<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996
REGISTRATION NO. 33-45315
FILE NO. 811-6550
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
PRE-EFFECTIVE AMENDMENT NO. _ ( )
POST-EFFECTIVE AMENDMENT NO. 10 (X)
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 12 (X)
(CHECK APPROPRIATE BOX OR BOXES)
THE MENTOR FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(804) 782-3648
(REGISTRANT'S TELEPHONE NUMBER)
PAUL F. COSTELLO
PRESIDENT
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
TIMOTHY W. DIGGINS, ESQ.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MA 02110
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
( ) IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
<PAGE>
(X) ON JAN. 15, 1996 PURSUANT TO PARAGRAPH (B)
( ) 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
( ) ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
( ) 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
( ) ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
( ) THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OR AMOUNT OF
SECURITIES UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2. A RULE
24F-2 NOTICE FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 WAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1995.
<PAGE>
THE MENTOR FUNDS
CROSS REFERENCE SHEET
(as required by Rule 404(c))
Part A - The Mentor Funds
N-1A Item No. Location
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Cover Page; Expenses Summary;
Financial Highlights
3. Condensed Financial Information . . Expenses Summary; Financial
Highlights
4. General Description of Registrant . Cover Page; Investment
Objectives and Policies;
General
5. Management of the Fund . . . . . . Investment Objectives
and Policies; Other
Investment Practices;
Valuing Shares;
Distribution Plans; General;
Management; The Sub-Advisers;
Performance Information
5A. Management's Discussion
of Fund Performance . . . . . . . (Contained in the Annual
Report of the Registrant)
6. Capital Stock and Other
Securities . . . . . . . . . . . How to Buy Shares; How
to Exchange Shares;
Distributions and Taxes;
Management; General
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . Sales Arrangements; How
to Buy Shares; Management
8. Redemption or Repurchase . . . . . How to Buy Shares; How
to Sell Shares; How to
Exchange Shares
9. Pending Legal Proceedings . . . . . Not Applicable
<PAGE>
Part A - Mentor Balanced Portfolio
N-1A Item No. Location
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Cover Page; Expense
summary
3. Condensed Financial Information . . Expense summary;
Financial highlights
4. General Description of Registrant . Cover Page; Investment
objective and policies;
Other investment
practices
5. Management of the Fund . . . . . . Investment objective and
policies; Other
investment practices;
Management of the
Portfolio; The Mentor
Funds; Valuing shares;
Distribution and taxes;
Custodian and transfer
and dividend agent;
Performance information
5A. Management's Discussion
of Fund Performance . . . . . . . (Contained in the Annual
Report of Mentor
Balanced Portfolio)
6. Capital Stock and Other
Securities . . . . . . . . . . . Management of the
Portfolio; The Mentor
Funds; How to buy
shares; Distributions
and taxes; General
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . Management of the
Portfolio; How to buy
shares
8. Redemption or Repurchase . . . . . How to buy shares; How
to sell shares;
9. Pending Legal Proceedings . . . . . Not Applicable
<PAGE>
Part B
N-1A Item No. Location
10. Cover Page . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . Table of Contents
12. General Information and History . Cover Page; Introduction
13. Investment Objectives and
Policies . . . . . . . . . . . . Investment Restrictions
(Part I and Part II);
Certain Investment
Techniques (Part III)
14. Management of the Fund . . . . . . Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Advisors' Officers
15. Control Persons and Principal
Holders of Securities . . . . . Principal Holders of
Securities (Part III)
16. Investment Advisory and Other
Services . . . . . . . . . . . . Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Custodian
17. Brokerage Allocation . . . . . . . Brokerage Transactions
(Part III)
18. Capital Stock and Other
Securities . . . . . . . . . . . How to Buy Shares;
Distribution; Determining
Net Asset Value; Taxes;
Shareholder Liability
(Part III)
19. Purchase; Redemption and Pricing
of Securities Being Offered . . Brokerage Transactions;
Distribution;
Determining Net Asset
Value; Redemptions in
Kind (Part III)
20. Tax Status . . . . . . . . . . . . Investment Restrictions;
Taxes (Part III)
21. Underwriters . . . . . . . . . . . Distribution
22. Calculations of Performance Data . Performance Information;
Performance Comparisons
(Part III)
23. Financial Statements . . . . . . . Independent Accountants;
Financial Statements
(Part III)
<PAGE>
Part C
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of the Registration
Statement.
PROSPECTUS JANUARY 15, 1996
THE MENTOR FUNDS
The Mentor Funds, an open-end management investment company, is offering
shares of eight different investment portfolios by this Prospectus: Mentor
Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy Portfolio (an
asset allocation total return fund), Mentor Income and Growth Portfolio, Mentor
Perpetual Global Portfolio (a global growth fund), Mentor Quality Income
Portfolio, Mentor Municipal Income Portfolio, and Mentor Short-Duration Income
Portfolio. CERTAIN OF THE PORTFOLIOS MAY USE "LEVERAGE" -- THAT IS, THEY MAY
BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL
RISKS.
