio . . . . . -- -- --
Balanced Portfolio . . . . . . . . . . . -- -- --
For fiscal 1994, the brokerage commissions paid by the Mentor/Cambridge Growth
Portfolio to Wheat amounted to 0.37% of the aggregate brokerage commissions paid
by the Portfolio and 0.18% of the aggregate dollar amount of transactions
involving payment of commissions by the Portfolio. For fiscal 1994, the
brokerage commissions paid by the Capital Growth Portfolio to Wheat amounted to
40.03% of the aggregate brokerage commissions paid by the Portfolio and 35.20%
of the aggregate dollar amount of transactions involving payment of commissions
by the Portfolio. For fiscal 1994, the brokerage commissions paid by the Income
and Growth Portfolio to Wheat amounted to 19.36% of the aggregate brokerage
commissions paid by the Portfolio and 11.81% of the aggregate dollar amount of
transactions involving payment of commissions by the Portfolio. For fiscal
1994, the brokerage commissions paid by the Growth Portfolio to Wheat amounted
to 9.00% of the aggregate brokerage commissions paid by the Portfolio and 10.00%
of the aggregate dollar amount of transactions involving payment of commissions
by the Portfolio. For fiscal 1994, the brokerage commissions paid by the
Strategy Portfolio to Wheat amounted to less than 1% of the aggregate brokerage
commissions paid by the Portfolio. For fiscal 1994, the Short-Duration Income
Portfolio and the Balanced Portfolio paid no brokerage commissions to Wheat.
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, Class A shares of the Portfolios are
sold at their net asset value plus an applicable sales charge on days the
New York Stock Exchange is open for business. Class B shares of the
Portfolios are sold at their net asset value with no sales charge on days
the New York Stock Exchange is open for business. The procedure for
purchasing Class A and Class B shares of the Portfolios is explained in the
Prospectus under the section entitled "How to Buy Shares."
Dealers will be compensated on purchases of Class A shares in accordance
with the following schedule:
Amount of Purchase Dealer Commission
Less than $2 million 1.00%
$2 million but less than $3 million .80%
$3 million but less than $50 million .50%
$50 million but less than $100 million .25%
$100 million or more .15%
The above commission will be paid by the Distributor and not the Trust or its
shareholders.
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors in accordance
with its Distribution Plan adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Prior to June 1, 1995, each of the
Growth, Strategy, Short-Duration Income, and Balanced Portfolios made
payments under its plan to Wheat. During fiscal 1994, the Portfolios paid
fees pursuant to their respective Plans as follows: Mentor/Cambridge
Growth Portfolio, $253,834; Capital Growth Portfolio, $360,712; Quality
Income Portfolio, $511,073; Municipal Income Portfolio, $253,801; Income
and Growth Portfolio, $252,486; Global Portfolio, $20,749; Growth
Portfolio, $1,422,197; Strategy Portfolio, $1,207,346; and Short-Duration
Income Portfolio, $29,331. During 1994, Wheat waived 12b-1 fees of $11,536
in respect of the Balanced Portfolio.
During fiscal 1994, Mentor Distributors paid the following in commissions
in connection with distribution:
</TABLE>
<TABLE>
Class A Class B
<S> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . . . . $ 6,113 $191,694
Capital Growth Portfolio . . . . . . . . . . . 3,758 124,947
Quality Income Portfolio . . . . . . . . . . . 4,910 202,265
Municipal Income Portfolio . . . . . . . . . . 6,042 177,446
Income and Growth Portfolio . . . . . . . . . . 13,596 527,081
Global Portfolio . . . . . . . . . . . . . . . 12,357 159,754
</TABLE>
During fiscal 1994, Mentor Distributors incurred the following expenses
for marketing materials and promotional activities:
<TABLE>
Class A Class B
<S> <C> <C>
Mentor/Cambridge Growth Portfolio . . . . . . . $39,544 $ 77,787
Capital Growth Portfolio . . . . . . . . . . . 53,456 111,497
Quality Income Portfolio . . . . . . . . . . . 81,758 211,265
Municipal Income Portfolio . . . . . . . . . . 67,963 125,197
Income and Growth Portfolio . . . . . . . . . . 48,208 117,228
Global Portfolio . . . . . . . . . . . . . . . 26,715 21,664
</TABLE>
During 1994, Wheat paid the following in commissions in connection with
distribution:
Growth Portfolio . . . . . . . . . . . . . . . $1,993,158
Strategy Portfolio . . . . . . . . . . . . . . 2,538,411
Short-Duration Income Portfolio . . . . . . . . 92,123
Balanced Portfolio . . . . . . . . . . . . . . --
During 1994, Wheat paid the following expenses for marketing materials
and other promotional activities:
Growth Portfolio . . . . . . . . . . . . . . . $264,166
Strategy Portfolio . . . . . . . . . . . . . . 224,874
Short-Duration Income Portfolio . . . . . . . . 4,017
Balanced Portfolio . . . . . . . . . . . . . . --
During fiscal 1994, Wheat received contingent deferred sales charges of
$321,429 and $108,534, respectively, in respect of the Growth Portfolio and
Strategy Portfolio, which each had only one class of shares outstanding
during such period.
DETERMINING NET ASSET VALUE
A Portfolio determines net asset value per share of each series of shares
once each day the New York Exchange (the "Exchange") is open. Currently,
the Exchange is closed Saturdays, Sundays and the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Thanksgiving and Christmas. A Portfolio determines net asset
value as of the close of regular trading on the Exchange. However, equity
options held by a Portfolio are priced as of the close of trading at 4:10
p.m., and futures contracts on U.S. Government securities and index options
held by a Portfolio are priced as of their close of trading at 4:15 p.m.
Securities for which market quotations are readily available are valued at
prices which, in the opinion of the Trustees or a Portfolio's investment
adviser or sub-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,
institutional-size 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 or sub-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 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.
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
securities occur between the time when their price is determined and the
time when a Portfolio's net asset value is calculated, such securities will
be valued at fair value as determined in good faith by the Trustees.
REDEMPTIONS IN KIND
Although the Trust intends to redeem Class A and Class B shares in cash, it
reserves the right under certain circumstances to pay the redemption price
in whole or in part by a distribution of securities from the respective
Portfolio's investment portfolio. To the extent available, such securities
will be readily marketable. 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, with respect to each Portfolio, the Trust is obligated to
redeem Class A or Class B 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 elects 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. As a series of Massachusetts
business trust, 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; (b) derive less than 30% of its
gross income from the sale or other disposition of certain assets
(including stock or securities and certain options, futures contracts,
forward contracts, and foreign currencies) held less than three months; (c)
distribute with respect to each taxable year 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; and (d) 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
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 the Portfolio controls and which are engaged in the
same, similar, or related trades or businesses. In order to receive the
favorable tax treatment accorded regulated investment companies and their
shareholders, moreover, a Portfolio must in general distribute at least 90%
of its interest, dividends, net short-term capital gain, and certain other
income each year.
If a Portfolio qualifies as a regulated investment company that is accorded
special tax treatment, the Portfolio will not be subject to federal income
tax paid to its shareholders in the form of dividends (including capital
gain dividends).
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 (or later if the
Portfolio is permitted so to elect and so elects), plus any retained amount
from the prior year, the Portfolio will be subject to a 4% excise tax on
the undistributed amounts. A dividend paid to shareholders by a Portfolio
in January of a year generally is deemed to have been paid by the Portfolio
on December 31 of the preceding year, if the dividend was declared and
payable to shareholders of record on a date in October, November or
December of that preceding year. A Portfolio intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.
Exempt-interest dividends. A Portfolio will be qualified to pay exempt-
interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of
the Portfolio's assets consists of obligations the interest on which is
exempt form federal income tax. Distributions that the Portfolio properly
designates as exempt-interest dividends are treated by shareholders as
interest excludable from their gross income for federal income tax purposes
but may be taxable for federal alternative minimum tax purposes and for
state and local purposes. If the Portfolio intends to be qualified to pay
exempt-interest dividends, the Portfolio may be limited in its ability to
enter into taxable transactions involving forward commitments, or
repurchase agreements, financial futures, and options contracts on
financial futures, tax-exempt bond indices, and other assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying exempt-
interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the
indebtedness, multiplied by the percentage of a Portfolio's total
distributions (not including distributions from net long-term capital
gains) paid to the shareholder that are exempt-interest dividends. Under
rules used by the Internal Revenue Service for determining when borrowed
funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of shares may be considered to have been
made with borrowed funds even though such funds are not directly traceable
to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligaitons or bonds
or who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will inform
investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The
percentage is applied uniformly to all distributions made during the year.
The percentage of income designated as tax-exempt for any particular
distribution may be substantially different form the percentage of the
Portfolio's income that was tax-exempt during the period covered by the
distribution.
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
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.
Under the 30% of gross income test described above (see "Taxation of the
Portfolio"), the Portfolio will be restricted in selling assets held or
considered under Code rules to have been held for less than three months,
and in engaging in certain hedging transactions (including hedging
transactions in options and futures) that in some circumstances could cause
certain Portfolio assets to be treated as held for less than three months.
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 exchange of a capital asset,
as the case may be. If a Portfolio's book income is less than its taxable
income, the Portfolio could be required to make distributions exceeding
book income to qualify as a regulated investment company that is accorded
special tax treatment.
Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of
capital to the extent of your tax basis in your shares, and thereafter as
capital gain. A return of capital is not taxable, but it reduces your tax
basis in your shares, thus reducing any loss or increasing any gain on a
subsequent taxable disposition by you or your shares.
Securities issued or purchased at a discount. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the
Portfolio to accrue and distribute income not yet received. In order to
generate sufficient cash to make the requisite distributions, a Portfolio
may be required to sell securities in its portfolio that it otherwise would
have continued to hold.
Foreign currency-denominated securities and related hedging transactions.
A Portfolio's transactions in foreign currencies, foreign currency-
denominated debt securities and certain foreign currency options, futures
contracts, and forward contacts (and similar instruments) may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a Portfolio's assets at year end consists of the debt
and equity securities of foreign corporations, the Portfolio may elect to
permit shareholders to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Portfolio
to foreign countries. In such a case, shareholders will include in gross
income from foreign sources their pro rata shares of such taxes. A
shareholder's ability to claim a foreign tax credit or deduction in respect
of foreign taxes paid by the Portfolio may be subject to certain
limitations imposed by the Code, as a result of which a shareholder may not
get a full credit or deduction for the amount of such taxes. Shareholders
who do not itemize on their federal income tax returns may claim a credit
(but no deduction) for such foreign taxes.
Investment by a Portfolio in certain "passive foreign investment companies"
could subject the Portfolio to a U.S. federal income tax or other charge on
the proceeds from the sale of its investment in such a company; however,
this tax can be avoided by making an election to mark such investments to
market annually or to treat the passive foreign investment company as a
"qualified electing fund."
Sale or redemption of shares. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain or
loss realized upon a taxable disposition of shares will be treated as long-
term capital gain or loss if the shares have been held for more than 12
months, and otherwise as short-term capital gain or loss. However, if a
shareholder sells shares at a loss within six months of purchase, any loss
will be disallowed for federal income tax purposes to the extent of any
exempt-interest dividends received on such shares. In addition, any loss
(not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares held for six months or less will be
treated as long-term, rather than short-term, to the extent of any long-
term capital gain distributions received by the shareholder with respect to
the shares. All or a portion of any loss realized upon a taxable
disposition of Portfolio shares will be disallowed if other Portfolio
shares are purchased within 30 days before or after the disposition. In
such a case, the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.
Shares purchased through tax-qualified plans. Special tax rules apply to
investments though defined contribution plans and other tax-qualified
plans. Shareholders should consult their tax adviser to determine the
suitability of shares of a Portfolio as an investment through such plans
and the precise effect of an investment on their particular tax situation.
Backup withholding. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other
distributions paid to any individual shareholder who fails to furnish the
Portfolio with a correct taxpayer identification number (TIN), who has
underreported dividends or interest income, or who fails to certify to the
Portfolio that he or she is not subject to such withholding. Shareholders
who fail to furnish their current TIN are subject to a penalty of $50 for
each such failure unless the failure is due to reasonable cause and not
wilful neglect. An individual's taxpayer identification number is his or
her social security number.
If a Portfolio invests in stock of certain foreign investment companies,
the Portfolio may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition
of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of a Portfolio's holding period
for the stock. The distribution or gain so allocated to any taxable year
of a Portfolio, other than the taxable year of the excess distribution or
disposition, would be taxed to the Portfolio at the highest ordinary income
rate in effect for such year, and the tax would be further increased by an
interest charge to reflect the value of the tax deferral deemed to have
resulted from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the distribution or
disposition would be included in a Portfolio's investment company taxable
income and, accordingly, would not be taxable to the Portfolio to the
extent distributed by the Portfolio as a dividend to its shareholders.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and regulations. The Code and regulations are subject to change
by legislative or administrative actions. Dividends and distributions also
may be subject to state and federal taxes. Shareholders are urged to
consult their tax advisers regarding specific questions as to federal,
state or local taxes. The foregoing discussion relates solely to U.S.
federal income tax law. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a
30% United States withholding tax (or a reduced rate of withholding
provided by treaty).
For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in
respect of taxes.
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP, LOCATED AT ONE BOSTON PLACE, BOSTON, MASSACHUSETTS
02108, ARE THE TRUST'S INDEPENDENT AUDITORS, 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. THE FINANCIAL HIGHLIGHTS INCLUDED IN THE
PROSPECTUS OF THE TRUST AND THE PORTFOLIO'S PROSPECTUSES, IF ANY, AND THE
FINANCIAL STATEMENTS INCORPORATED BY REFERENCE INTO SUCH PROSPECTUSES AND
INCLUDED IN THIS STATEMENT OF ADDITIONAL INFORMATION HAVE BEEN SO INCLUDED
AND INCORPORATED IN RELIANCE UPON THE REPORT OF KPMG PEAT MARWICK, THE
INDEPENDENT AUDITORS, GIVEN ON THE AUTHORITY OF SAID FIRM AS EXPERTS IN
AUDITING AND ACCOUNTING.
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. 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.
TRANSFER AGENT SERVICES
The Shareholder Services Group, Inc. ("TSSG"), P.O. Box 9653, Providence,
Rhode Island 02940, will serve as transfer and dividend agent in respect
of certain shares for a period of time necessary to effect the transition
of such services to Boston Financial Data Services, Inc. It is expected
that this transition process will be completed by September 1, 1995.
PERFORMANCE INFORMATION
The average annual total return for the one- and five- year periods (where
applicable) and for the life of the Portfolios are as follows:
Class A Shares 1 Year Since Inception
Mentor/Cambridge Growth Portfolio . . . -16.87% -0.84%
Capital Growth Portfolio . . . . . . . . -6.79% 0.68%
Quality Income Portfolio . . . . . . . . -7.97% 0.14%
Municipal Income Portfolio . . . . . . . -9.35% 4.42%
Income and Growth Portfolio . . . . . . 0.68% 4.30%
Global Portfolio . . . . . . . . . . . . -5.17% -5.17%
Class B Shares 1 Year Since Inception
Mentor/Cambridge Growth Portfolio . . . -12.48% 0.99%
Capital Growth Portfolio . . . . . . . . -2.00% 2.44%
Quality Income Portfolio . . . . . . . . -3.97% 1.66%
Municipal Income Portfolio . . . . . . . -5.34% 6.00%
Income and Growth Portfolio . . . . . . 5.66% 8.15%
Global Portfolio . . . . . . . . . . . . -1.21% -1.21%
Single Class Shares 1 Year 5 Year Since Inception
Growth Portfolio . . . . . . . . -8.9% 11.1% 12.46%
Strategy Portfolio . . . . . . . -8.1% -- -5.1%
Short-Duration Income Portfolio . -- -- 0.95%
Balanced Portfolio . . . . . . . -- -- -3.96%
THE ANNUAL TOTAL RETURN INFORMATION SHOWN ABOVE FOR THE GROWTH, STRATEGY,
SHORT-DURATION INCOME, AND BALANCED PORTFOLIOS REFLECTS VARIOUS SALES
CHARGES CURRENTLY NOT APPLICABLE TO THE PORTFOLIOS; ANNUAL TOTAL RETURN FOR
THESE PORTFOLIOS MAY VARY. The Growth, Strategy, Short-Duration, and
Balanced Portfolios are the successors to Mentor Growth Fund, Mentor
Strategy Fund, Mentor Short-Duration Income Fund, and Mentor Balanced Fund,
respectively, each of which was previously a series of shares of beneficial
interest of Mentor Series Trust. For fiscal 1994, none of the Mentor funds
bore a front-end sales charge, but Mentor Strategy Fund, Mentor Short-
Duration Income Fund, and Mentor Balanced Fund each was subject to a
maximum contingent deferred sales charge of 5%. Total Fund Operating
Expenses for the Mentor funds for fiscal 1994 were 2.01%, 2.19%, 1.29%
(annualized), and 0.50% (annualized) for Mentor Growth Fund, Mentor
Strategy Fund, Mentor Short-Duration Income Fund, and Mentor Balanced Fund,
respectively.
Total return for one-, five-, and ten-year periods (or for such shorter
periods as a Portfolio has been in operation) is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the
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 deduction of a
Portfolio's maximum contingent deferred sales charge, if applicable, and
reinvestment of all Portfolio distributions at net asset value on their
respective reinvestment dates.
At times, a Portfolio's investment adviser or sub-adviser may reduce its
compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. The per share amount of any such fee reduction or
assumption of expenses during a Portfolio's past ten fiscal years (or for
the life of a Portfolio, if shorter) is reflected in the Trust's Prospectus
and the Portfolio Prospectuses. 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.
Total return may be presented for other periods or without giving effect to
any contingent deferred sales charge. Any quotation of total return or
yield not reflecting the contingent deferred sales charge would be reduced
if the sales charges were reflected.
ALL DATA ARE BASED ON PAST PERFORMANCE AND DO NOT PREDICT FUTURE RESULTS.
YIELD AND TAX-EQUIVALENT YIELD
The thirty-day yield for both classes of shares of the Portfolios for the
period ending September 30, 1994, were as follows:
PORTFOLIO CLASS A CLASS B
Quality Income Portfolio 6.08% 5.73%
Municipal Income Portfolio 4.56% 4.11%
Income and Growth Portfolio 1.87% 1.57%
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.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying
those fees.
The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1994, was 7.55%.
The tax-equivalent yield for the Class B shares was 6.81% for the same
period.
The tax-equivalent yield for both classes of the Municipal Income Portfolio
is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Portfolio would have had to earn to equal its actual
yield, assuming a 39.6% tax rate (the maximum effective federal rate for
individuals) and assuming that income is 100% tax-exempt.
The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Portfolio's investment portfolio generally remains free from
federal regular income tax but may be subject to state and local taxes.
(Some portion of the Portfolio's income may be subject to federal
alternative minimum tax and state and local taxes.) Capital gains, if any,
are subject to federal, state and local tax. As the table below indicates,
a "tax-fee" investment is an attractive choice for investors, particularly
in times of narrow spreads between tax-free and taxable yields.
Taxable Yield Equivalent for 1994
Federal Income Tax Bracket:
15.00% 20.00% 31.00% 36.00% 39.60%
Joint Return $1-36,900 $36,901- $89,151- $140,001- Over $250,000
89,150 140,000 250,000
Single Return $1-22,100 $22,101- $53,501- $115,001- Over $250,000
53,500 115,000 250,000
Tax-Exempt
Yield Taxable Yield Equivalent
0.025 2.94% 3.47% 3.62% 3.91% 4.14%
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
8.50 10.00 11.81 12.32 13.28 14.07
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent.
The table above is for illustrative purposes only. It is not an indicator
of past or future performance of the Portfolio.
PERFORMANCE COMPARISONS
The performance of Class A and Class B shares, where applicable, 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 the Trust or Class A or Class B
shares of a particular Portfolio; and various other factors.
The performance of each Portfolio's Class A and Class B 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 the
Portfolios.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio,
and other investment companies, performed in specified time periods.
Agencies whose reports are commonly used for such comparisons are set forth
below. From time to time, a Portfolio may distribute these comparisons to
its shareholders or to potential investors. THE AGENCIES LISTED BELOW
MEASURE PERFORMANCE BASED ON THEIR OWN CRITERIA RATHER THAN ON THE
STANDARDIZED PERFORMANCE MEASURES DESCRIBED IN THE PRECEDING SECTION.
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified
period of time. From time to time, a Portfolio will quote its Lipper
ranking in advertising and sales literature.
MORNINGSTAR, INC. DISTRIBUTES MUTUAL FUND RATINGS TWICE A MONTH. THE
RATINGS ARE DIVIDED INTO FIVE GROUPS: HIGHEST, ABOVE AVERAGE, NEUTRAL,
BELOW AVERAGE, AND LOWEST. THEY REPRESENT A PORTFOLIO'S HISTORICAL
RISK/REWARD RATIO RELATIVE TO OTHER FUNDS WITH SIMILAR OBJECTIVES. THE
PERFORMANCE FACTOR IS A WEIGHTED-AVERAGE ASSESSMENT OF THE PORTFOLIO'S
3-YEAR, 5-YEAR, AND 10-YEAR TOTAL RETURN PERFORMANCE (IF AVAILABLE)
REFLECTING DEDUCTION OF EXPENSES AND SALES CHARGES. PERFORMANCE IS
ADJUSTED USING QUANTITATIVE TECHNIQUES TO REFLECT THE RISK PROFILE OF THE
PORTFOLIO. THE RATINGS ARE DERIVED FROM A PURELY QUANTITATIVE SYSTEM THAT
DOES NOT UTILIZE THE SUBJECTIVE CRITERIA CUSTOMARILY EMPLOYED BY RATING
AGENCIES SUCH AS STANDARD & POOR'S CORPORATION AND MOODY'S INVESTOR
SERVICE, INC.