The Mentor Funds provides investors an opportunity to design their own
investment programs by investing in a variety of Portfolios offering a wide
array of investment strategies. Each Portfolio pursues its investment objectives
through the investment policies described in this Prospectus. This Prospectus
sets forth concisely the information about The Mentor Funds that a prospective
investor should know before investing. Please read this Prospectus carefully and
retain it for future reference. You can find more detailed information in the
January 15, 1996 Statement of Additional Information, as amended from time to
time. For a free copy of the Statement or for other information, please call
1-800-382-0016. The Statement has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus by reference. The address of
The Mentor Funds is P.O. Box 1357, Richmond, Virginia 23286-0109.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
Expenses Summary................................... 3
Financial Highlights............................... 6
Investment Objectives and Policies................. 11
Valuing the Portfolios' Shares..................... 25
Sales Arrangements................................. 25
Distribution Plans (Class B Shares)................ 29
How To Sell Shares................................. 30
How To Exchange Shares............................. 31
Distributions and Taxes............................ 31
Management......................................... 32
General............................................ 35
Performance Information............................ 36
APPENDIX........................................... 37
<PAGE>
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The following tables summarize your maximum transaction costs from
investing in each of the Portfolios and expenses each Portfolio expects to incur
in the current fiscal year. The Examples show the cumulative expenses
attributable to a hypothetical $1,000 investment in each of the Portfolios over
specified periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)(1)
Mentor Growth Portfolio...................................................................... 5.75% None
Mentor Capital Growth Portfolio.............................................................. 5.75% None
Mentor Strategy Portfolio.................................................................... 5.75% None
Mentor Income and Growth Portfolio........................................................... 5.75% None
Mentor Perpetual Global Portfolio............................................................ 5.75% None
Mentor Quality Income Portfolio.............................................................. 4.75% None
Mentor Municipal Income Portfolio............................................................ 4.75% None
Mentor Short-Duration Income Portfolio....................................................... 1.00% None
Maximum Sales Charge Imposed on Reinvested Dividends........................................... None None
Exchange Fee................................................................................... None None
Contingent Deferred Sales Charge (as a percentage of
the lower of the original purchase price or redemption proceeds of shares redeemed)
Class A Shares (all Portfolios):.......................................................... None(2)
</TABLE>
<TABLE>
<S> <C>
Class B Shares(3):
Growth, Capital Growth, Strategy, Income and 4.0% in the first year, declining to 1.0% in the fifth
Growth, and Global Portfolios year, and eliminated thereafter
Quality Income, Municipal Income, and 4.0% in the first year, declining to 1.0% in the sixth
Short-Duration Income Portfolios year, and eliminated thereafter
</TABLE>
(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1 million that are redeemed within one year of purchase.
(3) The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See
"How to Buy Shares -- Class B Shares."
(4) A CDSC of 1.00% is assessed on Class B shares that are purchased pursuant to
certain asset-allocation plans and that are not otherwise subject to the
CDSC shown in the table, if those shares are redeemed within one year of
purchase. Contact Mentor Distributors, Inc. for more information.
2
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.40%(2)
12b-1 Fees.......... None None None None None None None None
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.21%
Total Portfolio
Operating
Expenses(1)..... 1.32% 1.45% 1.47% 1.37% 2.00% 1.05% 1.15% 0.86%
</TABLE>
<TABLE>
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.40%(2)
12b-1 Fees.......... 0.75% 0.75% 0.75% 0.75% 0.75% 0.50% 0.50% 0.30%
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.21%
Total Portfolio
Operating
Expenses(1)..... 2.07% 2.20% 2.22% 2.12% 2.75% 1.55% 1.65% 1.16%
</TABLE>
(1) The amounts shown in the tables reflect the expenses each of the
Portfolios expects to incur during the current fiscal year. If
Total Portfolio Operating Expenses of any Portfolio materially
exceed the amounts shown above, Mentor Investment Group, Inc.
intends to bear the Portfolio's expenses to that extent. Management
Fees for the Global Portfolio were reduced during fiscal 1995 by an
expense limitation to 1.05% of the Fund's average net assets. For
their last fiscal year, the Portfolios' Total Portfolio Operating
Expenses were as follows, without giving effect to any expense
limitations in effect during the year: Growth Portfolio, Class
A -- 1.36%, Class B -- 2.08%; Capital Growth Portfolio, Class
A -- 1.87%, Class B -- 2.56%; Strategy Portfolio, Class A -- 1.65%,
Class B -- 2.08%; Income and Growth Portfolio, Class A -- 1.69%,
Class B -- 2.43%; Global Portfolio, Class A -- 2.11%, Class
B -- 2.79%; Quality Income Portfolio, Class A -- 1.36%, Class
B -- 1.79%; Municipal Income Portfolio, Class Class A -- 1.43%,
Class B -- 1.92%; Short-Duration Income Portfolio, Class
A -- 1.00%, Class B -- 1.70%. For their last fiscal year, the
Portfolios' Other Expenses were as follows, without giving effect
to any expense limitations in effect during the year: Growth
Portfolio, Class A -- 0.41%, Class B -- 0.38%; Capital Growth
portfolio, Class A -- 0.82%, Class B -- 0.76%; Strategy Portfolio,
Class A -- 0.55%, Class B -- 0.23%; Income and Growth Portfolio,
Class A -- 0.69%, Class B -- 0.68%; Global Portfolio, Class
A -- 0.81%, Class B -- 0.74%; Quality Income Portfolio, Class
A -- 0.55%, Class B -- 0.49%; Municipal Income Portfolio, Class
A -- 0.58%, Class B -- 0.57%; Short-Duration Income Portfolio,
Class A -- 0.46%, Class B -- 0.65%. Other Expenses for the Short-
Duration Income Portfolio reflect the expense limitation described
above; in the absence of the limitation, the Portfolio's
Other Expenses would be 0.56% for both its Class A and Class B
shares, and its Total Portfolio Operating Expenses (without
reflecting the waiver of the Management Fees described below)
would be 1.31% and 1.61% for its Class A and Class B shares,
respectively.
(2) In order to limit the Portfolios' operating expenses, the
investment advisers of each of the Quality Income and
Short-Duration Income Portfolios have agreed to limit their
compensation until September 30, 1996; in the absence of such
limitations, these Portfolios' Management Fees would be 0.60% and
0.50%, respectively, as would have been the case if no expense
limitations had been in effect during the last fiscal year.