WEISENBERGER'S MANAGEMENT RESULTS publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year, 3-
year, 5-year and 10-year performance. Mutual funds are ranked in general
categories (e.g., international bond, international equity, municipal bond,
and maximum capital gain). Weisenberger rankings do not reflect deduction
of sales charges or fees.
A Portfolio's shares also may be compared to the following indices:
DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by Dow Jones & Company, it is cited as
a principal indicator of market conditions.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's listed on its index. Taxes due on any of
these distributions are not included, nor are brokerage or other fees
calculated, in the Standard & Poor's figures.
CONSUMER PRICE INDEX is generally considered to be a measure of inflation.
CDA MUTUAL FUND GROWTH INDEX is a weighted performance average of other
mutual funds with growth of capital objectives.
LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
SHEARSON LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry, public
utilities and finance. The average maturity of these bonds approximates
nine years. Tracked by Shearson Lehman Brothers Inc., the index calculates
total returns for one month, three month, twelve month and ten year periods
and year-to-date.
SHEARSON LEHMAN 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 maturity of one year are
included.
RUSSELL GROWTH 1000 (RUSSELL 1000 INDEX) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market
values between $20 million and $300 million that can be used to compare the
total returns of funds whose portfolios are invested primarily in growth
common stocks.
SHEARSON LEHMAN 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).
SHEARSON LEHMAN 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 21,000 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 both classes of their 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 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 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 intermediate - and long-term past
performance of each fund versus its category, as well as taking into
account its risk, reward to risk, and fees. An A+ rated fund is one of the
best, while a D- rated fund is one of the worst. The source for Financial
World rating is Schabacker investment management in Rockville, Maryland.
FORBES magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond
funds, municipal bond funds, etc. Data sources include Lipper Analytical
Services and CDA Investment Technologies. The ratings are based strictly
on performance at net asset value over the given cycles. Funds performing
in the top 5% receive an A+ rating; the top 15% receive an A rating; and so
on until the bottom 5% receive an F rating. Each fund exhibits two
ratings, one for performance in "up" markets and another for performance in
"down" markets.
KIPLINGER'S PERSONAL FINANCE MAGAZINE (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value
and reinvestment of dividends and capital gains and not reflecting
deduction of any sales charges. Funds are ranked by tenths: a rank of 1
means that a fund was among the highest 10% in total return for the period;
a rank of 10 denotes the bottom 10%. Funds compete in categories of
similar funds -- aggressive growth funds, growth and income funds, sector
funds, corporate bond funds, global governmental bond funds, mortgage-
backed securities funds, etc. Kiplinger's also provides a risk-adjusted
grade in both rising and falling markets. Funds are graded against others
with the same objective. The average weekly total return over two years is
calculated. Performance is adjusted using quantitative techniques to
reflect the risk profile of the fund.
U.S. NEWS AND WORLD REPORT periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre &
Co., a Boston research firm. Over 2000 funds are tracked and divided into
10 equity, taxable bond and tax-free bond categories. Funds compete within
the 10 groups and three broad categories. The OPI is a number from 0-100
that measures the relative performance of funds at least three years old
over the last 1, 3, 5 and 10 years and the last six bear markets. Total
return reflects changes in net asset value and the reinvestment of any
dividends and capital gains distributions and does not reflect deduction of
any sales charges. Results for the longer periods receive the most weight.
THE 100 BEST MUTUAL FUNDS YOU CAN BUY authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund
categories, and the 100 funds are determined by applying four criteria.
First, equity funds whose current management teams have been in place for
less than five years are eliminated. (The standard for bond funds is three
years.) Second, the author excludes any fund that ranks in the bottom 20
percent of its category's risk level. Risk is determined by analyzing how
many months over the past three years the fund has underperformed a bank CD
or a U.S. Treasury bill. Third, a fund must have demonstrated strong
results for current three-year and five-year performance. Fourth, the fund
must either possess, in Mr. Williamson's judgment, "excellent" risk-
adjusted return or "superior" return with low levels of risk. Each of the
100 funds is ranked in five categories: total return, risk/volatility,
management, current income and expenses. The rankings follow a five-point
system: zero designates "poor"; one point means "fair"; two points denote
"good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
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.
Financial Statements
The Report of Independent Accountants and the financial statements for the
fiscal year ended September 30, 1994 in respect of the Cambridge Growth,
Capital Growth, Income and Growth, Quality Income, Municipal Income, and
Global Portfolios are incorporated herein by reference to the Annual Report of
Cambridge Series Trust, the predecessor to the Trust, dated September 30, 1994
(File Nos. 33-45315 and 811-6550). The Quality Income Portfolio was formerly
the Cambridge Government Portfolio. The Report of Independent Accountants and
the financial statements for the fiscal year ended December 31, 1994 in
respect of the Growth, Strategy, Short-Duration Income, and Balanced
Portfolios are incorporated herein by reference to the Annual Reports of
Mentor Series Trust dated December 31, 1994 (File Nos. 2-95278 and 811-04228).
The Growth, Strategy, Short-Duration Income, and Balanced Portfolios are the
successors to Mentor Growth Fund, Mentor Strategy Fund, Mentor Short-Duration
Income Fund, and Mentor Balanced Fund, respectively, each of which previously
was a series of shares of beneficial interest of Mentor Series Trust. You may
request a copy of any Annual Report free of charge by writing the Trust or by
calling 1-800-382-0016.
CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 96.72%
BASIC MATERIALS 8.65%
Air Products & Chemicals, Inc. 8,000 $ 374,000
Alco Standard Corporation 8,000 497,000
Consolidated Papers, Inc. 1,000 51,750
Kimberly Clark Corporation 8,000 470,000
Minerals Technologies, Inc. 10,500 311,063
Monsanto Company 5,000 401,875
Morton International, Inc. 7,500 206,250
Newell Company 28,000 623,000
Nucor Corporation 11,500 805,000
3,739,938
CAPITAL GOODS & CONSTRUCTION 5.37%
Automotive Industries* 14,400 349,200
Emerson Electric Company 8,900 530,663
General Electric Company 14,100 678,562
Grainger, Inc. 3,500 207,375
Magna International, Inc. 13,600 501,500
Trimas Corporation 2,500 56,875
2,324,175
CONSUMER CYCLICAL 18.62%
Ann Taylor Stores, Inc.* 5,700 205,200
Brinker International, Inc.* 21,300 511,200
CUC International, Inc.* 6,900 227,700
Duracell International, Inc. 3,500 159,688
Franklin Quest Company* 13,500 506,250
General Nutrition Companies, Inc.* 12,900 287,025
Harcourt General, Inc. 6,000 206,250
Heilig-Meyers Company 11,600 304,500
Home Depot, Inc. 19,300 810,600
International Game Technology 7,400 152,625
Kohl's Corporation* 3,000 145,500
Lone Star Steakhouse & Saloon,
Inc.* 2,000 50,750
Manpower, Inc. 26,500 725,438
McDonald' s Corporation 14,000 367,500
Office Depot, Inc.* 10,800 280,800
Promus Companies, Inc.* 21,000 706,125
Shaw Industries, Inc. 20,900 300,438
Starbucks Corporation* 9,000 207,562
Station Casinos, Inc.* 7,900 106,650
The Bombay Company, Inc.* 4,900 64,925
The Walt Disney Company 6,000 233,250
Tribune Company 4,400 237,600
Viacom, Inc.-Class A* 384 15,696
Viacom, Inc.-Class B* 2,909 115,633
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
CONSUMER CYCLICAL (CONTINUED)
Viacom, Inc.- Rights* 4,800 $ 6,300
Viking Office Products, Inc.* 18,800 568,700
WalMart Stores, Inc. 23,600 551,650
8,055,555
CONSUMER STAPLES 9.90%
Abbott Laboratories 4,100 128,638
Campbell Soup Company 10,800 426,600
Coca Cola Company 15,000 729,375
Conagra, Inc. 12,600 396,900
CPC International, Inc. 11,000 556,875
Gillette Company 7,000 495,250
Philip Morris Companies, Inc. 9,900 605,138
Procter & Gamble Company 11,000 655,875
UST, Inc. 10,000 286,250
4,280,901
ENERGY 1.82%
Enron Corporation 16,900 511,225
Mobile Corporation 3,000 237,375
Repsol SA~ 1,200 36,579
785,179
FINANCIAL 9.31%
Bankers Life Holding Corporation 7,200 169,200
Boatmen's Bancshares, Inc. 14,000 434,875
Conseco, Inc. 6,500 291,688
Equity Residential Properties Trust 7,500 238,125
Federal National Mortgage Association 4,000 315,000
First USA, Inc. 12,100 425,012
General RE Corporation 3,400 359,975
MBNA Corporation 23,500 543,438
MGIC Investment Corporation 19,900 599,488
Nationsbank Corporation 10,000 490,000
Western National Corporation 12,000 162,000
4,028,801
HEALTH 14.94%
American Medical Holdings, Inc.* 4,000 89,500
Columbia HCA Healthcare Corporation 12,500 543,750
Cordis Corporation* 7,600 400,900
Forest Laboratories, Inc.* 8,000 394,000
Foundation Health Corporation* 1,900 66,975
Idexx Laboratories, Inc.* 8,400 247,800
Integrated Health Services, Inc.* 16,000 568,000
</TABLE>
17
<PAGE>
CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
HEALTH(CONTINUED)
Johnson & Johnson 6,000 $ 309,750
Medtronic, Inc. 10,600 560,475
Mid Atlantic Medical Services, Inc.* 9,400 282,000
Pfizer, Inc. 4,000 276,500
Schering Plough Corporation 11,800 837,800
United Healthcare Corporation 7,500 397,500
US Healthcare, Inc. 6,500 302,656
Value Health, Inc.* 14,500 696,000
Warner Lambert Company 6,100 489,525
6,463,131
TECHNOLOGY 18.95%
3COM Corporation* 7,200 269,100
ADC Telecommunications, Inc.* 7,400 296,925
Applied Materials, Inc.* 10,400 486,200
AT&T Corporation 7,900 426,600
Cisco Systems, Inc.* 6,000 164,250
Compaq Computer Corporation* 12,100 394,763
Compuware Corporation* 8,000 376,500
EMC Corporation* 20,000 402,500
First Data Corporation 7,600 381,900
General Motors Corporation - Class E 10,400 395,200
Intel Corporation 5,000 307,500
Linear Technology Corporation 8,000 354,500
Loral Corporation 3,000 118,125
Maxim Integrated Products, Inc.* 1,300 79,625
Microchip Technology , Inc.* 1,500 58,875
Microsoft Corporation* 8,000 449,000
Motorola, Inc. 10,800 569,700
Oracle Systems Corporation* 14,100 606,300
Parametric Technology Corporation* 14,000 465,500
Reynolds & Reynolds Company 10,000 251,250
Scientific Atlanta, Inc. 5,700 232,988
Silicon Graphics, Inc.* 23,000 592,250
Solectron Corporation* 3,500 92,313
Tellabs, Inc.* 10,000 425,000
8,196,864
TRANSPORTATION & SERVICES 3.69%
Conrail, Inc. 7,600 376,200
Kansas City Southern Industries, Inc. 5,800 205,175
Southwest Airlines Company 11,000 247,500
Union Pacific Corporation 6,700 359,288
Wisconsin Central Transport* 9,900 405,900
1,594,063
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
FOREIGN SECURITIES 5.47%
AAlberts Industries 400 $ 18,626
Amway Japan, Ltd.* 2,100 33,338
Atlas Copco AB 4,500 56,469
BBC Brown Boveri 40 34,485
BMW Bayerische Motoren 50 24,125
BPB Industries 5,500 26,191
British Petroleum Company 3,500 22,048
Broken Hill Proprietary* 1,400 20,347
Carter Holt Harvey 8,600 19,524
Cementos De Mexico ACP 1,400 12,575
Comercial Del Plata 3,000 10,446
Creative Technology, Ltd. 500 8,833
CRH PLC 10,000 54,644
DDI Corporation 10 87,229
Ericsson 2,000 106,262
Grupo Carso ADR~ 500 11,500
Hagemeyer NV 200 16,085
Honda Motors Company 4,000 66,633
Keiyo Company 3,000 58,152
Keppel Corporation 5,000 40,459
Koninklijke Van Ommeren 1,300 34,378
Kyocera Corporation 1,000 71,479
Maderas Y Sinteticos Sociedad 800 22,800
Malaysian Helicopter 2,760 8,558
Matsushita Electric 4,000 63,806
Metsa Serla `B' 400 19,241
Nokia AB 500 58,073
Noranda, Inc. 1,100 22,237
Philips Electronics 1,900 57,999
Polygram NV 400 17,315
Road Builder Holdings 3,000 19,541
Sanyo Sihinpan Finance Company 600 63,604
Sharp Corporation 3,000 53,306
SIAM City Bank, Ltd. 20,200 25,710
Siebe PLC 7,000 59,603
Siemens AG 100 40,939
STET Societa Finanz 13,600 42,078
Technology Resources Industries 6,900 28,259
Telecom Argentina 3,300 22,121
Telefonos De Mexico 700 43,750
TNT Limited 10,300 18,217
Tokio Marine & Fire Insurance 5,000 59,566
Tokyo Electron, Ltd. 2,000 63,806
Universal Robina Corporation 11,000 10,329
Veba AG 200 66,288
Vodagone Group PLC 19,800 61,660
</TABLE>
19
<PAGE>
CAMBRIDGE GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SHARES OR
COMMON STOCKS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
Wai Kee Holdings 58,000 $16,663
Wai Kee Holdings-Warrants* 10,600 178
Western Mining Corporation 3,700 21,548
Wilson & Horton, Ltd. 4,000 18,307
WMX Technologies, Inc. 18,000 519,750
Woolwor ths, Ltd. 3,862 8,059
2,367,139
TOTAL COMMON STOCKS
(COST $38,688,583) 41,835,746
CORPORATE BOND 0.38%
Argosy Gaming Corporation,
12.00%, 6/1/01 (cost $150,000) $ 150,000 163,500
TOTAL INVESTMENTS
(COST $38,838,583) 97.10% 41,999,246
OTHER ASSETS LESS LIABILITIES 2.90% 1,257,440
NET ASSETS 100.00% $43,256,686
</TABLE>
* Non-income producing.
~ American Depository Receipts.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
CAMBRIDGE CAPITAL GROWTH PORTFOLIO
Portfolio of Investments
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 81.70%
BASIC MATERIALS 4.42%
Akzo Nobel 5,000 $ 586,663
British Steel ORD 200,000 544,784
DuPont EI de Nemours & Company 17,000 986,000
Dutch State Mines 7,500 635,958
2,753,405
CAPITAL GOODS & CONST RUCTION 8.44%
Brown Boveri & Cie 800 689,709
Browning Ferris Indus tries, Inc. 30,000 952,500
Fluor Corporation 12,000 597,000
PPG Industries, Inc. 25,000 990,625
Raytheon Company 17,000 1,090,125
United Technologies Corporation 15,000 939,375
5,259,334
CONSUMER CYCLICAL 17.72%
Capital Cities/ABC 11,000 902,000
Carnival Corporation 25,000 1,096,875
Dayton-Hudson Corporation 12,500 956,250
Harcourt General, Inc. 22,500 773,438
Home Depot, Inc. 30,000 1,260,000
Marriott International, Inc. 31,500 909,562
May Department Stores Company 30,000 1,181,250
Mirage Resorts, Inc.* 48,000 1,032,000
Price Costco, Inc.* 50,000 803,125
Toys R Us, Inc.* 38,000 1,353,750
Whirlpool Corporation 15,000 770,625
11,038,875
CONSUMER STAPLES 11.85%
Abbott Laboratories 40,000 1,255,000
Amgen, Inc.* 15,000 798,750
Astra AB 37,500 898,590
Columbia/HCA Healthcare
Corporation 25,000 1,087,500
Merck & Company, Inc. 40,000 1,420,000
Philip Morris Companies, Inc. 14,000 855,750
Schering-Plough Corporation 15,000 1,065,000
7,380,590
ENERGY 9.60%
British Petroleum PLC , ADS~ 13,000 984,750
Chevron Corporation 25,000 1,040,625
Dresser Industries, Inc. 50,000 1,012,500
</TABLE>
21
<PAGE>
CAMBRIDGE CAPITAL GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
ENERGY (CONTINUED)
Enron Corporation 25,000 $ 756,250
Mobil Corporation 12,000 949,500
Royal Dutch Petroleum Company 8,500 912,688
Tidewater, Inc. 15,000 322,500
5,978,813
FINANCIAL 5.98%
American International Group, Inc. 15,000 1,333,125
Federal National Mortgage Association 20,000 1,575,000
U.S. Healthcare, Inc. 17,500 814,844
3,722,969
TECHNOLOGY 15.21%
Cirrus Logic, Inc.* 35,000 980,000
Computer Associates International,
Inc. 30,000 1,335,000
Ericsson Telecommunication Company 15,000 806,250
General Motors Corporation - Class E 23,000 874,000
Hewlett Packard Company 15,000 1,310,625
International Business Machines
Corporation 9,000 625,500
Parametric Technology Corporation* 28,300 940,975
Perkin-Elmer Corporation 15,000 470,625
Philips Electronics Holdings Company 35,000 1,063,125
Xerox Corporation 10,000 1,067,500
9,473,600
TRANSPORTATION & SERVICES 2.61%
CSX Corporation 10,000 685,000
Union Pacific Corporation 17,500 938,438
1,623,438
UTILITIES 3.91%
Ameritech Corporation 20,000 805,000
Royal PTT Nederland 22,500 677,781
Sprint Corporation 25,000 953,125
2,435,906
MISCELLANEOUS 1.96%
Eastman Kodak Company 7,500 388,125
ITT Corporation 10,000 833,750
1,221,875
TOTAL COMMON STOCKS (COST $49,335,346) 50,888,805
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SHARES OR
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PREFERRED STOCKS 0.47%
Nokia AB (cost $202,825) $ 2,500 $ 290,363
GOVERNMENT BOND 3.14%
U.S. Treasury Note, 6.00%, 6/30/96
(cost $1,974,735) $1,975,000 1,958,726
SHORT-TERM INVESTMENTS 16.00%
COMMERCIAL PAPER 13.37%
Bellsouth Telecommunications, Inc.,
4.79%, 10/20/94 1,650,000 1,645,829
Exxon Imperial U.S., Inc.,
4.82%, 10/7/94 1,630,000 1,628,691
General Electric Company,
4.87%, 10/24/94 1,500,000 1,495,333
Johnson & Johnson, 4.90%, 10/24/94 745,000 742,668
Private Export Funding Corporation,
4.73%, 10/14/94 1,245,000 1,242,873
Private Export Funding Corporation,
4.72%, 10/20/94 225,000 224,439
Proctor & Gamble Corporation,
4.83%, 10/21/94 1,350,000 1,346,377
TOTAL COMMERCIAL PAPER 8,326,210
U.S. GOVERNMENT AGENCIES 2.63%
Federal Home Loan Mortgage
Corporation, 4.70%, 10/4/94 1,240,000 1,239,514
Federal National Mortgage Association,
4.76%, 10/26/94 400,000 398,678
TOTAL U.S. GOVERNMENT AGENCIES 1,638,192
TOTAL SHORT-TERM INVESTMENTS
(COST $9,964,402) 9,964,402
(COST $61,477,308) 101.31% 63,102,296
OTHER ASSETS LESS LIABILITIES (1.31%) (815,383)
NET ASSETS 100.00% $62,286,913
</TABLE>
* Non-income producing.