3
<PAGE>
The tables are provided to help you understand the expenses of
investing in each of the Portfolios and your share of the operating
expenses of each of the Portfolios. In the case of Class A shares for the
Growth, Strategy, and Short-Duration Income Portfolios, "Other expenses"
are estimated based on amounts for the 1995 fiscal period.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming
5% annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $21 $ 97 $65 $126 $111 $207 $240
Capital Growth Portfolio....... 71 22 101 69 132 118 221 253
Strategy Portfolio............. 72 23 101 69 133 119 223 255
Income and Growth Portfolio.... 71 22 98 66 128 114 213 245
Global Portfolio............... 77 28 117 85 159 145 277 308
Quality Income Portfolio....... 58 16 79 49 103 84 170 185
Municipal Income Portfolio..... 59 17 82 52 108 90 181 195
Short-Duration Income
Portfolio.................... 19 12 37 37 57 64 115 141
</TABLE>
You would pay the following expenses on a $1,000 investment assuming
redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $61 $ 97 $95 $126 $121 $207 $240
Capital Growth Portfolio....... 71 62 101 99 132 128 221 253
Strategy Portfolio............. 72 63 101 99 133 129 223 255
Income and Growth Portfolio.... 71 62 98 96 128 124 213 245
Global Portfolio............... 77 68 117 115 159 155 277 308
Quality Income Portfolio....... 58 56 79 79 103 94 170 185
Municipal Income Portfolio..... 59 57 82 82 108 100 181 195
Short-Duration Income
Portfolio.................... 19 52 37 67 57 74 115 141
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
PERFORMANCE; ACTUAL EXPENSES MAY VARY.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following tables have been audited by KPMG Peat Marwick LLP,
The Mentor Funds' independent auditors. Their report dated November 10,
1995 on the Portfolios' financial statements for the period ended
September 30, 1995 is included in the Annual Report dated September 30,
1995, which is incorporated by reference. This table should be read in
conjunction with each Portfolio's financial statements and notes
thereto, which are included in the Statement of Additional Information
and which may be obtained free of charge from The Mentor Funds. The
Growth, Strategy, and Short-Duration Income Portfolios are successors
to the Mentor Growth, Strategy, and Short-Duration Income Funds, each
of which was a series of shares of beneficial interest of Mentor Series
Trust, a Massachusetts business trust. Each of those Funds offered only
one class of shares until June 1995. Until April 12, 1995, Mentor
Quality Income Portfolio was known as "Cambridge Government Income
Portfolio"; until that time, the Portfolio was required, among other
things, to invest at least 65% of its assets in U.S. Government
securities.
CLASS A SHARES
<TABLE>
<CAPTION>
MENTOR
INCOME
AND
MENTOR GROWTH MENTOR STRATEGY GROWTH
PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD YEAR YEAR YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.37 $ 14.88 $ 15.26 $ 14.21 $ 14.18 $ 13.45 $ 15.27
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.01) 0.02 0.09 0.14 0.08 -- 0.40
Net realized and
unrealized gain (loss)
on investments 2.72 2.91 (0.30) 1.02 0.03 1.79 2.14
Total from investment
operations 2.71 2.93 (0.21) 1.16 0.11 1.79 2.54
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.04) (0.11) (0.08) -- (0.40)
In excess of net
investment income -- -- -- -- -- -- (0.03)
Distributions from
capital gains -- (1.79) (0.13) -- -- -- (0.25)
Distributions in excess
of capital -- -- -- -- -- -- --
Total Distributions -- (1.79) (0.17) (0.11) (0.08) -- (0.68)
NET ASSET VALUE, END OF
PERIOD $ 16.08 $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 15.24 $ 17.13
Total Return 20.27% 20.18% (1.37%) 8.21% 0.78% 13.31% 17.24%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $20,368 $29,582 $21,181 $31,360 $ 20,864 $10,503 $19,888
Ratio of expenses to
average net assets 1.36%(a) 1.87% 1.70% 1.49% 1.14%(a) 1.65%(a) 1.69%
Ratio of expenses to
average net asset
excluding waiver 1.36%(a) 1.87% 1.70% 1.59% 1.43%(a) 1.65%(a) 1.69%
Ratio of net investment
income
(loss) to average net
assets (0.65%)(a) 0.27% 0.53% 0.96% 1.54%(a) (0.06%)(a) 2.53%
Portfolio turnover rate 70% 157% 149% 192% 61% 122% 62%
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL
GLOBAL PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/94 9/30/93*** 9/30/95 9/30/94****
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.88 $ 14.14 $ 14.23 $ 14.18
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.31 0.09 0.05 (0.01)
Net realized and
unrealized gain (loss)
on investments 0.64 0.73 1.60 0.06
Total from investment
operations 0.95 0.82 1.65 0.05
LESS DISTRIBUTIONS
Dividends from net
investment income (0.30) (0.08) -- --
In excess of net
investment income -- -- -- --
Distributions from
capital gains (0.26) -- -- --
Distributions in excess
of capital -- -- -- --
Total Distributions (0.56) (0.08) -- --
NET ASSET VALUE, END OF
PERIOD $ 15.27 $ 14.88 $ 15.88 $ 14.23
Total Return 6.54% 5.54% 11.60% 0.35%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 17,773 $ 9,849 $ 6,854 $ 8,882
Ratio of expenses to
average net assets 1.75% 1.56%(a) 2.06% 2.09%(a)
Ratio of expenses to
average net asset
excluding waiver 1.75% 1.94%(a) 2.11% 3.18%(a)
Ratio of net investment
income
(loss) to average net
assets 2.20% 2.35%(a) 0.26% (0.10%)(a)
Portfolio turnover rate 78% 13% 155% 2%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period from May 24, 1993 (commencement
of operations) to September 30, 1993.
**** Reflects operations for the period from March 29, 1994
(commencement of operations) to September 30, 1994.
(a) Annualized.