~ American Depository Receipts.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PERCENT OF PRINCIPAL MARKET
NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 121.63%
U.S. GOVERNMENT AND
FEDERAL AGENCIES 94.08%
FEDERAL HOME LOAN
MORTGAGE CORPORATION 34.03%
6.00%, 1/15/20 $ 5,236,000 $ 4,707,478
10.00%, 3/1/21 1,548,772 1,651,316
6.75%, 5/15/21 3,000,000 2,669,040
9.50%, 12/1/22 776,622 811,080
6.00%, 11/14/24 (c) 13,000,000 11,208,444
CMO, IO, 9.98% - 11.66%,
7/15/06 - 1/15/16 23,277,819 4,806,943
CMO, REMIC, 8.50%, 6/25/19 1,976,636 2,003,815
IO, REMIC, 4.00% -7.00%,
12/15/08 -3/25/24 92,193,018 8,907,180
36,765,296
FEDERAL HOUSING AGENCY 3.65%
7.38%, 7/1/21 (a) 2,979,428 2,962,669
7.43%, 12/1/21 (a) 998,994 977,890
3,940,559
FEDERAL NATIONAL
MORTGAGE ASSOCIATION 0.46%
11.00%, 12/1/20 449,589 494,547
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - REMIC 15.03%
8.00%, 1991 Class 155ZA, 2/25/17 4,085,083 4,092,722
6.15%, 1993 Class 160AG, 12/25/20 2,000,000 1,805,620
6.00%, 1991 Class 140D, 10/25/21 9,875,000 8,612,778
6.50%, 1993 Class 189PK, 3/25/22 2,000,000 1,730,620
16,241,740
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION 39.15%
12.00%, 12/15/12 - 5/15/15 3,178,281 3,607,349
11.50%, 2/15/13 - 6/20/19 643,805 712,580
10.50%, 5/20/14 - 6/20/19 2,815,070 3,033,890
11.00%, 1/15/16 - 6/15/21 3,130,421 3,459,694
6.50%, 11/15/23 1,487,152 1,298,462
6.00%, 8/20/24 - 9/20/24* 11,430,001 11,088,632
9.50%, 9/15/10 - 1/15/28 5,023,272 5,274,436
9.00%, 1/15/28 2,842,244 2,914,181
8.75%, 1/15/28 - 5/15/28 4,394,051 4,398,137
10.00%, 5/15/24 - 7/15/28 4,017,475 4,301,189
9.75%, 2/15/29 2,061,048 2,201,199
42,289,749
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
TREASURY SECURITIES 1.76%
U.S. Treasury Note, 6.38%, 1/15/009 $1,980,000 $1,898,93
TOTAL U.S. GOVERNMENT
AND FEDERAL AGENCIES 101,630,830
CORPORATE BONDS 10.14%
CONSUMER NON-DURABLES 3.20%
RJR Nabisco, Inc., 8.30%, 4/15/99 3,600,000 3,451,500
FINANCE 0.92%
Banesto Finance, 6.13%, 4/25/03 1,000,000 1,002,900
TRANSPORTATION 4.49%
American Airlines, 9.78%, 11/26/11 5,000,000 4,846,000
MISCELLANEOUS 1.53%
BR W Real Estate
Operating Company, 5.69%, 12/1/98
(3/24/94, $1,664,501) (a) (b) 1,668,672 1,652,508
TOTAL CORPORATE BONDS 10,952,908
COLLATERALIZED MORTGAGE OBLIGATIONS 15.19%
Prudential Home Mortgage
Securities Corporation,
Series 1992-34, 6.50%, 11/25/07 3,000,000 2,839,680
Prudential Home Mortgage
Securities Corporation,
Series 1992-46, 7.00%, 12/1/07 4,000,000 3,985,938
Prudential Home Mortgage
Securities Corporation,
Series 1993-15, 11.50%, 5/25/08 3,549,431 3,752,692
Resolution Trust Corporation,
Series 1992-C5, 6.90%, 5/25/22 (a) 1,679,665 1,633,471
Resolution T rust Corporation,
Series 1992-C1, 8.80%, 8/25/23 (a) 3,275,983 3,343,550
Sears Mortgage Securities Corporation,
Series 1992-9, 5.76%, 6/25/22 (a) 875,806 857,278
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 16,412,609
MORTGAGES 2.22%
Chase Mortgage Finance
Corporation, IO, Series 1994-F , Class A,
2.50%, 3/25/25 10,511,000 817,892
Prudential Home Mortgage
Securities Corporation, IO, CMO,
Series 1993-63, 6.75%, 1/25/24 4,451,111 1,016,105
Residential Funding Mortgage
Securities, IO, 6.50%, 3/25/09 2,912,931 561,877
TOTAL MORTGAGES 2,395,874
</TABLE>
25
<PAGE>
CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
TOTAL LONG-TERM INVESTMENTS
(COST $136,708,288) $131,392,221
SHORT-TERM INVESTMENT 0.90%
United Missouri Bank,
Time Deposit, 3.77%,
10/3/94 $ 974,000 974,000
TOTAL SHORT-TERM INVESTMENTS
(COST $974,000) 974,000
TOTAL INVESTMENTS
(COST $137,682,288) 122.53% 132,366,221
OTHER ASSETS LESS LIABILITIES (22.53%) (24,336,572)
NET ASSETS 100.00% $108,029,649
</TABLE>
INVESTMENT ABBREVIATIONS
CMO - Collateralized Mortgage Obligation
IO - Interest Only Security
REMIC - Real Estate Mortgage Investment Conduit
* Government National Mortgage Association, 6.00%, 9/20/24 with a market
value of $9,390,015 was segregated as collateral for a reverse repurchase
agreement at September 30, 1994.
(a) Securities are valued based upon their fair value determined under
procedures approved by the Board of Trustees. At September 30, 1994, the fair
value of these securities was $11,427,366 (10.6% of net assets).
(b) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses after
the title of the restricted securities.
(c)At September 30, 1994 cost of securities purchased on a when-issued
basis totalled $11,456,250.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
<TABLE>
CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
PERCENT OF PRINCIPAL MARKET
NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
LONG-TERM
MUNICIPAL SECURITIES 98.92%
CALIFORNIA 16.67%
California Educational
Facilities, College of
Osteopathic Medicine,
7.50%, 6/1/18 $ 985,000 $ 1,003,675
California State Revenue
Anticipation Bond, WTS, Series C,
5.75%, 4/25/96 3,000,000 3,041,550
Carson Improvement Board Act 1915,
Special Assessment District 92,
7.38%, 9/2/22 740,000 754,237
Los Angeles Convention,
Series A, 5.13%, 8/15/21 1,750,000 1,427,055
Los Angeles County
Metropolitan, 5.00%, 7/1/21 4,500,000 3,600,630
Orange County
Community Facilities District,
Series A, 7.35%, 8/15/18 300,000 343,602
San Francisco City Sewer
Revenue Refunding, 5.38%, 10/1/22 2,000,000 1,695,740
11,866,489
COLORADO 4.80%
Colorado HFA, SFM,
Series A-3, 7.00%, 11/01/24 655,000 661,857
Denver City & County
Airport Revenue, Series D,
7.75%, 11/15/13 1,000,000 997,880
Denver City & County
Airport Revenue, Series A,
8.50%, 11/15/23 1,700,000 1,750,830
3,410,567
DISTRICT OF COLUMBIA 3.94%
District of Columbia
Certificates of Partnership,
Participation Note,
7.30%, 1/1/13 1,000,000 1,012,130
District of Columbia Hospital
Revenue, Series A, 7.13%, 8/15/19 1,000,000 991,250
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/1/19 800,000 800,864
2,804,244
</TABLE>
27
<PAGE>
CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
FLORIDA 4.50%
Dade County, 6.50%, 10/1/26 $1,930,000 $ 1,950,921
Sarasota County, Health Facilities
Authority Revenue, 10.00%, 7/1/22 1,200,000 1,253,400
3,204,321
GEORGIA 2.90%
Cobb County Development
Authority Revenue Bonds,
Series 92A, 8.00%, 6/1/22 1,000,000 1,040,000
Monroe County
Development Authority PCR,
6.75%, 1/1/10 1,000,000 1,024,800
2,064,800
ILLINOIS 6.81%
Broadview T ax Increment Revenue,
Tax Allocation, 8.25%, 07/01/13 1,000,000 985,740
Chicago Heights Residential
Mortgage Revenue,
Series B, (effective yield-2.51%) (a),
6/1/09 3,465,000 1,215,591
Chicago O'Hare International
Airpor t Special Facilities
Revenue, 6.75%, 1/1/18 1,350,000 1,356,251
Illinois Health Facilities
Authority Revenue, 9.50%, 10/1/22 1,250,000 1,293,450
4,851,032
INDIANA 6.88%
Indiana Health Facilities
Hospital Revenue, 7.20%, 10/1/22 1,815,000 1,784,780
Indianapolis Public Improvement Bond,
Series D, 6.75%, 2/1/20 2,400,000 2,405,040
Indiana Transportation
Finance Authority, Series A,
(effective yield-1.50% - 1.70%) (a),
12/1/15 - 6/1/17 3,000,000 706,710
4,896,530
IOWA 0.95%
Student Loan Liquidity Corporation,
Student Loan Revenue,
Series C, 6.95%, 3/1/06 625,000 670,931
KENTUCKY 2.64%
Jefferson County, Hospital
Revenue, 9.05%, 10/1/08 500,000 518,750
</TABLE>
28
<PAGE>
<TABLE>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
KENTUCKY 2.64%
Kenton County Airport
Board Revenue, OID, 7.50%, 2/1/20 $ 1,400,000 $ 1,359,666
1,878,416
LOUISIANA 0.58%
Louisiana Public Facilities
Authority Revenue, 6.80%, 5/15/12 400,000 415,984
MAINE 1.39%
Maine State Housing Authority ,
Series C, 6.88%, 11/5/24 1,000,000 993,040
MASSACHUSETTS 2.54%
Massachusetts State Health
and Educational Facilities Authority ,
OID Revenue Bonds,
Series A, 6.00%, 10/1/23 2,000,000 1,296,000
Plymouth County,
Certificates of Partnership,
Participation Notes,
Series A, 7.00%, 4/1/22 500,000 513,755
1,809,755
MICHIGAN 1.94%
Michigan State Strategic Funding,
7.50%, 1/1/21 1,000,000 953,810
Romulus Community School,
Refunding, (effective yield-3.86%) (a),
5/1/20 2,385,000 429,896
1,383,706
MONTANA 0.66%
Montana State Resource
Recovery Revenue Bonds,
7.00%, 12/31/19 500,000 472,895
NEBRASKA 0.52%
Nebraska Finance Authority,
SFM, 10.02%, 9/15/24 400,000 372,500
NEVADA 0.72%
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/1/12 500,000 510,125
NEW JERSEY 2.63%
New Jersey Economic Development
Authority, Electric Energy Facilities
Revenue, 7.88%, 6/1/19 1,000,000 1,035,880
</TABLE>
29
<PAGE>
CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
NEW JERSEY (CONTINUED)
New Jersey Healthcare Facilities
Financing Authority, Refunding,
6.80%, 7/1/11 $ 825,000 $ 839,578
1,875,458
NEW YORK 8.84%
Refunding & Improvement, 8.00%, 1/1/20 1,000,000 977,730
Herkimer County, IDA, 8.00%, 1/1/09 1,000,000 1,041,160
New York City, Series H, 7.00%, 2/1/16 500,000 508,835
New York City, OID,
Series H, 7.10%, 2/1/12 300,000 308,400
New York City, OID,
Series H, 7.00%, 2/1/20 600,000 610,602
New York City, OID Refunding,
Series A, 6.25%, 8/1/21 600,000 559,464
New York, New York, Series A,
7.00%, 8/1/04 1,000,000 1,056,110
Onondaga County Residential
Recovery Agency Revenue Project,
7.00%, 5/1/15 1,225,000 1,234,237
6,296,538
OHIO 1.32%
Cleveland Airport Revenue, Series A,
6.00%, 1/1/24 1,000,000 938,510
OKLAHOMA 4.13%
Oklahoma City, Industrial and
Cultural Facilities Trust, 6.75%, 9/15/17 1,000,000 1,004,150
Tulsa, Municipal Airport Trust Revenue,
7.38%, 12/1/20 2,000,000 1,937,860
2,942,010
PENNSYLVANIA 7.56%
Delaware County Healthcare Authority,
Series A, 5.13%, 11/15/12 2,000,000 1,685,760
Lehigh County General Purpose
Authority Revenue, OID,
Series A, 6.60%, 7/15/22 1,000,000 924,820
Pennsylvania Economic
Development, 6.40%, 1/1/09 500,000 482,540
Pennsylvania HFA, SFM,
Series 4, 7.00%, 4/1/24 500,000 509,360
Pennsylvania Intergovernmental
Cooperative Authority,
Special Tax Revenue, 6.80%, 6/15/12 750,000 813,353
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 $ 1,000,000 $ 965,900
5,381,733
PUERTO RICO 1.22%
Puerto Rico, Commonwealth
Highway Transportation
Authority, Series T, 6.50%, 7/1/22 800,000 869,584
RHODE ISLAND 0.67%
West Warwick, Series A, G.O. Bonds,
6.80% - 7.30%, 7/15/98 - 7/15/08 475,000 480,564
TENNESSEE 2.26%
Memphis, Shelby County Airport
Authority Special Facilities
Revenue Refunding, 7.88%, 9/1/09 1,500,000 1,609,560
TEXAS 6.02%
Brazos Higher Education Authority
Student Loan Revenue, 7.10%,
11/1/04 1,000,000 1,012,820
Dallas-Fort Worth International
Airport Facility Revenue Bonds,
7.63%, 11/1/21 625,000 614,738
Dallas-Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/1/30 1,000,000 947,600
Leander Independent
School District Capital Appreciation
Refunding, (effective yield-3.92%)
(a), 8/15/15 3,995,000 969,227
Texas State Department
of Housing and Community Affairs
Refunding, Series C, 10.13%, 7/2/24 750,000 745,313
4,289,698
UTAH 0.36%
Bountiful Hospital Revenue,
9.50%, 12/15/18 250,000 257,370
WASHINGTON 0.60%
Washington State Housing
Finance Commission, SFM,
7.10%, 7/1/22 425,000 430,640
WEST VIRGINIA 4.73%
Harrison County,
Waste Disposal Revenue,
6.75%, 8/1/24 2,000,000 2,007,820
</TABLE>
31
<PAGE>
CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
LONG-TERM
MUNICIPAL SECURITIES PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
WEST VIRGINIA (CONTINUED)
West Virginia State Hospital
Finance Authority Revenue,
9.70%, 1/1/18 $ 1,500,000 $1,359,090
3,366,910
OTHER 0.14%
Virgin Islands Public Finance
Authority Revenue Refunding
Series A, 7.25%, 10/1/18 100,000 101,642
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $72,276,934) 70,445,552
SHORT-TERM MUNICIPAL SECURITIES 1.12%
CALIFORNIA
California Pollution Control, 3.60%,
VRDN 800,000 800,000
TOTAL SHORT-TERM
MUNICIPAL SECURITIES (COST $800,000) 800,000
TOTAL INVESTMENTS
(COST $73,076,934) 100.04% 71,245,552
OTHER ASSETS LESS LIABILITIES (0.04%) (31,798)
NET ASSETS 100.00% $ 71,213,754
</TABLE>
INVESTMENT ABBREVIATIONS
HFA - Housing Finance Authority
PFA - Public Financing Authority
IDA - Industrial Development Authority
SFM - Single Family Mortgage
OID - Original Issue Discount
PCR - Pollution Control Revenue
VRDN - Variable Rate Demand Note, rate shown represents current
interest rate at 9/30/94.
(a) Effective yield is the yield as calculated at time of purchase at which
the bond accretes on an annual basis until its maturity date.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 62.17%
BASIC MATERIALS 14.16%
Aluminum Company of America 23,000 $1,949,249
Boise Cascade Corporation 19,700 581,150
Cleveland Cliffs, Inc. 1,700 65,875
Dekalb Genetics Corporation 900 26,100
Gaylord Container Corporation-
Warrants* 10,000 70,000
Georgia Pacific Corporation 3,000 229,500
International Paper Company 23,200 1,821,199
International Specialty Products,
Inc. 12,600 99,225
Kaiser Aluminum Corporation* 14,900 156,450
Norsk Hydro AS~ 19,300 711,688
Pichiney SA 12,000 863,000
Potlatch Corporation 2,700 111,375
Rayonier, Inc. 5,100 164,475
Rhone Poulenc SA~ 15,700 361,100
St. Lawrence Cement, Inc.* 25,000 223,580
Temple-Inland, Inc. 12,900 712,725
Willamette Industries, Inc. 9,500 486,875
8,633,566
CAPITAL GOODS & CONSTRUCTION 6.43%
American R E Partners 1,400 11,025
Ameron, Inc. 2,300 82,800
BE Aerospace, Inc.* 32,700 302,475
Black & Decker Corporation 32,000 700,000
Centex Construction Products,
Inc.* 18,200 227,500
Giant Cement Holding, Inc. 7,300 102,200
Honeywell, Inc. 900 31,050
Kaufman & Broad Home Corporation 20,900 284,762
Lafarge Corporation 2,400 48,300
National Gypsum Company* 8,100 307,800
Ryland Group, Inc. 5,700 90,488
Sequa Corporation* 18,100 486,437
Southdown, Inc.* 7,700 161,700
Standard Pacific Corporation 22,200 160,950
United T echnologies Corporation 400 25,050
USG Corporation* 16,600 342,375
Welbilt Corporation* 9,700 244,925
York International Corporation 7,500 312,188
3,922,025
</TABLE>
33
<PAGE>
<TABLE>
CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
CONSUMER CYCLICAL 3.51%
Borg-Warner Automotive, Inc. 4,000 $ 101,500
General Motors Corporation 27,900 1,307,812
Host Marriott Corporation* 17,400 171,825
Navistar International* 30,200 419,025
Servico, Inc.* 4,200 35,700
Valassis Communications, Inc. 6,600 102,300
2,138,162
CONSUMER STAPLES 4.35%
Davids, Ltd. 110,000 122,100
Fleming Companies, Inc. 13,900 324,913
Hills Stores Company* 10,000 213,750
Interstate Bakeries Corporation 19,000 247,000
Monk Austin, Inc. 11,800 172,575
Morningstar Group, Inc.* 15,200 106,400
Seagram Company, Ltd. 2,500 75,625
Standard Commercial Corporation 16,000 242,000
Universal Corporation 47,000 1,151,500
2,655,863
ENERGY 5.64%
Amerada Hess Corporation 2,600 120,900
Arethusa Off-Shore, Ltd.* 5,200 55,250
Atlantic Richfield Company 900 90,787
Burlington Resources, Inc. 200 7,500
Enserch Corporation 9,400 130,425
Gerrity Oil & Gas Corporation* 17,000 119,000
Gulf Canada Resources, Ltd.* 26,300 100,269
Home Oil Company* 13,200 181,500
Indresco, Inc. 2,200 28,875
Lone Star Technologies, Inc. 25,100 156,875
Maxus Energy Corporation* 61,900 278,550
Nabors Industries, Inc.* 15,000 91,875
Noble Drilling Corporation* 39,300 294,750
Nowsco Well Service, Ltd. 1,700 26,350
Petroleum Heat & Power Company 13,400 123,950
Phillips Petroleum Company 2,600 89,050
Ranchmen's Resources, Ltd.* 41,900 226,394
Santa Fe Energy Resources, Inc.* 10,000 92,500
Sonat Offshore Drilling, Inc. 22,400 445,200
U.S.X. Marathon Group, Inc. 18,000 319,500
Unocal Corporation 16,400 463,300
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
FINANCIAL 19.10%
ACE, Ltd. 32,500 $ 780,000
Aetna Life & Casualty Company 5,900 273,613
Alexander & Alexander Services, Inc. 18,600 362,700
American Express Company 9,200 279,450
Astoria Financial Corporation* 5,300 159,662
BankAmerica Corporation 31,338 1,382,756
California Federal Bank* 17,556 237,006
Capital Guaranty Corporation 22,800 350,550
Chase Manhattan Corporation 8,300 287,388
Chubb Corporation 12,300 874,837
CIGNA Corporation 8,900 548,463
Coast Savings Financial, Inc.* 8,800 156,200
Colonial Properties Trust 14,900 324,075
Enhance Financial Services Group, Inc. 10,400 198,900
Exel Limited 8,900 345,988
Federal National Mortgage Association 1,000 78,750
First Union Corporation 2,000 86,500
Firstfed Financial Corporation* 6,400 99,200
Gables Residential Trust 13,800 313,950
GP Financial Corporation 7,400 175,750
Holly Residential Properties 16,900 253,500
ITT Corporation 1,500 125,062
Keycorp 5,100 155,550
Koger Equity, Inc. REIT* 36,800 331,200
Lehman Brothers Holding, Inc. 24,840 366,390
Loews Corporation 1,200 106,050
Mellon Bank Corporation 2,400 135,000
National Bank of Canada 47,800 333,973
Newhall Land & Farming Company 3,100 45,725
Old Republic International Corporation 16,000 334,000
Policy Management Systems Corporation* 6,900 275,138
Reinsurance Group of America 3,600 82,800
Storage Equities, Inc. 21,300 319,500
Twentieth Century Industries* 37,000 471,750
U.S. Bank Corporation 3,200 81,600
Unidanmark A/S*~(b) 5,100 196,085
Union Bank 15,200 467,400
Unitrin, Inc. 5,200 250,900
11,647,361
TECHNOLOGY 3.51%
B.C.E., Inc. 25,400 911,225
Comsat Corporation 5,500 140,938
Cooper Industries, Inc. 7,600 305,900
</TABLE>
35
<PAGE>
CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
TECHNOLOGY (CONTINUED)
Digital Equipment Corporation* 2,000 $ 53,000
IDB Communications Group, Inc.* 28,900 260,100
Raychem Corporation 11,500 471,500
2,142,663
TRANSPORTATION & SERVICES 2.09%
Canadian Pacific, Ltd. 23,500 393,625
Canadian Pacific, Ltd.*
(2/14/94, $16,814) (a) 1,000 16,769
Continental Airlines, Inc.* 11,000 189,750
MESA Airlines, Inc.* 1,700 11,262
OMI Corporation* 18,400 117,300
Overseas Shipholding Group 5,000 108,750
Tidewater , Inc. 5,300 113,950
Trinity Industries, Inc. 8,500 269,874
Union Pacific Corporation 1,000 53,625
1,274,905
UTILITIES 0.43%
Central Maine Power Company 6,100 68,625
New York State Electric & Gas
Company 1,500 27,938
Niagra Mohawk Power 3,700 49,025
Telecom Italia Spa 11,000 30,972
Unicom Corporation 3,800 84,550
261,110
MISCELLANEOUS 2.95%
Brascan, Ltd. 19,200 276,000
CRSS, Inc. 2,900 32,988
Essex Property Trust, Inc. 15,500 279,000
Innkeepers U.S.A. T rust 9,000 87,188
Shurgard Storage Centers, Inc. 1,600 36,800
Sun Communities, Inc. 12,600 289,800
T ucker Properties Corporation 13,900 224,138
Unilab Corporation* 5,100 27,413
United Mobile Homes, Inc. 36,000 270,000
W.M.X. Technologies, Inc. 9,600 277,200
1,800,527
TOTAL COMMON STOCKS (COST
$36,159,724) 37,918,982
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SHARES OR
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
PREFERRED STOCKS 2.25%
BASIC MATERIALS 0.52%
Boise Cascade Corporation 9,000 $ 237,375
Reynolds Metals Company 1,500 80,812
318,187
CONSUMER STAPLES 0.04%
FHP International Corporation 800 21,900
FINANCIAL 1.16%
Glendale Federal Bank 21,700 707,963
TRANSPORTATION & SERVICES 0.53%
AMR Corporation (b) 5,000 205,000
UAL Corporation (b) 1,400 115,850
320,850
TOTAL PREFERRED STOCKS
(COST $1,150,737) 1,368,900
CORPORATE BONDS 7.86%
BASIC MATERIALS 0.36%
Aluminum Company of America,
5.75%, 2/1/01 $250,000 221,600
CAPITAL GOODS & CONSTRUCTION 0.15%
Lockheed Corporation, 6.75%,
3/15/03 100,000 90,219
CONSUMER CYCLICAL 1.04%
Circus Circus Enterprises, Inc.,
7.63%, 7/15/13 250,000 219,865
Sears Roebuck Company,
9.25%, 4/15/98 175,000 183,622
Time Warner Entertainment, Inc.,
8.88%, 10/1/12 250,000 230,187
633,674
CONSUMER STAPLES 0.34%
Gillette Company,
5.75%, 10/15/05 250,000 206,638
ENERGY 0.39%
Coastal Corporation,
8.13%, 9/15/02 250,000 239,820
</TABLE>
37
<PAGE>
CAMBRIDGE INCOME & GROWTH PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
CORPORATE BONDS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
FINANCIAL 3.62%
American General Finance
Corporation,
5.88%, 7/1/00 $ 250,000 $ 226,650
Associates Corporation
of North America,
5.25%, 3/30/00 250,000 219,713
Bank of Boston,
6.63%, 2/1/04 250,000 222,420
Chase Manhattan Corporation,
7.75%, 11/1/99 250,000 246,210
Chrysler Financial Corporation,
6.63%, 8/15/20 250,000 231,413
Comerica Bank Inc.,
7.13%, 12/1/13 250,000 213,245
Dean W itter Discover,
6.25%, 3/15/00 100,000 91,837
Ford Motor Credit,
8.88%, 6/15/99 100,000 103,633
Great Western Financial,
6.38%, 7/1/00 250,000 226,750
Home Savings of Americas,
6.00%, 11/01/00 250,000 225,140
Toronto-Dominion Bank-NY,
6.13%, 11/1/08 250,000 201,107
2,208,118
UTILITIES 1.96%
Duke Power Company,
7.00%, 6/1/00 100,000 96,534
Florida Power & Light Company,
5.38%, 4/1/00 250,000 223,015
Long Island Lighting Company,
7.05%, 3/15/03 100,000 80,934
Pacific Gas & Electric Company,
5.93%, 10/8/03 250,000 216,515
Philadelphia Electric Company,
7.5%, 1/15/99 100,000 98,841
Southwestern Public Service Company,
6.88%, 12/1/99 250,000 241,443
Union Electric Company,
6.75%, 10/15/99 250,000 238,420
1,195,702
TOTAL CORPORATE BONDS (COST
$5,454,869) 4,795,771
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
GOVERNMENT BONDS 23.15%
Government National Mortgage
Association,
7.00%, 1/15/24 $ 2,474,696 $ 2,243,460
Government National Mortgage
Association,
6.50%, 9/15/23-4/15/24 1,484,365 1,296,489
U.S. Treasury Note,
4.75%, 9/30/98 2,000,000 1,837,060
U.S. Treasury Note,
5.75%, 8/15/03 2,000,000 1,763,680
U.S. Treasury Bond,
7.25%, 5/15/16 5,500,000 5,081,230
U.S. Treasury Bond,
7.50%, 11/15/16 2,000,000 1,895,980
TOTAL GOVERNMENT BONDS (COST
$15,179,888) 14,117,899
SHORT-TERM INVESTMENT 2.95%
REPURCHASE AGREEMENT
Lehman Brothers, Inc.
Dated 9/29/94, 4.85%, Due 10/3/94,
collateralized by $1,620,000,
U.S. Treasury Bond, 9.25%, 2/15/16 1,797,000 1,797,000
TOTAL SHORT-TERM INVESTMENTS
(COST $ 1,797,000) 1,797,000
TOTAL INVESTMENTS
(COST $59,742,218) 98.38% 59,998,552
OTHER ASSETS LESS LIABILITIES 1.62% 992,964
NET ASSETS 100.00% $60,991,516
</TABLE>
* Non-income producing.
~ American Depository Receipts.
REIT - Real Estate Investment Trust
(a) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933). Dates of acquisition and costs are set forth in
parentheses after the title of the restricted securities.
(b) These are securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
CAMBRIDGE GLOBAL PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PERCENT OF MARKET
NET ASSETS SHARES VALUE
<S> <C> <C> <C>
COMMON STOCKS 91.63%
AUSTRALIA 5.07%
Broken Hill Proprietary Company* 24,033 $ 349,286
Western Mining Corporation
Holdings, Ltd. ORD 36,450 212,278
Woodside Petroleum, Ltd. 79,500 294,150
855,714
CANADA 4.70%
Alcan Aluminum, Ltd. 7,300 192,456
Canadian Pacific, Ltd. 16,600 278,357
Rogers Communications, Inc.* 21,200 321,918
792,731
DENMARK 1.55%
FLS Industries A/S `B' 3,750 260,899
FRANCE 1.45%
Alcatel Alsthom (CGE)~ 13,200 244,200
GERMANY 6.14%
Hoechst AG 1,390 295,766
Mannesmann AG 1,100 273,530
Munich Reinsurance 155 271,097
Veba AG 590 195,552
1,035,945
GREAT BRITAIN 10.24%
Carlton Communications ORD 18,600 245,773
Enterprise Oil ORD 45,500 277,651
Lasmo PLC 129,857 313,281
Rio Tinto-Zinc Corporation ORD 19,700 272,888
Saint James Place 130,000 243,931
Waste Management International PLC* 30,600 261,998
Willis Corroon Group PLC 48,000 111,259
1,726,781
HONG KONG 1.66%
Hong Kong Telecom, Ltd. 69,000 137,961
Hutchison Whampoa, Ltd. 30,000 141,707
279,668
</TABLE>
40
<PAGE>
<TABLE>
COMMON STOCKS PERCENT OF MARKET
(CONTINUED) NET ASSETS SHARES VALUE
<S> <C> <C> <C>
ITALY 4.71%
Instituto Mobilaire Italiano 4,000 $ 27,644
Instituto Nazionale ORD 112,000 166,635
Rinascente 39,000 124,410
Rinascente - Warrants* 10,400 0
Telecom Italia SPA 90,600 255,097
STET Societa Finanz 71,300 220,602
794,388
JAPAN 9.27%
Canon, Inc. 16,000 281,070
Hitachi, Ltd. 31,000 299,202
Kyocera Corporation 4,000 285,916
Matsushita Electric 8,000 127,612
NKS, Ltd. 2,000 15,063
Sony Corporation~ 500 29,188
Sony Corporation 4,000 232,610
Toshiba Corporation 39,000 293,337
1,563,998
SOUTH AFRICA 1.47%
Impala Platinum Holdings~ 10,400 248,430
SOUTH KOREA 2.95%
Goldstar (b) 13,400 298,150
Yukong, Ltd.* (b) 8,000 200,000
498,150
SWEDEN 5.93%
Astra AB A-F 7,000 167,737
Autoliv AB 8,900 267,324
SKF AB* 15,200 264,801
Volvo AB 16,500 300,665
1,000,527
SWITZERLAND 9.73%
Brown Boveri & CIE AG 295 254,330
CIBA Geigy AG Basel 480 271,410
Nestle Cham Et Vevey 302 274,204
SCHW Rueckversicherungs 600 291,728
SGS Societe Gen De Surveill 165 256,311
Sulzer AG* (Participation Certificate) 443 294,186
1,642,169
</TABLE>
41
<PAGE>
CAMBRIDGE GLOBAL PORTFOLIO
Portfolio of Investments
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SHARES OR
COMMON STOCKS PERCENT OF PRINCIPAL MARKET
(CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C>
UNITED STATES 25.30%
Allegheny Ludlum Corporation 1,700 $ 36,550
Ambac, Inc. 7,600 281,200
American President Cos., Ltd. 12,200 308,050
Amway Asia Pacific, Ltd. 1,600 48,200
Boeing Company 4,700 202,688
Destec Energy , Inc.* 27,400 311,675
Enron Corporation 8,700 263,175
Exel, Ltd. ORD 7,400 287,675
General RE Corporation 2,220 235,043
Harnischfeger 1,300 34,287
LaFarge Corporation 13,800 277,725
MBIA, Inc. 5,200 310,050
Mid Ocean, Ltd. ORD* 10,800 273,375
Partnerre Holdings, Ltd. 12,600 275,625
Schlumberger, Ltd. 4,600 250,125
Thermo Electron Corporation* 2,700 123,863
United Healthcare Corporation 4,600 243,800
United Technologies Corporation 3,300 206,663
WMX Technologies, Inc. 10,300 297,412
4,267,181
VENEZUELA 1.46%
Venezolana De Prerredicidos*
(4/13/94, $260,293) (a) (b) 35,600 246,975
TOTAL COMMON STOCKS (COST $15,437,475) 15,457,756
CORPORATE BONDS 0.72%
CANADA 0.46%
Teck Corporation, 3.75%, 7/15/06~ $80,000 78,000
ITALY 0.16%
Mediobanca, 4.50%, 1/1/00* 25,852 26,620
MALAYSIA 0.10%
Telekom Malaysia Berhad,
4.00%, 10/3/04~ (a) (b)
(9/22/94, $170,000) 170,000 169,958
TOTAL CORPORATE BONDS (COST $260,604) 274,578
SHORT- TERM INVESTMENTS 8.59%
Federal Home Loan Bank, OID,
4.80%, 10/28/94 800,000 797,120
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SHARES OR
SHORT-TERM PERCENT OF PRINCIPAL MARKET
INVESTMENTS (CONTINUED) NET ASSETS AMOUNT VALUE
<S> <C> <C> <C>
REPURCHASE AGREEMENT
Donaldson, Lufkin, & Jenrette Securities Corporation
Dated 9/30/94, 4.80%, due 10/3/94,
collateralized by $473,000,
U.S. Treasury Bond, 12.75%, 11/15/10 $651,000 $ 651,000
TOTAL SHORT-TERM INVESTMENTS
(COST $1,448,120) 1,448,120
TOTAL INVESTMENTS
(COST $17,146,199) 100.94% 17,180,454
OTHER ASSETS LESS LIABILITIES (0.94%) (310,915)
NET ASSETS 100.00% $16,869,539
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses after
the title of the restricted securities.
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4 (2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
CAMBRIDGE SERIES TRUST
Statements of Assets and Liabilities
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE CAMBRIDGE
CAMBRIDGE CAPITAL GOVERNMENT MUNICIPAL INCOME AND CAMBRIDGE
GROWTH GROWTH INCOME INCOME GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at market value* (Note 2) $41,999,246 $63,102,296 $132,366,221 $71,245,552 $59,998,552 $17,180,454
Cash 859,416 - - 130,404 - 2,344
Receivables
Investments sold 832,966 741,914 - - 904,135 -
Fund shares sold 11,126 42,470 34,094 23,324 200,362 94,816
Dividends and interest 95,051 139,759 1,170,752 1,348,724 439,641 28,360
Deferred organization expenses (Note 2) 9,039 11,351 33,502 10,468 9,964 45,295
Other assets - 5,101 - 4,496 - -
Total assets 43,806,844 64,042,891 133,604,569 72,762,968 61,552,654 17,351,269
LIABILITIES
Payables
Investments purchased 141,000 1,342,854 14,362,419 1,006,858 124,141 381,081
Reverse repurchase agreement (Note 2) - - 8,956,501 - - -
Fund shares redeemed 250,951 218,520 908,895 207,479 208,711 3,771
Dividends - - 274,254 177,981 - -
Forward contract payable (Note 7) - - - - - 14,160
Variation margin (Note 2) - - - 25,000 - -
Accrued administration expenses
(Note 4) 5,285 7,531 13,372 5,429 4,619 12,809
Accrued distribution expenses 21,847 53,090 43,523 24,552 9,555 9,723
Accrued expenses and other liabilities 131,075 133,983 1,015,956 101,915 214,112 60,186
Total liabilities 550,158 1,755,978 25,574,920 1,549,214 561,138 481,730
NET ASSETS $43,256,686 $62,286,913 $108,029,649 $71,213,754 $60,991,516 $16,869,539
Net Assets represented by: (Note 2)
Additional paid-in capital $42,915,639 $59,500,018 $124,898,930 $73,383,330 $59,544,077 $16,831,407
Undistributed net investment
income - - 165,284 - 75,944 -
Accumulated distributions in
excess of net investment income - (103,086) - (58,877) - -
Undistributed realized gain (loss)
on investment transactions (2,819,616) 1,264,435 (11,718,498) (631,634) 1,115,161 17,822
Net unrealized appreciation
(depreciation) of investments and
foreign currency related
transactions 3,160,663 1,625,546 (5,316,067) (1,479,065) 256,334 20,310
Net Assets $43,256,686 $62,286,913 $108,029,649 $71,213,754 $60,991,516 $16,869,539
NET ASSET VALUE PER SHARE
Class A Shares $14.68 $ 14.88 $ 12.75 $ 14.42 $ 15.27 $ 14.23
Class B Shares $14.53 $ 14.80 $ 12.76 $ 14.43 $ 15.28 $ 14.15
OFFERING PRICE PER SHARE
Class A $15.53 (a) $ 15.75(a) $ 13.39(b) $ 15.14(b) $ 16.16(a) $ 15.06(a)
Class B $14.53 $ 14.80 $ 12.76 $ 14.43 $ 15.28 $ 14.15
REDEMPTION PROCEEDS PER SHARE
Class A $14.68 $ 14.88 $ 12.75 $ 14.42 $ 15.27 $ 14.23
Class B (c) $14.38 $ 14.65 $ 12.63 $ 14.29 $ 15.13 $ 14.01
SHARES OUTSTANDING
Class A Shares 993,054 1,423,010 2,363,773 1,738,078 1,164,060 624,181
Class B Shares 1,974,036 2,778,026 6,103,595 3,198,229 2,828,735 564,671
Total Shares Outstanding 2,967,090 4,201,036 8,467,368 4,936,307 3,992,795 1,188,852
</TABLE>
* Investments at cost $38,838,583, $61,477,308, $137,682,288, $73,076,934,
$59,742,218, and $17,146,199 respectively.
(a) Computation of offering price: 100/94.50 of net asset value.
(b) Computation of offering price: 100/95.25 of
net asset value.
(c) Computation of redemption proceeds: 99/100 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
44 45
<PAGE>
CAMBRIDGE SERIES TRUST
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994 CAMBRIDGE CAMBRIDGE CAMBRIDGE CAMBRIDGE
CAMBRIDGE CAPITAL GOVERNMENT MUNICIPAL INCOME AND CAMBRIDGE
GROWTH GROWTH INCOME INCOME GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 72,373 $ 498,408 $11,163,429* $5,211,568 $1,100,703 $ 41,716
Dividends (Net of withholding taxes)*** 525,699 1,152,741 - - 869,081 80,443
Total investment income (Note 2) 598,072 1,651,149 11,163,429 5,211,568 1,969,784 122,159
EXPENSES
Management fee (Note 4) 410,955 590,693 839,139 468,787 374,462 69,515
Distribution fees (Note 4) 253,834 360,712 511,023 253,801 252,486 20,749
Transfer agent fee 163,583 213,354 135,467 88,237 107,910 40,323
Shareholder services fees (Note 4) 128,423 184,588 349,642 195,328 124,821 15,340
Administration fee (Note 4) 64,195 92,278 174,797 97,653 62,315 7,670
Custodian fee 71,513 67,014 271,676 72,717 97,592 36,000
Registration fees 30,000 27,000 36,000 23,000 38,000 -
Shareholder reports 25,338 36,777 65,132 41,328 37,476 8,091
Organizational expenses 12,275 12,195 12,114 10,397 2,941 1,904
Professional fees 11,008 15,782 27,500 17,912 14,914 4,014
Directors' fees 7,180 7,180 7,180 7,180 7,180 3,590
Other 13,472 13,705 24,573 30,733 11,429 10,889
Total expenses 1,191,776 1,621,278 2,454,243 1,307,073 1,131,526 218,085
Deduct
Waiver of administration fee (Note 4) 6,569 - 23,563 - 15,033 530
Waiver of management fee (Note 4) - - - 81,713 - 69,515
Net Expenses 1,185,207 1,621,278 2,430,680 1,225,360 1,116,493 148,040
Net investment income (loss) (587,135) 29,871 8,732,749 3,986,208 853,291 (25,881)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on investments (Note 2) (514,259) 1,128,751 (8,118,106) (527,018)(a) 1,523,312 17,822
Change in unrealized
appreciation (depreciation) (5,796,253) (2,465,351) (5,963,957) (7,578,461)(b) (248,910) 20,310(b)
Net realized and unrealized
gain (loss) on investments (6,310,512) (1,336,600) (14,082,063) (8,105,479) 1,274,402 38,132
Net increase (decrease) in net assets
resulting from operations $ (6,897,647) $(1,306,729) $(5,349,314) $(4,119,271) $2,127,693 $12,251
</TABLE>
* Net of interest expense ($7,680).
** For the period from March 29, 1994 (date of initial public investment)
to September 30, 1994.
***Withholding taxes were $1,534, $1,232, and $2,960 for the Capital Growth Port
folio, Income and Growth Portfolio and Global Portfolio respectively for the
year ended September 30, 1994. (a) Includes net realized gain on futures of
$167,132. (b) Includes unrealized appreciation on variation margin receivable
of $352,317 on Cambridge Municipal Income Portfolio and unrealized
depreciation on forward exchange contracts of $14,160 on Cambridge Global
Portfolio.
SEE NOTES TO FINANCIAL STATEMENTS.
46 47
<PAGE>
CAMBRIDGE SERIES TRUST
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE
GROWTH CAPITAL GROWTH GOVERNMENT INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (587,135) $ (370,213) $ 29,871 $ 362,476 $ 8,732,749 $ 10,265,188
Net realized gain (loss) on
investments (514,259) (1,548,366) 1,128,751 1,367,380 (8,118,106) (3,077,078)
Change in unrealized appreciation
(depreciation) of investments (5,796,253) 8,221,415 (2,465,351) 3,040,826 (5,963,957) (60,842)
Increase (decrease) in net assets
from operations (6,897,647) 6,302,836 (1,306,729) 4,770,682 (5,349,314) 7,127,268
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - (87,466) (204,040) (2,342,783) (3,306,334)
Class B - - - (94,762) (5,799,239) (6,958,854)
Distributions in excess of
net investment income
Class A - (22,462) - - - (146,203)
Class B - - - (35,370) - (301,354)
Net realized gain on investments
Class A - - (241,102) - -
Class B - - (445,582) - -
Net decrease from distributions - (22,462) (774,150) (334,172) (8,142,022) (10,712,745)
CAPITAL SHARE TRANSACTIONS (NOTE 8)
Net proceeds from sale of shares 15,028,646 30,595,316 9,607,870 47,948,857 14,581,398 103,828,094
Reinvested distributions - 22,029 755,452 324,735 5,302,074 6,788,193
Cost of shares redeemed (19,651,657) (7,411,912) (34,385,554) (10,651,945) (73,488,727) (34,305,532)
Change in net assets from capital
share transactions (4,623,011) 23,205,433 (24,022,232) 37,621,647 (53,605,255) 76,310,755
Increase (decrease) in net assets (1 1,520, 658) 29,485,807 (26,103,111) 42,058,157 (67,096,591) 72,725,278
NET ASSETS
Beginning of period 54,777,344 25,291,537 88,390,024 46,331,867 175,126,240 102,400,962
End of period $ 43,256,686 $ 54,777,344 $ 62,286,913 $ 88,390,024 $108,029,649 $175,126,240
</TABLE>
48 49
<PAGE>
CAMBRIDGE SERIES TRUST
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
CAMBRIDGE CAMBRIDGE CAMBRIDGE
MUNICIPAL INCOME INCOME AND GROWTH GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1994 1993** 1994*
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,986,208 $ 3,527,864 $ 853,291 $ 114,097 $ (25,881)
Net realized gain (loss) on
investments (527,018) 435,238 1,523,312 258,659 17,822
Net unrealized appreciation
(depreciation) of investments (7,578,461) 5,587,476 (248,910) 505,244 20,310
Increase (decrease) in net assets
from operations (4,119,271) 9,550,578 2,127,693 878,000 12,251
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (1,463,600) (1,450,546) (300,723) (50,722) -
Class B (2,444,169) (2,077,318) (476,423) (55,843) -
Distributions in excess of
net investment income
Class A - (57,691) - - -
Class B - (90,022) - - -
Net realized gain on investments
Class A (189,589) (3,927) (204,420) - -
Class B (340,533) (5,805) (470,138) - -
Net decrease from distributions (4,437,891) (3,685,309) (1,451,704) (106,565) -
CAPITAL SHARE T RANSACTIONS
Net proceeds from sale of shares 14,229,526 39,212,917 38,661,567 27,786,270 18,542,494
Reinvested distributions 2,491,222 1,918,307 1,370,230 98,283 -
Cost of shares redeemed (17,170,919) (9,841,523) (7,692,563) (679,695) (1,685,206)
Change in net assets from capital
share transactions (450,171) 31,289,701 32,339,234 27,204,858 16,857,288
Increase (decrease) in net assets (9,007,333) 37,154,970 33,015,223 27,976,293 16,869,539
NET ASSETS
Beginning of period 80,221,087 43,066,117 27,976,293 - -
End of period $ 71,213,754 $80,221,087 $60,991,516 $27,976,293 $ 16,869,539
</TABLE>
* For the period from March 29, 1994 (date of initial public investment) to
September 30, 1994.