5
<PAGE>
<TABLE>
<CAPTION>
Class A Shares (continued) MENTOR
SHORT-DURATION
INCOME MENTOR MUNICIPAL
MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO INCOME PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.75 $ 14.04 $ 14.39 $ 14.30 $12.74 $ 14.42 $ 16.05
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.84 0.84 1.06 0.44 0.22 0.81 0.82
Net realized and
unrealized gain (loss)
on investments 0.61 (1.30) (0.31) 0.09 (0.03) 0.51 (1.54)
Total from investment
operations 1.45 (0.46) 0.75 0.53 0.19 1.32 (0.72)
LESS DISTRIBUTIONS
Dividends from net
investment income (0.85) (0.83) (1.06) (0.44) (0.22) (0.82) (0.81)
In excess of net
investment income (0.06) -- (0.04) -- (0.03) -- --
Distributions from
capital gains -- -- -- -- -- -- (0.10)
Distributions in excess
of capital -- -- -- -- -- -- --
Total Distributions (0.91) (0.83) (1.10) (0.44) (0.25) (0.82) (0.91)
NET ASSET VALUE, END OF
PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39 $12.68 $ 14.92 $ 14.42
Total Return 11.82% (3.39%) 5.41% 3.37% 1.51% 9.46% (4.83%)
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $24,472 $30,142 $47,780 $ 36,740 $1,002 $20,460 $25,056
Ratio of expenses to
average net assets 1.32% 1.38% 1.04% 0.36%(a) 0.71%(a) 1.43% 1.24%
Ratio of expenses to
average net asset
excluding waiver 1.36% 1.39% 1.22% 1.21%(a) 1.00%(a) 1.43% 1.33%
Ratio of net investment
income
(loss) to average net
assets 6.73% 6.33% 7.31% 8.00%(a) 4.10%(a) 5.56% 5.43%
Portfolio turnover rate 368% 455% 102% 9% 126% 43% 87%
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/93 9/30/92**
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.76 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.92 0.32
Net realized and
unrealized gain (loss)
on investments 1.32 0.47
Total from investment
operations 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net
investment income (0.92) (0.32)
In excess of net
investment income (0.03) --
Distributions from
capital gains -- --
Distributions in excess
of capital -- --
Total Distributions (0.95) (0.32)
NET ASSET VALUE, END OF
PERIOD $ 16.05 $ 14.76
Total Return 16.00% 5.34%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 29,245 $ 18,801
Ratio of expenses to
average net assets 0.71% 0.00%(a)
Ratio of expenses to
average net asset
excluding waiver 1.39% 1.26%(a)
Ratio of net investment
income
(loss) to average net
assets 5.92% 6.21%(a)
Portfolio turnover rate 88% 0%
</TABLE>
* For the period from June 16, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
(a) Annualized.
6
<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
PERIOD YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 $ 7.45
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.13) (0.15) (0.08) (0.06) (0.09) 0.02 0.13 0.01
Net realized and
unrealized gain (loss)
on investments 4.03 (0.47) 2.07 1.94 4.30 (1.10) 1.35 1.24
Total from investment
operations 3.90 (0.62) 1.99 1.88 4.21 (1.08) 1.48 1.25
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- -- -- -- (0.05) (0.12) (0.01)
</TABLE>
<TABLE>
<CAPTION>
NINE
MOS. YEAR PERIOD
ENDED ENDED 4/16/85** TO
12/31/87 3/31/87 3/31/86
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.91 $ 9.34 $ 6.67
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.01) (0.01) (0.03)
Net realized and
unrealized gain (loss)
on investments (2.32) 0.92 2.70
Total from investment
operations (2.33) 0.91 2.67
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- --
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributions in excess
of net investment
income -- -- -- -- -- -- -- --
Distributions from
capital gains -- (1.00) (1.02) (1.23) (0.42) (0.13) (0.27) (0.15)
Distributions in excess
of capital gains -- (0.01) -- -- -- -- -- --
Total Distributions -- (1.01) (1.02) (1.23) (0.42) (0.18) (0.39) (0.16)
NET ASSET VALUE, END OF
PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54
Total Return 32.10% (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33% 16.78%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $246,326 $190,126 $186,978 $136,053 $108,719 $ 83,540 $107,315 $ 96,425
Ratio of expenses to
average
net assets 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% 2.24% 2.19%
Ratio of expenses to
average net asset
excluding waiver 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% -- --
Ratio of net investment
income
(loss) to average net
assets (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36% 0.16%
Portfolio turnover rate 70% 77% 64% 50% 40% 50% 26% 31%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Distributions in excess
of net investment
income -- -- --
Distributions from
capital gains (0.13) (0.34) --
Distributions in excess
of capital gains -- -- --
Total Distributions (0.13) (0.34) --
NET ASSET VALUE, END OF
PERIOD $ 7.45 9.91 $ 9.34
Total Return (23.47%) 9.74% 41.77%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 92,763 $113,317 $ 63,767
Ratio of expenses to
average
net assets 2.18%(a) 2.16% 2.43%(a)
Ratio of expenses to
average net asset
excluding waiver -- -- --
Ratio of net investment
income
(loss) to average net
assets (0.19%)(a) (0.18%) (0.53%)(a)
Portfolio turnover rate 33% 34% 35%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
(a) Annualized.