** For the period from May 24, 1993 (date of initial public investment) to
September30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
50 51
<PAGE>
CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class A Shares CAMBRIDGE CAMBRIDGE
GROWTH PORTFOLIO CAPITAL GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.69 $ 14.14 $ 14.18 $ 15.26 $ 14.21 $ 14.18
Income from investment operations
Net investment income (loss) (0.11) (0.07) 0.03 0.09 0.14 0.08
Net realized and unrealized
gain (loss) on investments (1.90) 2.65 (0.07) (0.30) 1.02 0.03
Total from investment operations (2.01) 2.58 (0.04) (0.21) 1.16 0.11
Less distributions
Dividends from income - - - (0.04) (0.11) (0.08)
Distributions from capital gains - - - (0.13) - -
Distributions in excess of
net investment income - (0.03) - - - -
Total distributions - (0.03) - (0.17) (0.11) (0.08)
NET ASSET VALUE, END OF PERIOD $ 14.68 $ 16.69 $ 14.14 $ 14.88 $ 15.26 $ 14.21
Total Return (12.04%) 18.23% (0.28%) (1.37%) 8.21% 0.78%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 14,579 $ 19,708 $ 11,464 $ 21,181 $ 31,360 $ 20,864
Ratio of expenses to average net assets 1.81% 1.66% 1.33% (a) 1.70% 1.49% 1.14%(a)
Ratio of expenses to average net assets
excluding waiver 1.82% 1.78% 1.72% (a) 1.70% 1.59% 1.43%(a)
Ratio of net investment income (loss)
to average net assets (0.65%) (0.49%) 0.59% (a) 0.53% 0.96% 1.54%(a)
Portfolio turnover rate 132% 137% 26% 149% 192% 61%
</TABLE>
*Reflects operations for the period from April 29, 1992 (date of initial public
investment) to September 30, 1992.
(a) Annualized.
52 53
<PAGE>
CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class A Shares (continued)
CAMBRIDGE CAMBRIDGE
GOVERNMENT INCOME PORTFOLIO MUNICIPAL INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.04 $ 14.39 $ 14.30 $ 16.05 $ 14.76 $ 14.29
Income from investment operations
Net investment income 0.84 1.06 0.44 0.82 0.92 0.32
Net realized and unrealized
gain (loss) on investments (1.30) (0.31) 0.09 (1.54) 1.32 0.47
Total from investment operations (0.46) 0.75 0.53 (0.72) 2.24 0.79
Less distributions
Dividends from income (0.83) (1.06) (0.44) (0.81) (0.92) (0.32)
Distributions from capital gain - - - (0.10) - -
Distributions in excess of
net investment income - (0.04) - - (0.03) -
Total distributions (0.83) (1.10) (0.44) (0.91) (0.95) (0.32)
NET ASSET VALUE, END OF PERIOD $ 12.75 $ 14.04 $ 14.39 $ 14.42 $ 16.05 $ 14.76
Total Return (3.39%) 5.41% 3.37% (4.83%) 16.00% 5.34%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $30,142 $47,780 $ 36,740 $25,056 $29,245 $ 18,801
Ratio of expenses to average net assets 1.38% 1.04% 0.36% (a) 1.24% 0.71% 0.00%(a)
Ratio of expenses to average net assets
excluding waiver 1.39% 1.22% 1.21% (a) 1.33% 1.39% 1.26%(a)
Ratio of net investment income
to average net assets 6.33% 7.31% 8.00% (a) 5.43% 5.92% 6.21%(a)
Portfolio turnover rate 455% 102% 9% 87% 88% 0%
</TABLE>
* Reflects operations for the period from April 29, 1992 (date of initial
public in vestment) to September 30, 1992.
(a) Annualized.
54 55
<PAGE>
CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class A Shares
CAMBRIDGE CAMBRIDGE
(continued) INCOME AND GROWTH PORTFOLIO GLOBAL PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993*** 1994(B)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.88 $ 14.14 $ 14.18
Income from investment operations
Net investment income (loss) 0.31 0.09 (0.01)
Net realized and unrealized
gain on investments 0.64 0.73 0.06
Total from investment operations 0.95 0.82 0.05
Less distributions
Dividends from income (0.30) (0.08) 0.00
Distributions from capital gains (0.26) 0.00 0.00
Distributions in excess of
net investment income - 0.00 0.00
Total distributions (0.56) (0.08) 0.00
NET ASSET VALUE, END OF PERIOD $ 15.27 $ 14.88 $ 14.23
Total Return 6.54% 5.54% 0.35%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $17,773 $ 9,849 $ 8,882
Ratio of expenses to average net assets 1.75% 1.56%(a) 2.09% (a)
Ratio of expenses to average net assets
excluding waiver 1.75% 1.94%(a) 3.18% (a)
Ratio of net investment income (loss)
to average net assets 2.20% 2.35%(a) (0.10%)(a)
Portfolio turnover rate 78% 13% 2%
</TABLE>
*** Reflects operations for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993.
(a) Annualized.
(b) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to September 30, 1994
.
SEE NOTES TO FINANCIAL STATEMENTS.
56 57
<PAGE>
CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class B Shares CAMBRIDGE CAMBRIDGE
GROWTH PORTFOLIO CAPITAL GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.59 $ 14.14 $ 14.18 $ 15.23 $ 14.22 $ 14.18
Income from investment operations
Net investment income (loss) (0.25) (0.14) (0.01) (0.04) 0.05 0.46
Net realized and unrealized
gain (loss) on investments (1.81) 2.59 (0.03) (0.26) 1.02 0.04
Total from investment operations (2.06) 2.45 (0.04) (0.30) 1.07 0.50
Less distributions
Dividends from income - - - - (0.05) (0.46)
Distributions from capital gains - - - (0.13) - -
Distributions in excess of
net investment income - - - - (0.01) -
Total distributions - - - (0.13) (0.06) (0.46)
NET ASSET VALUE, END OF PERIOD $ 14.53 $ 16.59 $ 14.14 $ 14.80 $ 15.23 $ 14.22
Total Return (12.48%) 17.33% (0.28%) (2.00%) 7.52% 0.61%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 28,678 $35,069 $ 13,828 $41,106 $57,030 $ 25,468
Ratio of expenses to average net assets 2.56% 2.41% 2.07% (a) 2.46% 2.24% 1.86% (a)
Ratio of expenses to average net assets
excluding waiver 2.58% 2.53% 2.47% (a) 2.46% 2.34% 2.16%(a)
Ratio of net investment income (loss)
to average net assets (1.40%) (1.24%) (0.17%) (a) (0.22%) 0.21% 0.83%(a)
Portfolio turnover rate 132% 137% 26% 149% 192% 61%
</TABLE>
* Reflects operations for the period from April 29, 1992 (date of initial
public investment) to September 30, 1992.
(a) Annualized.
58 59
<PAGE>
CAMBRIDGE SERIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Class B Shares CAMBRIDGE CAMBRIDGE
(continued) GOVERNMENT INCOME PORTFOLIO MUNICIPAL INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993 1992* 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.06 $ 14.40 $ 14.30 $ 16.06 $ 14.78 $ 14.29
Income from investment operations
Net investment income 0.82 0.99 0.41 0.74 0.82 0.29
Net realized and unrealized
gain (loss) on investments (1.37) (0.31) 0.10 (1.54) 1.32 0.49
Total from investment operations (0.55) 0.68 0.51 (0.80) 2.14 0.78
Less distributions
Dividends from income (0.75) (0.99) (0.41) (0.73) (0.82) (0.29)
Distributions from capital gains - - - (0.10) - -
Distributions in excess of
net investment income - (0.03) - - (0.04) -
Total distributions (0.75) (1.02) (0.41) (0.83) (0.86) (0.29)
NET ASSET VALUE, END OF PERIOD $ 12.76 $ 14.06 $ 14.40 $ 14.43 $ 16.06 $ 14.78
Total Return (3.97%) 4.86% 3.24% (5.34%) 15.27% 5.28%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $77,888 $127,346 $ 65,661 $46,157 $50,976 $ 24,265
Ratio of expenses to average net assets 1.88% 1.54% 0.83%(a) 1.74% 1.21% 0.50%(a)
Ratio of expenses to average net assets
excluding waiver 1.90% 1.72% 1.67%(a) 1.86% 1.89% 1.76%(a)
Ratio of net investment income
to average net assets 6.21% 6.81% 7.53%(a) 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 455% 102% 9% 87% 88% 0%
</TABLE>
* Reflects operations for the period from April 29, 1992 (date of initial
public investment) to September 30, 1992.
(a) Annualized.
60 61
<PAGE>
<TABLE>
CAMBRIDGE SERIES TRUST
Financial Highlights
Class B Shares
CAMBRIDGE
(continued) INCOME AND CAMBRIDGE
GROWTH PORTFOLIO GLOBAL PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1994 1993** 1994 (B)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 14.14 $ 14.18
Income from investment operations
Net investment income (loss) 0.21 0.05 (0.04)
Net realized and unrealized
gain on investments 0.61 0.77 0.01
Total from investment operations 0.82 0.82 (0.03)
Less distributions
Dividends from income (0.19) (0.05) -
Distributions from capital gains (0.26) - -
Distributions in excess of
net investment income - - -
Total distributions (0.45) (0.05) -
NET ASSET VALUE, END OF PERIOD $ 15.28 $ 14.91 $ 14.15
Total Return 5.66% 5.54% (0.21%)
Ratios/Supplemental Data
Net assets, end of period (in thousands) $43,219 $ 18,127 $ 7,987
Ratio of expenses to average net assets 2.44% 2.31% (a) 2.79% (a)
Ratio of expenses to average net assets
excluding waiver 2.44% 2.69% (a) 3.93% (a)
Ratio of net investment income (loss)
to average net assets 1.51% 1.60% (a) (0.82%) (a)
</TABLE>
** Reflects operations for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993.
(a) Annualized.
(b) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to September 30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
62 63
<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements
NOTE 1: ORGANIZATION
Cambridge Series Trust ("Trust") is registered under the Investment Company
Act of 1940, as amended, as an
open-end management investment company. The Trust consists of six separate
diversified portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1994, as
follows:
Cambridge Growth Portfolio
("Growth Portfolio")
Cambridge Capital Growth Portfolio
("Capital Growth Portfolio")
Cambridge Government Income Portfolio
("Government Income Portfolio")
Cambridge Municipal Income Portfolio
("Municipal Income Portfolio")
Cambridge Income and Growth Portfolio
("Income and Growth Portfolio")
Cambridge Global Portfolio
("Global Portfolio")
The assets of each Portfolio of the Trust are segregated and a shareholder's
interest is limited to the Portfolio in which shares are held.
Each Portfolio provides two classes of shares ("Class A and Class B" ).
Class B shares are identical in all respects to Class A shares except that Class
B shares are sold pursuant to a distribution plan ("Plan") adopted in accordance
with Investment Company Act Rule 12b-1 and are not subject to a sales load.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios:
(a) Valuation of Securities-Listed equity securities held by the Growth
Portfolio, the Capital Growth Portfolio, the Income and Growth Portfolio and the
Global Portfolio are valued at the last sale prices reported on national
securities exchanges. Listed equity securities in which there were no sales are
valued at the mean between the bid and asked prices. Unlisted equity securities
are valued at the latest mean price. Bonds and other fixed-income securities are
valued at the last sale price on a national
64
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
securities exchange, if available. Otherwise, they are valued on the basis
of prices furnished by an independent pricing service. Short-term obligations
are ordinarily valued at the mean between the bid and asked prices as furnished
by an independent pricing service. However, short-term obligations with
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
U.S. government obligations, held by the Government Income Portfolio and
the Income and Growth Portfolio are valued at the mean between the over-the-
counter bid and asked prices as furnished by an independent pricing service.
U.S. government obligations and other short-term obligations maturing in 60 days
or less are valued at amortized cost, which approximates market value.
Debt securities held by the Government Income Portfolio for which current
market quotations are not readily available are valued at their fair value. An
independent pricing service values such securities taking into consideration
yield, stability, risk, quality, coupon, maturity, type of issue, trading
characteristics, special circumstances of a security or trading market, and any
other factors or market data it deems relevant in determining valuations for
normal institutional size trading units of debt securities and does not rely
exclusively on quoted prices.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities and does not rely exclusively on quoted prices.
(b) Repurchase Agreements-Repurchase agreements are purchases of securities
where the seller agrees to repurchase the securities at a specified time and
price. It is the policy of the Trust to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book entry system,
or to have segregated within the custodian bank's vault all securities held as
collateral in support of repurchase agreement investments. Addi-
65
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
tionally, procedures have been established by the Trust to monitor, on a
daily basis, the market value of each repurchase agreement's underlying
securities to ensure the existence of a proper level of collateral.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines established by the
Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.
(c) Borrowings-Each of the Portfolios may, under certain circumstances,
borrow money directly or through reverse repurchase agreements (arrangements in
which the Portfolio sells a security for a percentage of its market value with
an agreement to buy it back on a set date) or pledge securities. The Municipal
Income Portfolio may borrow up to 5% of its total assets and may pledge up to
10% of the value of those assets to secure such borrowings. Under certain
circumstances, each remaining Portfolio may borrow up to one-third of the value
of its net assets and pledge up to 10% of the value of those assets to secure
such borrowings. At September 30, 1994, Government Income Portfolio had an
outstanding reverse repurchase agreement which amounted to $8,956,501 with a
rate of 5.23%, and a maturity date of 12/22/94.
(d) Security Transactions and Investment Income-Security transactions for
the Portfolios are accounted for on the trade date. Dividend income is recorded
on the ex-dividend date. Interest income (except for Municipal Income Portfolio)
is recorded on the accrual basis. Interest income includes interest and discount
earned (net of premium) on short-term obligations, and interest earned on all
other debt securities including original issue discount as required by the
Internal Revenue Code. Dividends to shareholders and capital gain distributions,
if any, are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned
net of premium, and original issue discount as required by the Internal Revenue
Code.
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
(e) Federal Taxes-No provision for federal income taxes has been made since
it is each Portfolio's intent to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limits substantially all taxable
income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may be considered a tax preference
item to shareholders.
At September 30, 1994, Growth Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $2,690,000. Pursuant to the Code,
such capital loss carry-forwards expire as follows: $1,065,000 in 2001 and
$1,625,000 in 2002.
At September 30, 1994, Government Income Portfolio for federal tax
purposes, had a capital loss carryforward of approximately $4,500,000. Pursuant
to the Code, such capital loss carryforwards expire as follows: $821,000 in 2001
and $3,679,000 in 2002.
At September 30, 1994, Income and Growth Portfolio for Federal tax
purposes, had a capital loss carryforward of approximately $92,000. Pursuant to
the Code, such capital less carryforward will expire in 2002.
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(f) When-Issued and Delayed Delivery Transactions-The Portfolios may engage
in when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their invest-
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
ment objectives and policies and not for the purpose of investment leverage.
The Portfolios will record a when-issued security and the related liability on
the trade date. Until the securities are received and paid for, the Portfolios
will maintain security positions such that sufficient liquid assets will be
available to make payment for the securities purchased. Securities purchased on
a when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.
(g) Futures Contracts-Upon entering into a futures contract with a broker,
the Municipal Income Portfolio is required to deposit in a segregated account an
amount ("initial margin") of cash or U.S. government securities equal to a
percentage of the contract value. When entering into the contract the Portfolios
agree to receive from or pay the broker an amount of cash equal to a specific
dollar amount times the difference between the closing value of the stock index
and the price at which the contract was made. On a daily basis, the value of a
futures contract is determined and any difference between such value and the
original futures contract value is reflected in the "variation margin" account.
Daily variation margin adjustments, arising from this "marking to market"
process, are recorded as unrealized gains or losses. At September 30, 1994, the
Municipal Income Portfolio had open U.S. Treasury Bond futures contracts with an
aggregate notional value of $10,000,000. The Portfolio recorded unrealized gains
of $352,317 on such futures contracts.
The Portfolio may decide to close their position on a contract at any time
prior to the contract's expiration. When a contract is closed, a realized gain
or loss is recognized. Risks of entering into futures contracts include the
possibility that there may be an illiquid market and that a change in the value
of the contract may not correlate with changes in the value of the underlying
securities. For the year ended September 30, 1994, the Municipal Income
Portfolio had realized gains of $167,132 on closed futures contracts.
(h) Option Contracts-The Growth Portfolio may write or purchase stock index
option contracts. A written stock index option obligates the Growth Portfolio to
deliver (a call), or to receive (a put), the contract amount of foreign currency
68
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
upon exercise by the holder of the option. The value of the option contract
is recorded as a liability and the unrealized gain or loss is measured by the
difference between the current value and the premium received. The Growth
Portfolio had no options outstanding at September 30, 1994.
(i) Deferred Organization Expenses- Costs incurred by the Portfolios in
connection with their initial share registration, other than organization
expenses, were deferred and are being amortized on a straight-line basis through
April 1997.
(j) Expenses-Expenses of the Portfolios (other than distribution fees) and
waivers and reimbursements, if any, are allocated to each class of shares based
on their relative average daily net assets for the period. Expenses incurred by
the Portfolios which do not specifically relate to an individual Portfolio are
allocated among all Portfolios based on a Portfolio's relative net asset value
size or as deemed appropriate by the administrator.
(k) Dollar Roll Transactions-The Government Income Portfolio, Income and
Growth Portfolio and Global Portfolio may enter into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in which
the Portfolios sell mortgage securities to financial institutions and
simultaneously agree to repurchase substantially similar (same type, coupon and
maturity) securities at a later date at an agreed upon price. During the period
between the sale and repurchase, the Portfolios forgo principal and interest
paid on the mortgage security sold. The Portfolios are compensated by the
interest earned on the cash proceeds of the initial sale and any additional fee
income received on the sale.
(l) Currency Transactions-Foreign currency amounts are converted into U.S.
dollars at the current rate of such currencies against U.S. dollars as follows:
assets and liabilities at the rate of exchange at the end of the respective
period; purchases and sales of securities and income and expenses at the rate of
exchange prevailing on the dates of such transactions. It is not practicable to
isolate that portion of the results of operations arising from changes in the
exchange rates from the portion arising from changes in the market prices of
investment securities.
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<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
(m) Distributions to shareholders are determined in accordance with income
tax regulations. Distributions from taxable net investment income and net
capital gains can exceed book basis net investment income and net capital gains.
Effective October 1, 1993, the Portfolios adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As a
result of this statement, the Portfolios changed the financial statement
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. Accordingly, the following Portfolios
have made reclassifications as of September 30, 1993 to reflect the adoption of
the statement. The Growth Portfolio reclassification resulted in an increase in
undistributed net investment income of $367,348 and a decrease in additional
paid-in capital of $367,348. The Capital Growth Portfolio reclassification
resulted in an increase in undistributed net investment income of $49,507 and a
decrease in undistributed realized gain (loss) on investment transactions and
additional paid-in capital of $49,484 and $23, respectively.
Differences between book basis investment income available for distribution
and tax basisinvestment income available for distribution are primarily
attributable to differences in the treatment on net operation losses.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders
invested in the Government Income Portfolio and the Municipal Income Portfolio
on the record date. Dividends are declared and paid semi-annually to all
shareholders invested in the Capital Growth Portfolio on the record date,
dividends are declared and paid annually to all shareholders invested in the
Growth Portfolio and the Global Portfolio on the record date, and dividends are
declared and paid quarterly to all shareholders invested in the Income and
Growth Portfolio on the record date. Dividends will be reinvested in additional
shares of the same class and Portfolio on payment dates at the ex-dividend date
net asset value without a sales charge unless
70
<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
cash payments are requested by shareholders in writing to the Trust. Capital
gains realized by each portfolio, if any, will be distributed at least once
every 12 months.
NOTE 4: INVESTMENT ADVISORY FEE AND OTHER
Cambridge Investment Advisors, Inc., the Portfolios' investment adviser
("Investment Adviser"), receives for its services an annual investment advisory
fee not to exceed the following percentages of the average daily net assets of
the particular Portfolio: Growth Portfolio, 0.80%; Capital Growth Portfolio,
0.80%; Government Income Portfolio, 0.60%; Municipal Income Portfolio, 0.60%;
Income and Growth Portfolio, 0.75%; and Global Portfolio, 1.10%. The Investment
Adviser may, from time to time, voluntarily waive some or all of its investment
advisory fee and may terminate any such voluntary waiver at any time at its sole
discretion.
The Investment Adviser pays each sub-adviser an annual fee not to exceed
the following percentage of Portfolio average daily net assets: Growth
Portfolio, 0.40%, Capital Growth Portfolio, 0.40%; Government Income Portfolio,
0.30%; and Municipal Income Portfolio, 0.30%. The sub-adviser to the Income and
Growth Portfolio receives from the Investment Adviser an annual fee expressed as
a percentage of that Portfolio's average daily net assets as follows: 0.325% of
the first $50 million in Portfolio average daily net assets, 0.275% of the next
$150 million, 0.225% of the next $300 million and 0.200% of any amounts over
$500 million. The sub-adviser to the Global Portfolio receives from the
Investment Adviser an annual fee expressed as a percentage of that Portfolio's
average daily net assets as follows: 0.55% of the first $75 million in average
daily net assets, and 0.50% of any amounts over $75 million. No performance or
incentive fees are paid to the sub-advisers. Under certain sub-advisory
agreements, the particular sub-adviser may, from time to time, voluntarily waive
some or all of its sub-advisory fee charged to the Investment Adviser and may
terminate any such voluntary waiver at any time in its sole discretion. For the
year ended September 30, 1994 the Investment Adviser and sub-advisers earned and
voluntarily waived the following advisory fees:
71
<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
<TABLE>
<CAPTION>
Sub-Adviser
Adviser Adviser Fee Sub-Adviser Fee
Fee Voluntarily Fee Voluntarily
Portfolio Earned Waived Earned Waiver
<S> <C> <C> <C> <C>
Growth $410,955 - $205,478 -
Capital Growth 590,693 - 295,347 -
Government Income 839,139 - 419,570 -
Municipal Income 468,787 81,713 234,393 -
Income and Growth 374,462 - 187,231 -
Global 69,515 69,515 34,757 -
</TABLE>
Administrative personnel and services are provided by Investment Management
Group, Inc. ("IMG" ) at an annual rate of .125 of 1% on the first $1.5 billion
of average aggregate daily net assets of the Trust and .120 of 1% on average
aggregate daily net assets in excess of $1.5 billion. Prior to June 1, 1994,
administrative personnel and services were provided by Cambridge Administration
Services ("CAS") at the same annual rate. IMG may voluntarily waive some or all
of its fee.
During the year ended September 30, 1994, CAS and IMG earned and
voluntarily waived the following administrative fees:
<TABLE>
<CAPTION>
Administrative Administrative Administrative Administrative
Fee Earned Fee Waived Fee Earned Fee Waived
Portfolio CAS CAS IMG IMG
<S> <C> <C> <C> <C>
Growth $ 45,092 $ 6,569 $19,103 -
Capital Growth 65,005 - 27,273 -
Government Income 126,300 23,563 48,497 -
Municipal Income 66,804 - 30,849 -
Income and Growth 37,484 15,033 24,831 -
Global 1,326 530 6,344 -
</TABLE>
The Class B shares of the Portfolios have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Each
Portfolio will reimburse Cambridge Distributors, Inc. (the "Distributor"), from
the assets of the Class B Shares of each Portfolio, for fees it paid which
relate to the distribution and administration of each Portfolio's Class B
Shares. The Plan provides that the Portfolio may incur distribution expenses up
to 0.75% of 1% of the average daily net assets of the Class B shares for the
Growth Portfolio, Capital Growth Portfolio, Income and Growth Portfolio and
Global Portfolio and 0.50% of 1% of the average daily net assets of the Class B
shares for the Government Income Portfolio and Municipal Income Portfolio.
72
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of each Portfolio.Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Portfolios to provide administrative support services to their customers who
from time to time may be owners of record or beneficial owners of Class A or
Class B shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding 0.25 of 1% of the average daily net assets of
the Class A or Class B shares of the particular Portfolio or Portfolios
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship.
Organization expenses of the Growth Portfolio ($55,060), Capital Growth
Portfolio ($51,200), Government Income Portfolio ($51,301), Municipal Income
Portfolio ($49,701), Income and Growth Portfolio ($29,179) and Global Portfolio
($45,771) were borne initially by CAS. Each Portfolio has agreed to reimburse
CAS for the organization expenses initially borne by CAS during the five-year
period following the date the Trust's Portfolios' registration became effective.
The amounts reimbursed to CAS for the year ended September 30, 1994 were as
follows: Growth Portfolio ($11,012), Capital Growth Portfolio ($10,240),
Government Income Portfolio ($10,260), Municipal Income Portfolio ($9,940),
Income and Growth Portfolio ($5,836).
NOTE 5: INVESTMENT TRANSACTIONS
Purchases, and sales of investments (excluding short-term investments), for
the fiscal year ended September 30,
1994, were as follows:
Portfolio Purchases Sales
Growth $ 66,113,202 $ 68,718,113
Capital Growth 90,983,444 104,459,473
Government Income 764,033,260 766,987,854
Municipal Income 67,155,011 66,953,196
Income and Growth 64,498,072 37,345,870
Global 15,956,459 276,203
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION
OF INVESTMENTS
At September 30, 1994, the cost of investments for federal income tax
purposes, amounted to $38,969,059 for the Growth Portfolio, $61,477,308 for the
Capital Growth Portfolio, $137,682,288 for the Government Income Portfolio,
$73,076,934 for Municipal Income Portfolio, $59,801,451 for the Income and
Growth Portfolio, and $17,146,199 for the Global Portfolio. Gross unrealized
appreciation and depreciation of investments based on such cost at September 30,
1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation/
Portfolio Appreciation Depreciation (Depreciation)
<S> <C> <C> <C>
Growth $4,509,389 $1,479,202 $ 3,030,187
Capital Growth 3,033,125 1,408,137 1,624,988
Government Income 327,206 5,643,273 (5,316,067)
Municipal Income 879,782 2,711,164 (1,831,382)
Income and Growth 3,199,063 3,001,962 197,101
Global 709,272 675,017 34,255
</TABLE>
NOTE 7: FORWARD CONTRACTS
In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Growth Portfolio, the Capital Growth Portfolio, the
Income and Growth Portfolio and the Global Portfolio may enter into forward
foreign currency exchange contracts ("contracts"). Additionally, from time to
time the Growth Portfolio, Capital Growth Portfolio, the Income and Growth
Portfolio and the Global Portfolio may enter into contracts to hedge certain
foreign currency assets. Contracts are recorded at market value. Realized gains
and losses arising from such transactions are included in net gain (loss) on
investments and forward foreign currency exchange contracts. The Portfolios are
subject to the credit risk that the other party will not complete the
obligations of the contract. At September 30, 1994 the Global Portfolio had
outstanding forward contracts as set forth below.
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts Net Unrealized
to Deliver/ In Exchange Appreciation
Settlement Date Receive For (Depreciation)
Sales
4/25/96 Japan-Yen 52,596,340 $562,843 $ (15,282)
7/1/96 Japan-Yen 29,851,660 $321,878 $ 1,122
$884,721 $ (14,160)
Net unrealized
depreciation
on Forward Contracts $ (14,160)
NOTE 8: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares. Transactions in Portfolio shares were as follows:
CAMBRIDGE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 1,180,695 $17,187,308 810,934 $11,500,191
Shares sold 220,548 3,512,282 557,050 8,601,094
Shares issued upon
reinvestment
of distributions - - 1,460 22,029
Shares redeemed (408,189) (6,315,589) (188,749) (2,936,006)
Shares outstanding,
end of period 993,054 $14,384,001 1,180,695 $17,187,308
CLASS B:
Shares outstanding,
beginning of period 2,113,910 $31,296,376 978,243 $13,778,060
Shares sold 733,554 11,516,364 1,426,86 121,994,222
Shares issued
upon reinvestment
of distributions - - - -
Shares redeemed (873,428) (13,336,068) (291,194) (4,475,906)
Shares outstanding,
end of period 1,974,036 $29,476,672 2,113,910 $31,296,376
</TABLE>
75
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CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
<TABLE>
<CAPTION>
CAMBRIDGE CAPITAL GROWTH PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 2,055,500 $29,379,736 1,467,971 $20,673,912
Shares sold 155,406 2,353,285 866,833 12,868,150
Shares issued
upon reinvestment
of distributions 21,385 320,355 13,495 198,314
Shares redeemed (809,281) (12,181,621) (292,799) (4,360,640)
Shares outstanding,
end of period 1,423,010 $19,871,755 2,055,500 $29,379,736
CLASS B:
Shares outstanding,
beginning of period 3,744,511 $54,154,730 1,790,373 $25,238,907
Shares sold 484,356 7,254,585 2,369,048 35,080,707
Shares issued
upon reinvestment
of distributions 29,045 435,097 8,583 126,421
Shares redeemed (1,479,886) (22,203,933) (423,493) (6,291,305)
Shares outstanding,
end of period 2,778,026 $39,640,479 3,744,511 $54,154,730
</TABLE>
<TABLE>
<CAPTION>
CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 3,403,828 $48,807,954 2,552,475 $36,680,594
Shares sold 175,391 2,326,934 1,223,573 17,167,884
Shares issued
upon reinvestment
of distributions 104,113 1,395,612 141,599 2,252,607
Shares redeemed (1,319,559) (17,795,382) (513,819) (7,293,131)
Shares outstanding,
end of period 2,363,773 $34,735,118 3,403,828 $48,807,954
</TABLE>
76
<PAGE>
<TABLE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
CAMBRIDGE GOVERNMENT INCOME PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS B:
Shares outstanding,
beginning of period 9,059,536 $129,708,345 4,558,855 $65,524,950
Shares sold 895,699 12,254,465 6,067,033 86,660,210
Shares issued
upon reinvestment
of distributions 290,900 3,906,462 336,653 4,535,586
Shares redeemed (4,142,540) (55,693,345) (1,903,005) (27,012,401)
Shares outstanding,
end of period 6,103,595 90,175,927 9,059,536 $129,708,345
</TABLE>
<TABLE>
<CAPTION>
CAMBRIDGE MUNICIPAL INCOME PORTFOLIO
Year Year
Ended 9/30/94 Ended 9/30/93
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 1,822,030 $26,713,229 1,273,427 $18,482,871
Shares sold 192,548 2,946,139 699,910 10,541,396
Shares issued
upon reinvestment
of distributions 51,632 797,051 44,317 672,587
Shares redeemed (328,132) (4,975,320) (195,624) (2,983,625)
Shares outstanding,
end of period 1,738,078 $25,481,099 1,822,030 $26,713,229
CLASS B:
Shares outstanding,
beginning of period 3,173,809 $47,130,669 1,642,240 $24,071,326
Shares sold 723,926 11,283,387 1,890,537 28,671,521
Shares issued
upon reinvestment
of distributions 109,721 1,694,171 81,888 1,245,720
Shares redeemed (809,227) (12,195,599) (440,856) (6,857,898)
Shares outstanding,
end of period 3,198,229 $47,912,628 3,173,809 $47,130,669
</TABLE>
77
<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
<TABLE>
<CAPTION>
CAMBRIDGE INCOME AND GROWTH PORTFOLIO
Year Period
Ended 9/30/94 Ended 9/30/93*
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares outstanding,
beginning of period 661,893 $9,518,102 - $ -
Shares sold 621,368 9,508,705 692,725 9,965,467
Shares issued
upon reinvestment
of distributions 31,362 474,885 3,200 47,907
Shares redeemed (150,563) (2,281,176) (34,032) (495,272)
Shares outstanding,
end of period 1,164,060 17,220,516 661,893 $9,518,102
CLASS B:
Shares outstanding,
beginning of period 1,216,165 $17,686,756 - $ -
Shares sold 1,909,839 29,152,862 1,225,260 17,820,803
Shares issued
upon reinvestment
of distributions 59,116 895,345 3,359 50,376
Shares redeemed (356,385) (5,411,387) (12,454) (184,423)
Shares outstanding,
end of period 2,828,735 $42,323,576 1,216,165 $17,686,756
</TABLE>
CAMBRIDGE GLOBAL PORTFOLIO **
Period
Ended 9/30/94
Shares Dollars
CLASS A:
Shares outstanding,
beginning of period - -
Shares sold 713,962 $10,133,334
Shares issued
upon reinvestment
of distributions - -
Shares redeemed (89,781) (1,281,155)
Shares outstanding,
end of period 624,181 $ 8,852,179
78
<PAGE>
CAMBRIDGE SERIES TRUST
Notes to the Financial Statements (continued)
CAMBRIDGE GLOBAL PORTFOLIO **
Period
Ended 9/30/94
Shares Dollars
CLASS B:
Shares outstanding,
beginning of period - -
Shares sold 593,033 $8,409,160
Shares issued
upon reinvestment
of distributions - -
Shares redeemed (28,362) (404,051)
Shares outstanding,
end of period 564,671 $8,005,109
* For the period from May 24, 1993 (date of initial public investment)
to September 30, 1993.
** For the period from March 29, 1994 (date of initial public invest--
ment) to September 30, 1994.
79
<PAGE>
CAMBRIDGE SERIES TRUST
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
CAMBRIDGE SERIES TRUST
We have audited the accompanying statements of assets and liabilities of the
Growth, Capital Growth, Government Income, Municipal Income, Income and Growth
and Global Portfolios, portfolios of Cambridge Series Trust, including the
portfolios of investments, as of September 30, 1994 and related statements of
operations for the year then ended for the Growth, Capital Growth, Government
Income, Municipal Income, and Income and Growth Portfolios and for the period
from March 29, 1994 (date of initial public investment) to September 30, 1994
for the Global Portfolio, the statements of changes in net assets for each of
the years in the two year period ended September 30, 1994 for the Growth,
Capital Growth, Government Income and Municipal Income Portfolios, for the year
ended September 30, 1994 and for the period from May 24, 1993 (date of initial
public investment) to September 30, 1993 for the Income and Growth Portfolio and
for the period from March 29, 1994 to September 30, 1994 for the Global
Portfolio, and the financial highlights for the periods presented on pages 52 to
63. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Growth, Capital Growth, Government Income, Municipal Income, Income and Growth
and Global Portfolios, as of September 30, 1994, the results of their operations
for the year then ended for the Growth, Capital Growth, Government Income,
Municipal Income and Income and Growth Portfolios and for the period from March
29, 1994 to September 30, 1994 for the Global Portfolio, the changes in their
net assets for each of the aforementioned years or periods in the two year
period then ended and the financial highlights for each of the years or periods
as indicated on pages 52 to 63, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 11, 1994
<PAGE>
Mentor Growth Fund
Portfolio of Investments
December 31, 1994
SECURITY DESCRIPTION PERCENT OF NET ASSETS SHARES MARKET VALUE
COMMON STOCKS 87.4%
BASIC INDUSTRIES 4.0%
Alco Standard Corporation 18,900 $ 1,185,975
Guilford Mills, Inc. 110,400 2,456,400
Nucor Corporation 30,500 1,677,500
Steel Technologies, Inc. 50,700 659,100
Unifi, Inc. 61,650 1,572,075
Total Basic Industries 7,551,050
BUILDING 2.2%
Blount, Inc., Class A 90,850 4,224,525 *
CAPITAL GOODS 2.0%
Fastenal Company 23,070 942,986
Flextronics International, Ltd. 80,100 1,221,525 *
Kemet Corporation 48,000 1,422,000 *
NCI Building Systems 10,000 172,500 *
Total Capital Goods 3,759,011
CONSUMER DURABLES 7.4%
Callaway Golf Company 63,750 2,111,719
Chromcraft Revington, Inc. 119,700 2,633,400 *
Consolidated Graphics 93,500 1,051,875 *
Dorsey Trailers, Inc. 53,450 808,431 *
Equity Inns, Inc. 143,000 1,573,000
Legget & Platt, Inc. 52,250 1,828,750
Regal Cinemas, Inc. 80,325 2,048,287 *
Wabash National Corporation 36,950 1,441,050
Winsloew Furniture, Inc. 95,025 593,906 *
Total Consumer Durables 14,090,418
CONSUMER NON-DURABLES 6.2%
Consolidated Products Company 89,150 1,136,662 *
Davco Restaurants, Inc. 120,000 1,470,000 *
Mid-Atlantic Medical Services 84,000 1,921,500 *
Quality Dining, Inc. 157,000 1,942,875 *
R.P. Scherer Corporation 43,000 1,951,125 *
Richfood Holdings, Inc. 125,100 2,001,600
Roberts Pharmaceutical 44,400 1,409,700 *
Total Consumer Non-durables 11,833,462
FINANCIAL 6.9%
First Financial Management
Corporation 36,550 $ 2,252,394
Leader Financial Corporation 88,400 1,823,250 *
Markel Corporation 88,360 3,666,940 *
Midland Financial Group, Inc. 120,800 1,781,800
National Commerce Bancorp 114,996 2,616,159
TFC Enterprises, Inc. 121,100 923,388 *
Total Financial 13,063,931
HEALTH 18.2%
American Homepatient 56,000 1,330,000 *
Beverly Enterprises 140,000 2,012,500
Biomet, Inc. 64,050 896,700
Columbia Healthcare Corporation 76,550 2,794,075
Health Management Associates 66,800 1,670,000 *
Idexx Laboratories, Inc. 44,900 1,616,400 *
Integrated Health Services, Inc. 81,550 3,221,225
Isolyzer Company 30,300 545,400 *
Lincare Holdings, Inc. 98,250 2,849,250 *
Manor Care, Inc. 84,100 2,333,775
Medaphis Corporation 70,400 3,273,600 *
Omnicare, Inc. 48,800 2,141,100
Owens & Minor, Inc. 138,975 1,963,022
Phycor, Inc. 84,300 2,255,025 *
Physician Sales & Services, Inc. 73,500 1,166,812 *
Vencor, Inc. 161,925 4,513,659 *
Total Health 34,582,543
RETAIL TRADE 11.3%
Big B, Inc. 159,400 2,191,750
Books A Million, Inc. 85,400 1,441,125 *
Casey' s General Stores, Inc. 193,550 2,903,250
Dollar General Corporation 66,914 2,007,413
Haverty Furniture Companies, Inc. 152,000 1,786,000
Heilig-Meyers Company 95,450 2,362,387
Movie Gallery, Inc. 83,700 2,176,200 *
Office Depot, Inc. 96,600 2,270,100 *
Revco D. S., Inc. 84,000 1,984,500 *
S & K Famous Brands, Inc. 136,700 973,988 *
Sportmart, Inc. 60,825 676,679 *
Sportmart, Inc., Class A 60,825 631,059 *
Total Retail Trade 21,404,451
TECHNOLOGY 19.5%
3Com Corporation 29,300 $ 1,510,781 *
ALC Communications Corporation 102,000 3,174,750 *
Applied Digital Access 44,050 1,117,769 *
Applied Materials, Inc. 25,900 1,094,275
Benchmark Electronics, Inc. 71,300 1,720,112 *
California Microwave 14,600 532,900 *
Casino Data Systems 70,800 1,115,100 *
Cisco Systems, Inc. 52,200 1,833,525 *
Compuware Corporation 37,900 1,364,400 *
Danka Business System 77,600 1,678,100
Dell Computer Corporation 29,800 1,221,800 *
Electronic Fab Technology Corporation 69,700 531,463 *
Informix Corporation 55,400 1,779,725 *
Integrated Device Technology Corporation 57,500 1,696,250 *
Keane, Inc. 106,200 2,522,250 *
Kent Electronics Corporation 62,300 2,468,638 *
Lam Research Corporation 18,700 696,575 *
LDDS Communications, Inc. 58,762 1,142,186 *
Linear Technology Corporation 69,000 3,415,500
LSI Logic Corporation 44,600 1,800,725
Micros Systems, Inc. 37,050 1,398,638 *
Norand Corporation 36,000 1,278,000 *
Symmetricom, Inc. 77,350 1,034,556 *
Verifone, Inc. 40,000 890,000 *
Total Technology 37,018,018
TRANSPORTATION 4.1%
American Freightways Corporation 117,350 2,332,331 *
Swift Transportation Company, Inc. 207,800 4,259,900 *
USATruck, Inc. 84,700 1,270,500 *
Total Transportation 7,862,731
MISCELLANEOUS 5.6%
ABR Information Services 76,000 1,539,000 *
Accustaff, Inc. 49,350 678,562 *
Career Horizons, Inc. 55,700 905,125 *
Manpower, Inc. 97,700 2,747,813 *
Offshore Pipelines, Inc. 45,700 1,033,963 *
Olsten Corporation 57,000 $ 1,809,750
Sodak Gaming, Inc. 84,100 1,282,525 *
Tech Data Corporation 39,500 671,500 *
Total Miscellaneous 10,668,238
TOTAL COMMON STOCKS
(COST $128,226,144) 166,058,378
SHORT-TERM INVESTMENT 14.2%
Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due
1/3/95, collateralized
by $30,374,255 Federal
National Mortgage Association,
6.50%, due 6/15/09,
(cost $27,087,636) $27,087,636 27,087,636
TOTAL INVESTMENTS
(COST $155,313,780) 101.6% 193,146,014
OTHER ASSETS LESS LIABILITIES (1.6%) (3,020,056)
NET ASSETS 100.0% $190,125,958
* SECURITIES NOT CURRENTLY PRODUCING INCOME.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
Mentor Strategy Fund
Portfolio of Investments
December 31, 1994
SECURITY DESCRIPTION PERCENT OF NET ASSETS SHARES MARKET VALUE
COMMON STOCKS 67.7%
BASIC MATERIALS 4.5%
Airgas, Inc. 63,000 $1,338,750 *
British Steel PLC, ADR** 34,200 829,350
Federal Paper Board Company, Inc. 62,800 1,821,200
Phelps Dodge Corporation 29,000 1,794,375
Rohm and Haas Company 11,700 668,363
Union Camp Corporation 36,100 1,701,213
Total Basic Materials 8,153,251
COMMERCIAL SERVICES & PRODUCTS 2.4%
Cadmus Communication Corporation 43,000 677,250
Equifax, Inc. 61,100 1,611,512
Paychex, Inc. 49,825 2,017,912
Total Commercial Services & Products 4,306,674
CONSUMER DURABLES 7.2%
Arctco, Inc. 86,250 1,671,094
Bush Industries, Inc., Class A 65,100 1,334,550
Capitol Cities-ABC, Inc. 9,500 809,875
Clear Channel Communications 36,000 1,827,000 *
Meredith Corporation 38,300 1,785,738
National Gaming Corporation 6,120 73,440 *
Polygram NV, ADR** 40,400 1,863,450
Royal Carribbean Cruises, Ltd. 58,500 1,667,250
Sport Supply Group, Inc., Warrants 7,675 13,431 *
Sunbeam-Oster Company, Inc. 74,400 1,915,800
Total Consumer Durables 12,961,628
CONSUMER NON-DURABLES 1.1%
Terra Industries, Inc. 189,800 1,969,175
ENERGY 2.4%
Ashland Oil Company, Inc. 20,100 693,450
Lyondell Petrochemicals Company 69,400 1,795,725
Offshore Pipelines, Inc. 83,500 1,889,187 *
Total Energy 4,378,362
FINANCIAL 2.7%
Aflac, Inc. 51,300 $1,641,600
Morgan Stanley Emerging Markets
Fund, Inc. 61,000 1,311,500
T. Rowe Price Associates, Inc. 60,500 1,815,000
Total Financial 4,768,100
HEALTH 12.0%
Cordis Corporation 15,900 961,950 *
Coventry Corporation 70,650 1,730,925 *
Datascope Corporation 104,000 1,768,000
Genentech, Inc. 36,100 1,638,037 *
Health Management Associates, Inc. 72,550 1,813,750 *
Healthsource, Inc. 46,500 1,900,688 *
Horizon Healthcare Corporation 72,100 2,018,800 *
Loewen Group, Inc. 69,400 1,839,100
Mid-Atlantic Medical Services, Inc. 68,000 1,555,500 *
Oxford Health Plans, Inc. 22,100 1,751,425 *
Pfizer, Inc. 12,000 927,000
Service Corporation International 65,600 1,820,400
Target Therapeutics, Inc. 60,100 1,697,825 *
Total Health 21,423,400
INDUSTRIAL PRODUCTS 3.1%
AGCO Corporation 52,050 1,581,019
Apogee Enterprises, Inc. 100,000 1,725,000
Empresas ICA Sociedad Controlador,
S.A., ADR** 32,900 509,950
Thermo Electron Corporation 39,500 1,772,562 *
Total Industrial Products 5,588,531
RETAIL 7.4%
Best Buy Company, Inc. 41,400 1,293,750
Books A Million, Inc. 112,500 1,898,438
Lowe' s Companies, Inc. 45,100 1,567,225
Office Depot, Inc. 72,450 1,702,575 *
Safeway, Inc. 58,400 1,861,500
Staples, Inc. 96,250 2,382,188
Vikings-Office Products, Inc. 59,100 1,809,937
Williams-Sonoma, Inc. 24,000 721,500
Total Retail 13,237,113
TECHNOLOGY 23.4%
Adaptec, Inc. 79,050 $ 1,867,556 *
Amphenol Corporation 39,700 952,800 *
Analog Devices, Inc. 50,400 1,770,300 *
Andrew Corporation 18,800 982,300
California Microwave, Inc. 30,600 1,116,900 *
Ceridian Corporation 74,700 2,007,563 *
Chipcom Corporation 22,000 1,100,000 *
Cognex Corporation 71,000 1,828,250 *
Computer Sciences Corporation 21,550 1,099,050 *
Continuum Company, Inc. 61,100 1,863,550 *
Dell Computer Corporation 19,800 811,800
EMC Corporation 42,000 908,250 *
Hewlett Packard Company 10,300 1,028,712
Hong Kong Telecommunications,
Ltd., ADR** 90,150 1,724,119
In Focus Systems, Inc. 48,300 1,258,819 *
KLA Instruments Corporation 36,000 1,764,000
LAM Research Corporation 42,300 1,575,675 *
Linear Technology Corporation 39,450 1,952,775
LSI Logic Corporation 21,000 847,875 *
Maxim Integrated Products, Inc. 55,800 1,953,000 *
Medic Computers Systems, Inc. 50,000 1,550,000 *
Nationwide Cellular Services, Inc. 70,800 1,354,050 *
Novellus Systems, Inc. 33,800 1,690,000 *
Silicon Graphics, Inc. 32,000 988,000 *
Stratcom, Inc. 35,400 1,239,000 *
Tech Data Corporation 88,600 1,506,200 *
Teradyne, Inc. 19,500 660,562 *
US Robotics, Inc. 45,500 1,967,875 *
Vanguard Cellular Systems, Inc. 33,400 860,050 *
Vicor Corporation 69,300 1,784,475
Total Technology 42,013,506
TRANSPORTATION 1.0%
American Freightways Corporation 84,900 1,687,388 *
MISCELLANEOUS 0.5%
Alco Standard Corporation 13,000 815,750
TOTAL COMMON STOCKS
(COST $116,154,950) 121,302,878
GOVERNMENT BONDS 14.8%
U.S. TREASURY NOTES-STRIPS ***
8.31%, 2/15/21 $68,032,000 $ 8,880,897
8.29%, 5/15/21 69,125,000 8,871,503
8.09%, 2/15/23 75,621,000 8,867,318
Total U.S. Treasury Notes-Strips 26,619,718
TOTAL GOVERNMENT BONDS
(COST $24,348,827) 26,619,718
SHORT-TERM INVESTMENT 16.0%
Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due 1/3/95,
collateralized by $32,141,470
Federal National Mortgage
Association, 6.50%, 6/15/09
(cost $28,663,290) 28,663,290 28,663,290
TOTAL INVESTMENTS
(COST $169,167,067) 98.5% 176,585,886
OTHER ASSETS LESS LIABILITIES 1.5% 2,687,920
NET ASSETS 100.0% $179,273,806
* SECURITIES NOT CURRENTLY PRODUCING INCOME.