7
<PAGE>
<TABLE>
<CAPTION>
MENTOR
Class B Shares (continued) INCOME
AND
GROWTH
MENTOR CAPITAL GROWTH PORTFOLIO MENTOR STRATEGY PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 12/31/94 12/31/93*** 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.80 $ 15.23 $ 14.22 $ 14.18 $ 12.24 $ 12.70 $ 12.50 $ 15.28
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.25 (0.04) 0.05 0.46 -- (0.06) -- 0.28
Net realized and
unrealized gain (loss)
on investments 2.53 (0.26) 1.02 0.04 2.97 (0.40) 0.20 2.14
Total from investment
operations 2.78 (0.30) 1.07 0.50 2.97 (0.46) 0.20 2.42
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.05) (0.46) -- -- -- (0.28)
In excess of net
investment income -- -- (0.01) -- -- -- -- (0.03)
Distributions from
capital gains (1.79) (0.13) -- -- -- -- -- (0.25)
Distributions in excess
of capital gains -- -- -- -- -- -- -- --
Total Distributions (1.79) (0.13) (0.06) (0.46) -- -- -- (0.56)
NET ASSET VALUE, END OF
PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 15.21 $ 12.24 $ 12.70 $ 17.14
Total Return 19.26% (2.00%) 7.52% 0.61% 24.26% (3.61%) 1.60% 16.32%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $57,648 $41,106 $57,030 $25,468 $224,643 $179,274 $ 122,177 $46,678
Ratio of expenses to
average
net assets 2.56% 2.46% 2.24% 1.86%(a) 2.08%(a) 2.19% 2.06%(a) 2.43%
Ratio of expenses to
average
net asset excluding
waiver 2.56% 2.46% 2.34% 2.16%(a) 2.08%(a) 2.19% 2.06%(a) 2.43%
Ratio of net investment
income
to average net assets (0.41%) (0.22%) 0.21% 0.83%(a) 0.25%(a) (0.54%) 0.08%(a) 1.78%
Portfolio turnover rate 157% 149% 192% 61% 122% 143% 0% 62%
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/94 9/30/93****
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.91 $ 14.14
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.21 0.05
Net realized and
unrealized gain (loss)
on investments 0.61 0.77
Total from investment
operations 0.82 0.82
LESS DISTRIBUTIONS
Dividends from net
investment income (0.19) (0.05)
In excess of net
investment income -- --
Distributions from
capital gains (0.26) --
Distributions in excess
of capital gains -- --
Total Distributions (0.45) (0.05)
NET ASSET VALUE, END OF
PERIOD $ 15.28 $ 14.91
Total Return 5.66% 5.54%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $43,219 $18,127
Ratio of expenses to
average
net assets 2.44% 2.31%(a)
Ratio of expenses to
average
net asset excluding
waiver 2.44% 2.69%(a)
Ratio of net investment
income
to average net assets 1.51% 1.60%(a)
Portfolio turnover rate 78% 13%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period of October 29, 1993
(commencement of operations) to December 31, 1993.
**** Reflects operations for the period from May 24, 1993 (commencement
of operations) to September 30, 1993.
(a) Annualized.
8
<PAGE>
<TABLE>
<CAPTION>
Class B Shares (continued) MENTOR
SHORT
DURATION
MENTOR PERPETUAL INCOME
GLOBAL PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94**** 9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95*
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.15 $ 14.18 $ 12.76 $ 14.06 $ 14.40 $ 14.30 $ 12.18
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.05) (0.04) 0.79 0.82 0.99 0.41 0.59
Net realized and
unrealized gain (loss)
on investments 1.57 0.01 0.61 (1.37) (0.31) 0.10 0.52
Total from investment
operations 1.52 (0.03) 1.40 (0.55) 0.68 0.51 1.11
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.79) (0.75) (0.99) (0.41) (0.59)
In excess of net
investment income -- -- (0.06) -- (0.03) -- (0.03)
Distributions from
capital gains -- -- -- -- -- -- --
Distributions in excess
of
capital gains -- -- -- -- -- -- --
Total Distributions -- -- (0.85) (0.75) (1.02) (0.41) (0.62)
NET ASSET VALUE, END OF
PERIOD $ 15.67 $ 14.15 $ 13.31 $ 12.76 $ 14.06 $ 14.40 $ 12.67
Total Return 10.74% (0.21%) 11.33% (3.97%) 4.86% 3.24% 9.22%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $12,667 $ 7,987 $62,155 $77,888 $127,346 $65,661 $ 19,871
Ratio of expenses to
average
net assets 2.72% 2.79%(a) 1.74% 1.88% 1.54% 0.83%(a) 1.20%(a)
Ratio of expenses to
average net asset
excluding waiver 2.79% 3.93%(a) 1.79% 1.90% 1.72% 1.67%(a) 1.70%(a)
Ratio of net investment
income
(loss) to average net
assets (0.40%) (0.82%) 6.24% 6.21% 6.81% 7.53%(a) 5.04%(a)
Portfolio turnover rate 155% 2% 368% 455% 102% 9% 126%
</TABLE>
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94*** 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.50 $ 14.43 $ 16.06 $ 14.78 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.41 0.74 0.74 0.82 0.29
Net realized and
unrealized gain (loss)
on investments (0.29) 0.52 (1.54) 1.32 0.49
Total from investment
operations 0.12 1.26 (0.80) 2.14 0.78
LESS DISTRIBUTIONS
Dividends from net
investment income (0.41) (0.74) (0.73) (0.82) (0.29)
In excess of net
investment income (0.03) -- -- (0.04) --
Distributions from
capital gains -- -- (0.10) -- --
Distributions in excess
of
capital gains -- -- -- --
Total Distributions (0.44) (0.74) (0.83) (0.86) (0.29)
NET ASSET VALUE, END OF
PERIOD $ 12.18 $ 14.95 $ 14.43 $ 16.06 $ 14.78
Total Return 0.95% 9.01% (5.34%) 15.27% 5.28%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $17,144 $39,493 $46,157 $50,976 $24,265
Ratio of expenses to
average
net assets 1.29%(a) 1.92% 1.74% 1.21 0.50%(a)
Ratio of expenses to
average net asset
excluding waiver 1.29%(a) 1.92% 1.86% 1.89% 1.76%(a)
Ratio of net investment
income
(loss) to average net
assets 4.90%(a) 5.07% 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 166% 43% 87% 88% 0%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period of April 29, 1994 (commencement
of operations) to December 31, 1993.
**** Reflects operations for the period from May 24, 1994 (commencement
of operations) to September 30, 1994.
(a) Annualized.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Mentor Funds is offering by this Prospectus shares of eight Portfolios
with differing investment objectives and policies. There can, of course, be
no assurance that any Portfolio will achieve its investment objective. The
differences in objectives and policies among the Portfolios can be expected to
affect the investment return of each Portfolio and the degree of market and
financial risk of an investment in each Portfolio. For a discussion of certain
investment practices in which the Portfolios may engage, and the risks they may
entail, see "Other Investment Practices" below. The investment objectives of the
Portfolios, other than those of the Strategy Portfolio and the Short-Duration
Income Portfolio, are fundamental policies and may not be changed without
shareholder approval. Except for the investment policies designated in this
Prospectus or the Statement of Additional Information as fundamental, the
investment policies described herein are not fundamental and may be changed by
approval of the Trustees without shareholder approval.
Any percentage limitation on a Portfolio's investments will apply only at
the time of investment; a Portfolio would not be considered to have violated any
such limitation, unless an excess or deficiency occurs or exists as a result of
an investment. In addition, a Portfolio will not necessarily dispose of a
security when its rating is reduced below any applicable minimum rating,
although the investment adviser or sub-adviser of the Portfolio will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Portfolio's investment objective.
MENTOR GROWTH PORTFOLIO
INVESTMENT ADVISER: CHARTER ASSET MANAGEMENT, INC. ("CHARTER")
The Growth Portfolio's investment objective is long-term capital growth.
Although the Portfolio may receive current income from dividends, interest, and
other sources, income is only an incidental consideration.
The Portfolio attempts to achieve long-term capital growth by investing in
a diversified portfolio of securities. Under normal circumstances at least 75%
of the Portfolio's assets will be invested in common stocks of companies
domiciled or located in the United States. Although the Portfolio may invest in
companies of any size, the Portfolio invests principally in common stocks of
small to mid-sized companies. The Portfolio invests in companies that, in the
opinion of Charter, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Charter is earnings growth which is above average
compared to the S&P 500 Index. Other important factors in selecting investments
include a strong balance sheet and product leadership in niche markets. Charter
believes that such investments may offer better than average potential for
long-term capital growth.
Small and mid-size companies may present greater opportunities for capital
growth than do larger companies because of high potential earnings growth, but
may also involve greater risk. They may have limited product lines, markets or
financial resources, or may depend on a limited management group. Their
securities may trade less frequently and in limited volume, and only in the
over-the-counter market or on a regional securities exchange. As a result, these
securities may change in value more than those of larger, more established
companies.
10
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC. ("COMMONWEALTH ADVISORS")
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety of
securities which Commonwealth Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed by
Commonwealth Advisors to have the potential for capital appreciation. The
Portfolio may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, convertible debentures and any other class or type
of security Commonwealth Advisors believes offers the potential for capital
appreciation. In selecting investments, Commonwealth Advisors will attempt to
identify securities it believes will provide capital appreciation over the
intermediate or long term due to change in the financial condition of issuers,
changes in financial conditions generally, or other factors. The Portfolio also
may invest in fixed-income securities, and cash or money market investments, for
temporary defensive purposes.
MENTOR STRATEGY PORTFOLIO
INVESTMENT ADVISER: WELLESLEY ADVISORS, INC. ("WELLESLEY")
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Wellesley actively
allocates the Portfolio's assets among the major asset categories of equity
securities, fixed-income securities, and money market instruments. The Portfolio
will normally invest some portion of its assets in each asset category, but may
invest without limit in any asset category. Total return consists of current
income (including dividends, interest, and, in the case of discounted
instruments, discount accruals) and capital appreciation (including realized and
unrealized capital gains and losses).
Wellesley believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of the
market as opposed to relying solely on just one market sector. For example,
Wellesley may at times believe that the equity market holds a higher potential
for total return than the debt market and that a relatively large portion of the
Portfolio's assets should be allocated to the equity market sector. The reverse
would be true at times when Wellesley believes that the potential for total
return in the bond market is greater than that in the equity market. Wellesley
might also allocate the Portfolio's investments to short-term bonds and money
market instruments in order to earn current return and to reduce the potential
adverse effect of declines in the bond and equity markets. After determining the
portions of the Portfolio's assets to be invested in the various market sectors,
Wellesley attempts to select the securities of companies within those sectors
offering potential for above-average total return. The achievement of the
Portfolio's investment objective depends upon, among other things, the ability
of Wellesley to assess correctly the effects of economic and market trends on
different sectors of the market. The Portfolio's investments may include both
securities of U.S. issuers and securities traded principally in foreign markets.
The Portfolio may invest without limit in foreign securities. See "Other
Investment Practices -- Foreign Securities" for a description of risks
associated with investments in such securities.
Within the equity sector, Wellesley actively allocates the Portfolio's
assets to those industries and issuers it expects to benefit from major market
trends or which it otherwise believes offer the potential for above-average
total return. The Portfolio may purchase equity securities (including
convertible debt obligations and convertible preferred stock) sold on the New
York, American, and other U.S. or foreign stock exchanges and in the over-the-
counter market.
11
<PAGE>
Within the fixed-income sector, Wellesley seeks to maximize the return on
its investments by adjusting maturities and coupon rates as well as by
exploiting yield differentials among different types of investment-grade
securities. The Portfolio may invest in debt securities of any maturity,
preferred stocks, and other fixed-income instruments, including, for example,
U.S. Government securities and corporate debt securities (including zero-coupon
securities). A substantial portion of the Portfolio's investments in the
fixed-income sector may be in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and certain other stripped
mortgage-backed securities, which have certain special risks. See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" for a description of
these risks. The Portfolio will only invest in debt securities which are rated
at the time of purchase Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's ("S&P") or, if unrated, are
deemed by Wellesley to be of comparable quality. While bonds rated Baa or BBB
are considered to be of investment grade, they have speculative characteristics
as well. A description of securities ratings is contained in the Appendix to
this Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P.
MENTOR INCOME AND GROWTH PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY ("WELLINGTON")
The investment objective of the Income and Growth Portfolio is to provide a
conservative combination of income and growth of capital consistent with capital
protection. The Portfolio invests in a diversified portfolio of equity
securities of companies Wellington believes exhibit sound fundamental
characteristics and in investment-grade fixed-income securities and U.S.
Government securities, as described below.
Wellington will manage the allocation of assets among asset classes based
upon its analysis of economic conditions, relative fundamental values and the
attractiveness of each asset class, and expected future returns of each asset
class. The Portfolio will normally have some portion of its assets invested in
each asset class at all times but may invest without limit in any asset class.