** AMERICAN DEPOSITORY RECEIPTS.
*** INTEREST ONLY SECURITY.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
Mentor Short-Duration Income Fund
Portfolio of Investments
December 31, 1994
<TABLE>
PRINCIPAL
SECURITY DESCRIPTION PERCENT OF NET ASSETS AMOUNT MARKET VALUE
<S> <C> <C> <C>
ASSET-BACKED SECURITIES 23.0%
Advanta CCMT 94-D, 6.30%, 9/1/00 $1,250,000 $ 1,249,608
General Motors Acceptance Corporation, 6.30%, 6/15/99 782,890 762,217
Signet CC Master Trust, 6.80%, 12/15/00 2,000,000 1,924,200
Total Asset-Backed Securities (cost $4,009,335) 3,936,025
GOVERNMENT BONDS AND AGENCIES 54.9%
Federal Home Loan Mortgage Corporation, 8.19%, 12/16/97 5,000,000 4,971,700
U. S. Treasury Note, 7.50%, 10/31/99 4,500,000 4,435,830
Total Government Bonds and Agencies (cost $9,448,860) 9,407,530
COLLATERALIZED MORTGAGE OBLIGATIONS 13.2%
Federal Home Loan Mortgage Corporation, 6.47%, 7/15/97 1,657,560 1,644,084
Ryland Acceptance Corporation, 9.63%, 9/25/17 653,951 627,391
Total Collateralized Mortgage Obligations (cost $2,302,562) 2,271,475
CORPORATE BOND 8.6%
General Motors Acceptance Corporation, 6.90%, 2/19/98
(cost $1,480,437) 1,550,000 1,482,188
SHORT-TERM INVESTMENT 4.5%
Repurchase Agreement
Lehman Brothers, Inc.
Dated 12/30/94, 5.40%, due 1/3/95, collateralized by
$1,000,000 U. S. Treasury Note, 3.88%,
8/31/95 (cost $775,000) 775,000 775,000
TOTAL INVESTMENTS (COST $18,016,194) 104.2% 17,872,218
OTHER ASSETS LESS LIABILITIES (4.2%) (728,376)
NET ASSETS 100.0% $17,143,842
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
Mentor Series Trust
Statements of Assets and Liabilities
December 31, 1994
<TABLE>
Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund**
<C> <C> <C> <C>
ASSETS
Investments, at market
value * (Note 2) $ 193,146,014 $ 176,585,886 $ 17,872,218
Cash - 7,269 -
Receivables
Investments sold 810,306 9,015,343 -
Fund shares sold 232,214 436,271 100,010
Dividends and interest 109,811 334,562 129,676
Deferred expenses 33,985 80,617 32,214
Other assets 15,809 - -
Total assets 194,348,139 186,459,948 18,134,118
LIABILITIES
Payable for investments purchased 3,959,796 6,739,051 -
Payable for fund shares redeemed 130,076 341,768 869,359
Dividends payable - 21,859 86,346
Accrued administration expenses
(Note 3) 8,177 - -
Accrued expenses 124,132 83,464 34,571
Total liabilities 4,222,181 7,186,142 990,276
NET ASSETS $190,125,958 $179,273,806 $17,143,842
Net Assets represented by:
Capital stock $ 15,653 $ 14,645 $ 1,407
Additional paid-in capital 152,435,771 182,020,192 17,617,300
Accumulated distributions in excess of
net investment income - - (37,127)
Undistributed net realized losses on
investment transactions (157,700) (10,179,850) (293,762)
Net unrealized appreciation
(depreciation)
of investments 37,832,234 7,418,819 (143,976)
Net Assets $ 190,125,958 $ 179,273,806 $17,143,842
Shares Outstanding 15,653,316 14,645,199 1,407,124
NET ASSET VALUE PER SHARE $ 12.15 $ 12.24 $ 12.18
* INVESTMENTS AT COST $155,313,780, $169,167,067 AND $18,016,194 RESPECTIVELY.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Mentor Series Trust
Statements of Operations
Year ended December 31, 1994
<TABLE>
Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund **
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of withholding taxes)* $ 833,720 $1,393,401 $ -
Interest 703,805 1,265,356 643,128 (a)
Total investment income (Note 2) 1,537,525 2,658,757 643,128
Expenses
Distribution fee (Note 4) 1,422,197 1,207,346 29,331
Management fee (Note 3) 1,327,384 1,368,325 48,884
Shareholder servicing fee (Note 4) 474,066 402,448 24,442
Custodian and accounting fees (Note 3) 103,545 117,006 5,964
Transfer agent fees 338,231 301,671 48,299
Registration expenses 51,421 - -
Shareholder reports and postage expenses 47,208 52,879 3,058
Auditing fees 10,700 13,035 11,784
Legal fees 5,945 7,241 1,309
Directors' fees and expenses 12,368 15,063 4,982
Administration fee (Note 3) - 160,979 9,776
Organizational expenses (Note 2) 8,634 20,135 4,512
Miscellaneous expenses 9,681 3,325 47
Total expenses 3,811,380 3,669,453 192,388
Deduct
Waiver of administration fee (Note 3) - 131,557 9,776
Waiver of management fee (Note 3) - - 48,884
NET EXPENSES 3,811,380 3,537,896 133,728
NET INVESTMENT INCOME (LOSS) (2,273,855) (879,139) 509,400
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on
investments sold 13,751,586 (10,179,850) (293,762) (b)
Change in unrealized appreciation
(depreciation) (20,155,668) 5,285,954 (143,976)
Net realized and unrealized loss
on investments (6,404,082) (4,893,896) (437,738)
Net increase (decrease) in net assets
resulting from operations $(8,677,937) $(5,773,035) $ 71,662
* WITHHOLDING TAXES WERE $805 AND $12,905 FOR THE GROWTH FUND AND STRATEGY FUND RESPECTIVELY FOR THE YEAR.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.
(A) NET OF INTEREST EXPENSE OF $110,072. (NOTE 2)
(B) INCLUDES NET REALIZED GAIN ON CLOSED FUTURES CONTRACTS OF $6,488.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Mentor Series Trust
Statements of Changes in Net Assets
<TABLE>
Mentor Mentor Mentor
Growth Strategy Short-Duration
Fund Fund Income Fund
Year ended December 31, 1994 1993 1994 1993* 1994**
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $(2,273,855) $(1,776,781) $(879,139) $14,753 $ 509,400
Net realized gain (loss) on investments 13,751,586 13,552,855 (10,179,850) - (293,762)
Change in unrealized appreciation
(depreciation) of investments (20,155,668) 12,813,963 5,285,954 2,132,865 (143,976)
Increase (decrease) in net assets
from operations (8,677,937) 24,590,037 (5,773,035) 2,147,618 71,662
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income - - (14,753) - (509,400)
In excess of net investment income - - (7,106) - (41,639)
Net realized gain on investments (14,441,603) (12,862,838) - - -
In excess of realized gain
on investments (186,774) - - - -
Net decrease from distributions (14,628,377) (12,862,838) (21,859) - (551,039)
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Net proceeds from sale of shares 35,199,222 41,824,518 70,664,481 120,228,889 27,846,704
Reinvested distributions 14,274,538 12,518,967 - - 366,811
Cost of shares redeemed (23,019,529) (15,145,165) (7,772,804) (199,484) (10,590,296)
Change in net assets from capital
share transactions 26,454,231 39,198,320 62,891,677 120,029,405 17,623,219
Net increase in net assets 3,147,917 50,925,519 57,096,783 122,177,023 17,143,842
NET ASSETS
Beginning of period 186,978,041 136,052,522 122,177,023 - -
End of period $190,125,958 $186,978,041 $179,273,806 $122,177,023 $17,143,842
* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1993.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Mentor Series Trust
Financial Highlights
<TABLE>
Mentor Growth Fund
Year ended December 31, 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $13.78 $12.81 $12.16 $8.37 $9.63
Net investment income (loss) (0.15) (0.08) (0.06) (0.09) 0.02
Net realized and unrealized
gain (loss) on investments (0.47) 2.07 1.94 4.30 (1.10)
Total from investment operations (0.62) 1.99 1.88 4.21 (1.08)
Less distributions
Dividends from net investment income - - - - (0.05)
Distributions from capital gains (1.00) (1.02) (1.23) (0.42) (0.13)
Distributions in excess of
capital gains (0.01) - - - -
Total distributions (1.01) (1.02) (1.23) (0.42) (0.18)
NET ASSET VALUE, END OF PERIOD $12.15 $13.78 $12.81 $12.16 $ 8.37
Total Return (4.48%) 15.60% 15.46% 50.30% (11.21%)
Ratios / Supplemental Data
Net assets, end of period (in 000's) $190,126 $186,978 $136,053 $108,719 $83,540
Ratio of expenses to
average net assets 2.01% 2.02% 2.05% 2.17% 2.25%
Ratio of net investment income (loss)
to average net assets (1.20%) (1.12%) (0.76%) (0.80%) 0.26%
Portfolio turnover rate 77% 64% 50% 40% 50%
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Mentor Series Trust
Financial Highlights (continued)
<TABLE>
Mentor Mentor
Strategy Short-Duration
Fund Income Fund
Year ended December 31, 1994 1993* 1994**
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $12.70 $ 12.50 $ 12.50
Net investment income (loss) (0.06) - 0.41
Net realized and unrealized
gain (loss) on investments (0.40) 0.20 (0.29)
Total from investment operations (0.46) 0.20 0.12
Less distributions
Dividends from net investment income - - (0.41)
Distributions in excess of
net investment income - - (0.03)
Total distributions - - (0.44)
NET ASSET VALUE, END OF PERIOD $12.24 $12.70 $12.18
Total Return (3.61%) 1.60% 0.95%
Ratios / Supplemental Data
Net assets, end of period (in 000's) $179,274 $122,177 $17,144
Ratio of expenses to
average net assets 2.19% 2.06% (a) 1.29% (a)
Ratio of net investment income (loss)
to average net assets (0.54%) 0.08% (a) 4.90% (a)
Portfolio turnover rate 143% 0% 166%
* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1993.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994.
(A) DETERMINED ON AN ANNUALIZED BASIS.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Mentor Series Trust
Notes to Financial Statements
December 31, 1994
NOTE 1: ORGANIZATION
Mentor Series Trust ("Trust") was organized on August 16, 1993 and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Trust is the successor to the
Mentor Growth Trust, Inc., which was incorporated on January 8, 1985. The
Trust consists of four separate diversified funds (hereinafter each
individually referred to as a Fund or collectively as the "Funds") at December
31, 1994, as follows: Mentor Growth Fund (Growth Fund) (formerly, Mentor Growth
Trust, Inc.)
Mentor Strategy Fund (Strategy Fund)
Mentor Short-Duration Income Fund (Short-Duration Income Fund)
Mentor Balanced Fund (Balanced Fund)
The assets of each Fund of the Trust are segregated and a shareholder' s
interest is limited to the Fund in which shares are held.
The Balanced Fund is not currently being offered to new investors.
These financial statements include the Growth Fund, Strategy Fund
and Short-Duration Income Fund.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds:
(a) Valuation of Securities - Listed securities held by the Growth Fund and
Strategy Fund and traded on national stock exchanges and over-the-counter
securities quoted on the NASDAQ National Market System are valued at the last
reported sales price or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated by the Board of Trustees of the Fund as the
primary market. Securities traded in the over-the-counter market, other than
those quoted on the NASDAQ National Market System, are valued at the last
available bid price. Short-term investments with remaining maturities of 60
days or less are carried at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Trustees.
U.S. Government obligations held by the Short-Duration Income
Fund are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed
corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities
are valued at the prices provided by an independent pricing service.
Security valuations not available from an independent pricing service
are provided by dealers approved by the Funds' Board of Trustees.
In determining value, the dealers use information with respect to
transactions in such securities, market transactions in comparable
securities, various relationships between securities, and yield to
maturity.
(b) Repurchase Agreements - All repurchase agreements are fully collateralized
by U.S. Government Agency securities and such collateral is in the possession of
the Trust' s custodian. The Trust monitors on a daily basis, the market value
of the collateral of each repurchase agreement to ensure the existence of a
proper level of collateral.
(c) Borrowings- Short-Duration Income Fund may, under certain
circumstances, borrow money directly or through dollar-roll transactions and
repurchase agreements (arrangements in which the Fund sells a security for a
percentage of its market value with an agreement to buy it back on a set
date). The Short-Duration Income Fund may borrow up to one-third of the value
of its net assets. The Fund had no reverse repurchase agreements or
dollar-rolls outstanding at December 31, 1994.
(d) Security Transactions and Investment Income - Security transac-
tions for the Funds are accounted for on a trade date basis. Dividend
income is recorded on the ex-dividend date, and interest is recorded
on the accrual basis. Interest income includes interest and discount
earned (net of premium) on short term obligations, and interest
earned on all other debt securities including original issue discounts
as required by the Internal Revenue Code. Realized and unrealized
gains and losses on investment security transactions are calculated
on an identified cost basis.
(e) Federal Income Taxes - No provision for federal income taxes has been made
since it is each Fund' s policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
(f) In order to gain exposure to or protect against declines in security
values, the Short-Duration Income Fund may buy and sell futures contracts. The
Fund may also buy or write put or call options on these futures contracts.
The Fund generally sells futures contracts to hedge against declines
in the value of portfolio securities. The Fund may also purchase
futures contracts to gain exposure to market changes as it may be
more efficient or cost effective than actually buying securities. The
Fund will segregate assets to cover its commitments under such
speculative futures contracts.
Upon entering into a futures contract, the Fund is required to deposit ither
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (varia- tion margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is
closed. For the year ended December 31, 1994, the Short-Duration Income Fund
had a realized gain of $6,488 on closed futures contracts.
Mentor Series Trust
Notes to Financial Statements (continued)
Risks of entering into future contracts (and related options) include the
possibility that there may be an liquid market and that a change in the value of
the contract or option may not correlate with changes in the value of the
underlying securities. At December 31, 1994, the Short-Duration Income Fund had
no open futures contracts or options thereon.
(g) Deferred Expenses - Costs incurred by the Trust in connection with its
initial share registration and organization costs were deferred by the Funds and
are being amortized on a straight-line basis over a five-year period through
April 1999.
(h) Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses and deferral of wash sales.
During the year ended December 31, 1994, the Growth Fund, Strategy Fund and
Short-Duration Income Fund made the following reclassifications to increase
(decrease) the accounts as shown:
ACCUMULATED UNDISTRIBUTED NET
DISTRIBUTIONS IN REALIZED LOSSES
ADDITIONAL EXCESS OF NET ON INVESTMENT
PAID-IN CAPITAL INVESTMENT INCOME TRANSACTIONS
Growth Fund $(2,302,929) $2,273,855 $29,074
Strategy Fund (886,245) 886,245 -
Short-Duration
Income Fund (4,512) 4,512 -
The above reclassifications had no effect on net investment income,
net realized gains (losses), or net assets of the Funds.
(i) Distributions to Shareholders- Distributions from net investment income and
net realized capital gains, after offsetting capital loss car- ryovers are
distributed annually for the Growth Fund and the Strategy Fund. Distributions
from net investment income are declared daily and paid monthly for the
Short-Duration Income Fund, and distribu- tions from net realized capital gains,
if any, are paid annually.
NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND
ADMINISTRATION AGREEMENTS
The Growth Fund has entered into an Investment Advisory and Man- agement
Agreement with Charter Asset Management, Inc. (Charter), a wholly-owned
subsidiary of Investment Management Group, Inc., which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Under this agreement, Charter s
management fee is accrued daily and paid monthly at an annual rate of 0.70%
applied to the average daily net assets of the Fund.
The Strategy Fund has entered into an Investment Advisory Agreement with
Wellesley Advisors, Inc. (Wellesley), a wholly-owned subsidiary of Investment
Management Group, Inc., which is a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc. Under this agreement, Wellesley' s management fee is
accrued daily and paid monthly at an annual rate of 0.85% applied to the average
daily net assets of the Fund.
The Short-Duration Income Fund has entered into an Investment Advisory Agreement
with Commonwealth Investment Counsel, Inc. (Commonwealth), a wholly-owned
subsidiary of Investment Management Group, Inc. (IMG), which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Under this agreement,
Commonwealth' s management fee is accrued daily and paid monthly at an annual
rate of 0.50%, applied to the average daily net assets of the Fund. For the year
ended December 31, 1994 Commonwealth earned and voluntarily waived advisory fees
of $48,884 for the Short-Duration Income Fund.
IMG provides administrative personnel and services to the Strategy Fund and
Short-Duration Income Fund, under an Administration Agreement, at an annual rate
of .10 of 1% of the average daily net assets of each Fund. In order to limit
the Funds' expenses during its start-up period, IMG agreed to waive its fee for
the first year of each Funds' operations. This waiver period elapsed on
October 31, 1994 for the Strategy Fund. In addition, the Growth Fund and
Strategy Fund provide direct reimbursement to IMG for certain accounting and
operation related costs not covered under the Administration Agreement. For the
year ended December 31, 1994, the Growth Fund and the Strategy Fund paid $24,000
and $21,507, respectively to IMG for these direct reimbursements.
Charter, Wellesley, and Commonwealth have agreed to reimburse the Funds for the
operating expenses (exclusive of interest, taxes, brokerage and distributions
fees, and extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions with jurisdiction over the
Funds. The most stringent state expense limitation applicable to the Funds
requires reimbursement of expenses in any year that such expenses exceed 2.5% of
the first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of
average daily net assets, and 1.5% of the average daily net assets over
$100,000,000. During the year ended December 31, 1994 for the Growth Fund and
Strategy Fund and the period of April 29, 1994 to December 31, 1994 for the
Short-Duration Income Fund, no reimbursement from Charter, Wellesley or
Commonwealth was required as a result of such state expense limitations.
NOTE 4: DISTRIBUTION AGREEMENT AND OTHERTRANSACTIONS
WITH AFFILIATES
Under a Distribution Agreement between the Funds and Wheat, First
Securities, Inc. (Wheat), a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc., Wheat was appointed Distributor of the Funds.
To compensate Wheat for the services it provides and for the expenses
it incurs under the Distribution Agreement, the Funds have adopted a
Plan of Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940, under which they pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the
Funds' average daily net assets for the Growth Fund and Strategy
Fund, and 0.30% of the Fund' s average daily net assets for the Short-Duration
Income Fund.
Mentor Series Trust
Notes to Financial Statements (continued)
Effective, July 7, 1993 for the Growth Fund, October 29, 1993 for
the Strategy Fund and April 29, 1994 for the Short-Duration Income
Fund, the Funds commenced payment of certain compensation to
Wheat under a Shareholder Service Agreement for administrative
support services at an annual rate of 0.25% of the Funds' average
daily net assets. The total charges to be borne by the Growth Fund
and Strategy Fund, under the Distribution and Shareholder Service
Agreements is expected to remain at an annual rate of 1% of the
Funds' average daily net assets. The total charges to be borne by the
Short-Duration Income Fund under the Distribution and Shareholder
Service Agreements is expected to remain at an annual rate of 0.55%
of the Fund' s average daily net assets.
In addition, Wheat is paid a contingent deferred sales charge on share
redemptions made within five years of original share purchase.
Reinvested distributions and share appreciation are excluded from
the sales charge. During the year ended December 31, 1994, Wheat
was paid contingent deferred sales charges of $321,429 and
$108,534, respectively, by the redeeming shareholders of the Growth
Fund and Strategy Fund.
NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities, for the
Growth Fund and the Strategy Fund during the year ended December 31, 1994, the
Short-Duration Income Fund for the period from April 29, 1994 to December 31,
1994 were as follows:
PURCHASES SALES
Growth Fund $132,806,285 $132,443,083
Strategy Fund 241,632,204 204,570,532
Short-Duration Income Fund 45,291,725 27,756,769
At December 31, 1994, Strategy Fund for federal tax purposes, had
a capital loss carryforward of approximately $9,900,000. Pursuant
to the Internal Revenue Code, such capital loss carryforward will
expire in 2002.
At December 31, 1994, Short-Duration Income Fund for federal tax purposes, had a
capital loss carryforward of approximately $67,000. Pursuant to the Internal
Revenue Code, such capital loss carryforward will expire in 2002. In addition,
the Fund realized approxi- mately $227,000 in net realized losses subsequent to
October 31, 1994 which for federal tax purposes may be used to offset realized
gains occurring in the next fiscal year.
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS
The cost of investments for federal income tax purposes amounted to
$155,471,480, for the Growth Fund, $169,431,332 for the Strategy Fund,
$18,016,194 for the Short-Duration Income Fund at December 31, 1994. Gross
unrealized appreciation and depreciation of investments at December 31, 1994
based on such costs were as follows:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
Growth Fund $44,656,702 $(6,982,168) $37,674,534
Strategy Fund 11,169,452 (4,014,898) 7,154,554
Short-Duration
Income Fund 1,751 (145,727) (143,976)
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions
in Fund shares were as follows:
GROWTH FUND
YEAR YEAR
ENDED ENDED
12/31/94 12/31/93
Shares outstanding,
beginning of period 13,569,941 10,620,907
Shares sold 2,621,726 3,156,077
Shares issued upon reinvestment
of distributions 1,176,364 916,466
Shares redeemed (1,714,715) (1,123,509)
Shares outstanding,
end of period 15,653,316 13,569,941
STRATEGY FUND
YEAR PERIOD
ENDED ENDED
12/31/94 12/31/93 *
Shares outstanding,
beginning of period 9,616,768 -
Shares sold 5,670,538 9,632,745
Shares issued upon reinvestment
of distributions - -
Shares redeemed (642,107) (15,977)
Shares outstanding,
end of period 14,645,199 9,616,768
SHORT-DURATION
INCOME FUND
PERIOD
ENDED
12/31/1994**
Shares outstanding,
beginning of period -
Shares sold 2,235,823
Shares issued upon reinvestment
of distributions 29,697
Shares redeemed (858,396)
Shares outstanding,
end of period 1,407,124
* FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1993.
** FOR THE PERIOD FROM APRIL 29, 1994 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1994.
<PAGE>
Mentor Series Trust
Independent Auditors' Report
THE TRUSTEES AND SHAREHOLDERS
MENTOR SERIES TRUST
We have audited the accompanying statements of assets and liabilities of Mentor
Growth Fund, Mentor Strategy Fund and Mentor Short-Duration Income Fund,
portfolios of Mentor Series Trust, including the portfolios of investments, as
of December 31, 1994, and the related statements of operations for the year then
ended for Mentor Growth Fund and Mentor Strategy Fund and for the period from
April 29, 1994 (commencement of operations) to December 31, 1994 for Mentor
Short-Duration Income Fund, the statements of changes in net assets for each of
the years in the two year period then ended for Mentor Growth Fund, for the year
then ended and the period from October 29, 1993 (commencement of operations) to
December 31, 1993 for Mentor Strategy Fund and for the peri- od from April 29,
1994 to December 31, 1994 for Mentor Short-Duration Income Fund, and the
financial high- lights for each of the years in the five-year period then ended
for Mentor Growth Fund, for the year then ended and for the period from October
29, 1993 to December 31, 1993 for Mentor Strategy Fund and for the period from
April 29, 1994 to December 31, 1994 for Mentor Short-Duration Income Fund.
These financial statements and financial highlights are the responsibility of
the Trust' s management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall finan- cial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mentor Growth Fund, Mentor
Strategy Fund and Mentor Short-Duration Income Fund, portfolios of Mentor Series
Trust, as of December 31, 1994, the results of their operations, changes in
their net assets and their financial highlights for each of the years or periods
specified in the first paragraph above in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 3, 1995
<PAGE>
MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 59.9%
BASIC INDUSTRIES 3.1%
Mohawk Industries, Inc. 2,300 $ 29,325
Unifi, Inc. 2,355 60,052
Total Basic Industries 89,377
CAPITAL GOODS 2.2%
York International Company 1,760 64,900
CONSUMER DURABLES 4.4%
Circus Circus Enterprises 2,480 57,660
Newell Company 3,420 71,820
Total Consumer Durables 129,480
CONSUMER NON-DURABLES 13.6%
Johnson & Johnson, Inc. 1,025 56,119
McDonald's Corporation 2,370 69,322
Pepsico, Inc. 2,300 83,375
Sonoco Products Company 2,570 56,219
Sysco Corporation 2,900 74,675
UST, Inc. 2,070 57,442
Total Consumer Non-durables 397,152
ENERGY 2.0%
Schlumberger Ltd. 1,140 57,428
FINANCIAL 9.5%
Banc One Corporation 2,612 66,279
Federal National Mortgage Association 550 40,081
Torchmark Corporation 1,890 65,914
United Asset Management Company 2,040 75,225
Wilmington Trust Corporation 1,330 30,257
Total Financial 277,756
RETAIL TRADE 12.8%
Albertson's, Inc. 1,980 57,420
Avon Products Company 1,190 71,103
May Department Store 2,000 67,500
Rubbermaid, Inc. 2,090 60,088
Toys R Us, Inc. 1,340 40,870
Tyco International Ltd. 1,570 74,575
Total Retail Trade 371,556
TECHNOLOGY 7.5%
Automatic Data Processing Corporation 840 49,140
Intel Corporation 860 54,933
</TABLE>
<PAGE>
MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
Premier Industrial Corporation 2,770 $ 65,441
Sensormatic Electronics Corporation 1,340 48,240
Total Technology 217,754
MISCELLANEOUS 4.8%
General Electric Company 1,530 78,030
Interpublic Group Company 1,890 60,716
Total Miscellaneous 138,746
TOTAL COMMON STOCKS (COST $1,748,659) 1,744,149
FIXED INCOME SECURITIES 41.5%
ASSET BACKED SECURITIES 2.9%
Advanta Credit Card Master Trust
94-D A, CMO, 6.29%, 9/1/00 $55,000 54,983
Case Equipment Loan Trust,
4.40%, 11/15/98 29,224 28,447
TOTAL ASSET BACKED SECURITIES
(COST $83,710) 83,430
GOVERNMENT BONDS 30.6%
U.S. TREASURY BONDS 4.7%
7.25%, 5/15/16 75,000 69,370
7.13%, 2/15/23 75,000 68,262
Total U.S. Treasury Bonds 137,632
U.S. TREASURY NOTES 24.0%
4.25%, 1/31/95 130,000 129,910
5.88%, 5/15/95 35,000 34,925
6.50%, 8/15/97 115,000 111,376
7.50%, 10/31/99 85,000 83,788
5.50%, 4/15/00 75,000 67,589
7.75%, 2/15/01 70,000 69,711
5.88%, 2/15/04 180,000 157,027
7.90%, 2/15/14 (a) 205,000 45,258
Total U.S. Treasury Notes 699,584
FEDERAL HOME LOAN MORTGAGE CORPORATION 1.9%
6.90%, 10/17/96 55,000 54,067
TOTAL GOVERNMENT BONDS (COST $900,794) 891,283
</TABLE>
<PAGE>
MENTOR BALANCED FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
NON-CONVERTIBLE CORPORATE BOND 1.6%
First Chicago Corporation, 7.63%,
1/15/03 (cost $49,094) $ 50,000 $ 47,187
SHORT-TERM INVESTMENT 6.4%
Repurchase Agreement
Goldman Sachs & Company
Dated 12/30/94, 5.75%, due
1/3/95, collateralized by
$207,851 Federal National Mortgage
Association, 6.50%, 6/15/09
(cost $185,103) 185,103 185,103
TOTAL FIXED INCOME SECURITIES
(COST $1,218,701) 1,207,003
TOTAL INVESTMENTS (COST $2,967,360) 101.4% 2,951,152
OTHER ASSETS LESS LIABILITIES (1.4%) (40,053)
NET ASSETS 100.0% $2,911,099
</TABLE>
CMO - Collateralized Mortgage Obligation
(a) Represents Interest Only U.S. Treasury Strip.
See notes to financial statements.
<PAGE>
MENTOR SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
MENTOR
BALANCED
FUND
ASSETS
Investments, at market value* (Note 2) $2,951,152
Dividends and interest receivables 22,926
Other assets 6,906
Total assets 2,980,984
LIABILITIES
Payable for investments purchased 20,898
Dividends payable 43,277
Other accrued expenses 5,710
Total liabilities 69,885
NET ASSETS $2,911,099
Net Assets represented by:
Capital stock $ 234
Additional paid-in capital 2,926,764
Undistributed net investment income 7,414
Undistributed net realized losses on
investment transactions (7,105)
Net unrealized depreciation of investments (16,208)
Net Assets $2,911,099
Shares Outstanding 233,931
NET ASSET VALUE PER SHARE $ 12.44
* Investments at cost $2,967,360.
See notes to financial statements.
<PAGE>
MENTOR SERIES TRUST
STATEMENT OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1994
MENTOR
BALANCED
FUND*
INTEREST INCOME
Dividends $ 17,245
Interest 41,137
Total investment income (Note 2) 58,382
Expenses
Distribution fee (Note 4) 11,536
Management fee (Note 3) 11,536
Shareholder servicing fee (Note 4) 3,845
Custodian and accounting fees 5,115
Registration expenses 303
Shareholder reports and postage expenses 285
Auditing fees 5,040
Directors' fees and expenses 3,835
Miscellaneous expenses 18
Total expenses 41,513
Deduct
Waiver of distribution fee (Note 3) 11,536
Waiver of management fee (Note 3) 11,536
Waiver of shareholder servicing fee (Note 3) 3,845
Reimbursement of expenses by Administrator 6,905
NET EXPENSES 7,691
NET INVESTMENT INCOME 50,691
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments sold (7,105)
Change in unrealized depreciation (16,208)
Net realized and unrealized loss on investments (23,313)
Net increase in net assets resulting
from operations $ 27,378
* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
See notes to financial statements.
<PAGE>
MENTOR SERIES TRUST
STATEMENT OF CHANGES IN NET ASSETS
MENTOR
BALANCED FUND
PERIOD ENDED DECEMBER 31, 1994*
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 50,691
Net realized loss on investments (7,105)
Change in unrealized depreciation of investments (16,208)
Increase in net assets from operations 27,378
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (43,277)
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Net proceeds from sale of shares 2,926,998
Reinvested distributions -
Cost of shares redeemed -
Change in net assets from capital
share transactions 2,926,998
Net increase in net assets 2,911,099
NET ASSETS
Beginning of period -
End of period $2,911,099
* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
See notes to financial statements.
<PAGE>
MENTOR SERIES TRUST
FINANCIAL HIGHLIGHTS
MENTOR
BALANCED FUND
PERIOD ENDED DECEMBER 31, 1994*
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50
Net investment income 0.22
Net realized and unrealized loss
on investments (0.09)
Total from investment operations 0.13
Less distributions
Dividends from net investment income (0.19)
NET ASSET VALUE, END OF PERIOD $ 12.44
Total Return 1.00%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 2,911
Ratio of expenses to average net assets 0.50% (a)
Ratio of net investment income to average net assets 3.32% (a)
Portfolio turnover rate 71%
* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
(a) Determined on an annualized basis.
See notes to financial statements.
<PAGE>
MENTOR SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1: ORGANIZATION
Mentor Series Trust ("Trust") was organized on August 16, 1993 and is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Trust is the successor to the Mentor Growth Trust, Inc.,
which was incorporated on January 8, 1985. The Trust consists of four separate
diversified funds at December 31, 1994, as follows:
Mentor Growth Fund ("Growth Fund") (formerly, Mentor Growth Trust, Inc.)
Mentor Strategy Fund ("Strategy Fund")
Mentor Short-Duration Income Fund ("Short-Duration Income Fund")
Mentor Balanced Fund ("Balance Fund")
The assets of each Fund of the Trust are segregated and a shareholder's interest
is limited to the Fund in which shares are held.
The financial statements included in this report are for the Balanced Fund
(hereinafter referred to as the "Fund").
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund:
(a) Valuation of Securities - Listed securities held by the Fund and traded on
national stock exchanges and over-the-counter securities quoted on the NASDAQ
National Market System are valued at the last reported sales price or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by the Board of Trustees of the Fund as the primary market. Securities traded in
the over-the-counter market, other than those quoted on the NASDAQ National
Market System, are valued at the last available bid price. Short-term
investments with remaining maturities of 60 days or less are carried at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Trustees.
U.S. Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Fund's Board of Trustees. In determining value, the
dealers use information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between securities,
and yield to maturity.
(b) Repurchase Agreements- All repurchase agreements are fully collateralized by
U.S. Government Agency securities and such collateral is in the possession of
the Trust's custodian. The Trust monitors on a daily basis, the market value of
the collateral of each repurchase agreement to ensure the existence of a proper
level of collateral.
(c) Security Transactions and Investment Income - Security transactions for the
Fund are accounted for on a trade date basis. Dividend income is recorded on the
ex-dividend date, and interest is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short term
obligations, and interest earned on all other debt securities including original
issue discounts as required by the Internal Revenue Code. Realized and
unrealized gains and losses on investment security transactions are calculated
on an identified cost basis.
(d) Federal Income Taxes - No provision for federal income taxes has been made
since it is the Fund's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
(e) Deferred Expenses - Costs incurred by the Trust in connection with its
initial share registration and organization costs were deferred by the Fund and
are being amortized on a straight-line basis over a five-year period through
June 1999.
(f) Distributions to Shareholders - Distributions from net investment income and
net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Fund.
NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Commonwealth
Investment Counsel, Inc. ("Commonwealth"), a wholly-owned subsidiary of
Investment Management Group, Inc., which is a wholly-owned subsidiary of Wheat
First Butcher Singer, Inc. Under this agreement, Commonwealth's management fee
is accrued daily and paid monthly at an annual rate of 0.75% applied to the
average daily net assets of the Fund. In order to limit the Fund's expenses
during its start-up period, Commonwealth has agreed to reduce its compensation
to the extent that expenses of the Fund during the first three months of its
operations (exclusive of brokerage, interest, taxes, deferred organization
expenses, and payments under the Fund's Distributions Plan) exceed an annual
rate of 0.50% of the Fund's average net assets. For the year ended December 31,
1994 Commonwealth earned and voluntarily waived advisory fees of $11,536 for the
Fund.
Investment Management Group, Inc. ("IMG") provides administrative personnel and
services to the Fund, under an Administration Agreement, at an annual rate of
.10 of 1% of the average daily net assets of the Fund. In order to limit the
Fund's expenses during its start-up period, IMG agreed to waive its fee for the
first year of the Fund's operations.
Commonwealth has agreed to reimburse the Fund for the operating expenses
(exclusive of interest, taxes, brokerage and distributions fees, and
extraordinary expenses) in excess of the most restrictive expense limitation
imposed by state securities commissions with jurisdiction over the Fund. The
most stringent state expense limitation applicable to the Fund requires
reimbursement of expenses in any year that such expenses exceed 2.5% of the
first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of
average daily net assets, and 1.5% of the average daily net assets over
$100,000,000. During the period from June 21, 1994 to December 31, 1994, no
reimbursement from Commonwealth was required as a result of such state expense
limitations.
NOTE 4: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under a Distribution Agreement between the Fund and Wheat, First Securities,
Inc. ("Wheat"), a wholly-owned subsidiary of Wheat First Butcher Singer, Inc.,
Wheat was appointed Distributor of the Fund. To compensate Wheat for the
services it provides and for the expenses it incurs under the Distribution
Agreement, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the Investment Company Act of 1940, under which the Fund pays a
distribution fee, which is accrued daily and paid monthly at the annual rate of
0.75% of the Fund's average daily net assets.
Effective June 21, 1994 the Fund commenced payment of certain compensation to
Wheat under a Shareholder Service Agreement for administrative support services
at an annual rate of 0.25% of the Fund's average daily net assets. The total
charges to be borne by the Fund, under the Distribution and Shareholder Service
Agreements is expected to remain at an annual rate of 1% of the Fund's average
daily net assets. For the year ended December 31, 1994 Wheat earned and
voluntarily waived distribution and shareholder services fees of $15,381.
NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities,
aggregated $4,724,246 and $1,749,781 respectively, for the period from June 21,
1994 to December 31, 1994. Purchases include $2,690,820 of trades in-kind.
At December 31, 1994, the Fund for federal tax purposes, had a capital loss
carryforward of approximately $7,000. Pursuant to the Internal Revenue Code,
such capital loss carryforward will expire in 2002.
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
At December 31, 1994 the cost of investments for federal income tax purposes
amounted to $2,967,360 and net unrealized depreciation aggregated $16,208, of
which $79,764 related to appreciated securities and $95,972 related to
depreciated securities.
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Fund shares
were as follows:
PERIOD
ENDED
12/31/94*
Shares outstanding, beginning of period -
Shares sold 233,931
Shares issued upon reinvestment of distribution -
Shares redeemed -
Shares outstanding, end of period 233,931
* For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
<PAGE>
MENTOR SERIES TRUST
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR SERIES TRUST
We have audited the accompanying statement of assets and liabilities of Mentor
Balanced Fund, portfolio of Mentor Series Trust, including the portfolio of
investments, as of December 31, 1994, and the related statement of operations,
the statement of changes in net assets, and the financial highlights for the
period from June 21, 1994 (commencement of operations) to December 31, 1994.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1994 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mentor Balanced Fund, portfolio
of Mentor Series Trust, as of December 31, 1994, the results of its operations,
changes in its net assets and its financial highlights for the period specified
in the first paragraph above in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 3, 1995