The Portfolio may invest in a wide variety of equity securities, such as
common stocks and preferred stocks, as well as debt securities convertible into
equity securities or that are accompanied by warrants or other equity
securities. In selecting equity investments, Wellington will attempt to identify
securities of out-of-favor companies which Wellington believes are undervalued.
Within the equity asset class, the Portfolio seeks to achieve long-term
appreciation of capital and a moderate income level by selecting investments in
out-of-favor companies with sound fundamentals. These decisions are based
primarily on Wellington's fundamental research and security valuations.
Within the fixed-income asset class, Wellington seeks to invest in a
portfolio that provides as high a level of current income as is consistent with
prudent investment risk. The Portfolio may invest in debt securities of any
maturity, preferred stocks, and other fixed-income instruments, including, for
example, U.S. Government securities and corporate debt securities (including
zero-coupon securities). The Portfolio will only invest in debt securities which
are rated at the time of purchase Baa or better by Moody's or BBB or better by
S&P or which, if
12
<PAGE>
unrated, are deemed by Wellington to be of comparable quality. While
fixed-income securities rated Baa or BBB are considered to be of investment
grade, they have speculative characteristics as well. A description of
securities ratings is contained in the Appendix to this Prospectus.
The Portfolio may invest up to 10% of its assets in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests in real estate. The Portfolio will limit its investment in
real estate investment trusts to 10% of its total assets. Such investments may
involve many of the risks of direct investment in real estate, such as declines
in the value of real estate, risks related to general and local economic
conditions, and adverse changes in interest rates. Other risks associated with
real estate investment trusts include lack of diversification, borrower default,
and voluntary liquidation.
MENTOR PERPETUAL GLOBAL PORTFOLIO
INVESTMENT ADVISER: MENTOR PERPETUAL ADVISORS, L.L.C. ("MENTOR PERPETUAL")
The investment objective of the Global Portfolio is to seek long-term
growth of capital through a diversified portfolio of marketable securities made
up primarily of equity securities, including common stocks, preferred stocks,
securities convertible into common stocks, and warrants. The Portfolio may also
invest in debt securities and other fixed-income securities of private or
governmental issuers (including zero-coupon securities) which Mentor Perpetual
believes to be consistent with the Portfolio's objective.
It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in securities
of U.S. issuers. To the extent that the Portfolio invests a substantial portion
of its assets in securities of issuers located in a single country, it will be
more susceptible to adverse economic, business, political, or regulatory
conditions in or affecting that country than if it were to invest in a
geographically more diverse portfolio. The Portfolio may invest in closed-end
investment companies holding foreign securities. The Portfolio also may hold a
portion of its assets in cash or cash equivalents, including foreign and
domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example, the
securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a substantial
portion of its assets in securities traded in the over-the-counter markets and
not on any exchange, which may affect the liquidity of the investment and expose
the Portfolio to the credit risk of its counterparties in trading those
investments. See "Other Investment Practices -- Foreign securities."
Mentor Perpetual may seek investment opportunities in securities of large,
widely traded companies as well as securities of small, less well known
companies. Small companies may present greater opportunities for investment
return, but may also involve greater risk. They may have limited product lines,
markets, or financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in
13
<PAGE>
limited volume. As a result the prices of these securities may fluctuate more
than prices of securities of larger, more established companies.
Except as described below, debt and fixed-income securities in which the
Portfolio may invest will be investmentgrade securities or those of equivalent
quality as determined by Perpetual. The Portfolio may invest up to 5% of its
total assets in debt securities rated Baa or below by Moody's, or BBB or below
by S&P, or deemed by Mentor Perpetual to be of comparable quality, and may
invest in securities rated as low as C by Moody's or D by S&P. Securities rated
Baa or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. Securities rated below investment grade are commonly
referred to as "junk bonds" and are predominately speculative. Securities rated
D may be in default with respect to payment of principal or interest. A
description of securities ratings is contained in the Appendix to this
Prospectus.
MENTOR QUALITY INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
The Quality Income Portfolio's investment objective is to seek high current
income consistent with what Commonwealth Advisors believes to be prudent risk.
The Portfolio may invest in debt securities, including both U.S. Government and
corporate obligations, and in other income-producing securities, including
preferred stocks and dividend-paying common stocks. The Portfolio may also hold
a portion of its assets in cash or money market instruments.
Corporate debt obligations and preferred stocks in which the Portfolio may
invest will be of investment grade. A security will be deemed to be of
"investment grade" if, at the time of investment by the Portfolio, it is rated
at least Baa3 by Moody's or BBB- by S&P or at a comparable rating by another
nationally recognized rating organization, or, if unrated, determined by
Commonwealth Advisors to be of comparable quality. Securities rated Baa or BBB
lack outstanding investment characteristics and have speculative characteristics
and are subject to greater credit and market risks than higher-rated securities.
The Portfolio will normally invest at least 80% of its assets in U.S. Government
securities and in other securities rated at least A by Moody's or S&P, or at a
comparable rating by another nationally recognized rating organization, or, if
unrated, determined by Commonwealth Advisors to be of comparable quality. A
description of securities ratings is contained in the Appendix to this
Prospectus.
Commonwealth Advisors may take full advantage of the entire range of
maturities of the securities in which the Portfolio may invest and may adjust
the average maturity of the Portfolio's securities from time to time, depending
on its assessment of relative yields on securities of different maturities and
expectations of future changes in interest rates. The Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs and certain stripped mortgage-backed
securities (including certain "residual" interests), which involve certain
risks. See "Other Investment Practices -- Mortgage-backed securities; other
asset-backed securities" and " -- Other mortgage-related securities" below. The
Portfolio may also engage in a variety of interest rate transactions, including
swaps, caps, floors and collars. See "Other Investment Practices -- Interest
rate transactions" below for a description of risks associated with these
transactions.
14
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: VAN KAMPEN/AMERICAN CAPITAL MANAGEMENT, INC. ("VAN KAMPEN")
The investment objective of the Municipal Income Portfolio is to provide
investors with a high level of current income exempt from federal regular income
tax, consistent with preservation of capital. Under normal market conditions,
the Portfolio will invest at least 80% of its total assets in tax-exempt
municipal securities rated investment grade, or deemed by Van Kampen to be of
comparable quality. The Portfolio may invest a substantial portion of its assets
in municipal securities that pay interest that is a tax preference item under
the federal alternative minimum tax. The Portfolio may not be a suitable
investment for investors who are already subject to federal alternative minimum
tax or who would become subject to federal alternative minimum tax as a result
of an investment in the Portfolio.
Tax-exempt municipal securities are debt obligations issued by or on behalf
of the governments of states (including the District of Columbia) and United
States territories or possessions, and their political subdivisions, agencies,
and instrumentalities, and certain interstate agencies, the interest on which,
in the opinion of bond counsel, is exempt from federal income tax. The Portfolio
may also invest up to 10% of its assets in tax-exempt money market funds, which
will be considered tax-exempt municipal securities for this purpose.
Up to 20% of the Portfolio's total assets may be invested in tax-exempt
municipal securities rated between BB and B-(inclusive) by S&P or between Ba and
B3 (inclusive) by Moody's (or equivalently rated short-term obligations) and
unrated tax-exempt securities that Van Kampen considers to be of comparable
quality. These securities are below investment grade and are considered to be of
poor standing and predominantly speculative. Assurance of interest and principal
payments or of maintenance of other terms of the securities' contract over any
long period of time may be small. The Portfolio will not invest in securities
rated below B- by S&P or below B3 by Moody's at the time of purchase. The
Portfolio may hold a portion of its assets in cash or money market instruments.
The two principal classifications of municipal securities are "general
obligation" and "special revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit, and taxing power for the payment
of principal and interest. Special revenue bonds are usually payable only from
the revenues derived from a particular facility or class of facilities or from
the proceeds of a special excise tax or other specific revenue source and
generally are not payable from the unrestricted revenues of an issuer.
Industrial development bonds and private activity bonds are usually special
revenue bonds, the credit quality of which is normally directly related to the
credit standing of the private user involved.
There are, in addition, a variety of hybrid and special types of municipal
securities, including variable rate securities, municipal notes, and municipal
leases. Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation in values of
the instruments. Municipal notes include tax, revenue, and bond anticipation
notes of short maturities, generally less than three years, which are issued to
obtain temporary funds for various public purposes. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered illiquid. They may
take the form of a lease, an installment purchase contract, a conditional sales
contract, or a participation certificate on any of the above. No more than 5% of
the net assets of the Portfolio will be invested in municipal leases. A more
detailed description of the types of municipal securities in which the Portfolio
may invest is included in the Statement of Additional Information.
RISKS OF LOWER-GRADE SECURITIES. Investors should carefully consider the
risks of owning shares of a mutual fund which invests in lower-grade securities,
commonly known as "junk bonds", before making an investment in
15
<PAGE>
the Portfolio. The lower ratings of certain securities held by the Portfolio
reflect a greater possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. Lower-grade securities
generally involve greater credit risk than higher-grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates, and individual issuer developments. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values the Portfolio had placed on such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the fair value of such securities and may not be
able to dispose of such securities in a timely manner at a price which reflects
the value of such securities. The rating assigned to a security by Moody's or
S&P does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security. For more information
about the rating services' descriptions of lower-rated municipal securities, see
the Appendix to this Prospectus.
Van Kampen seeks to minimize the risks involved in investing in lower-grade
securities through diversification and careful investment analysis. However, the
amount of information about the financial condition of an issuer of lower-grade
municipal securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. When the Portfolio invests in
tax exempt securities in the lower rating categories, the achievement of the
Portfolio's goals is more dependent on Van Kampen's ability than would be the
case if the Portfolio were investing in securities in the higher rating
categories. To the extent that there is no established retail market for some of
the lower-grade securities in which the Portfolio may invest, trading in such
securities may be relatively inactive. During periods of reduced market
liquidity and in the absence of readily available market quotations for
lower-grade municipal securities held by the Portfolio, the valuation of the
Portfolio's securities becomes more difficult and the use of judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established market exists as compared with the effects on securities for which
such a market does exist. Further, the Portfolio may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established market does exist.
CONCENTRATION. The Portfolio generally will not invest more than 25% of its
total assets in any one industry. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Portfolio may
invest more than 25% of its assets in a broader segment of the municipal
securities market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport revenue
obligations, if Van Kampen determines that the yields available from obligations
in a particular segment of the market justify the additional risks associated
with such concentration. Although such obligations could be supported by the
credit of governmental users, or by the credit of nongovernmental users engaged
in a number of industries, economic, business, political, and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may have
a general adverse effect on all municipal securities in such a market segment.
The Portfolio reserves the right to invest more than 25% of its assets in
industrial development or private activity bonds or in issuers located in any
individual state, although Van Kampen has no present intention to invest more
than 25% of the Portfolio's assets in issuers located in the same state. If the
Portfolio were to invest more than 25% of its assets in issuers located in
16
<PAGE>
one state, it would be more susceptible to adverse economic, business, or
regulatory conditions in or affecting that state than if it were to invest in a
geographically more diverse portfolio.
MENTOR SHORT-DURATION INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH INVESTMENT COUNSEL, INC. ("COMMONWEALTH
INVESTMENT COUNSEL")
The Short-Duration Income Portfolio's investment objective is to seek
current income. As a secondary objective, the Portfolio seeks preservation of
capital, to the extent consistent with its objective of current income. The
Portfolio will normally invest at least 65% of its assets in debt securities
with a "duration" of three years or less. The Portfolio may invest in U.S.
Government securities and debt obligations of private issuers and in preferred
stocks and dividend-paying common stocks, and may hold a portion of its assets
in cash or money market instruments.
The Portfolio may at times invest a substantial portion of its assets in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs and certain other stripped
mortgage-backed securities (including certain "residual" interests). See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" below for a description
of these securities and risks they may entail. The Portfolio may also invest a
substantial portion of its assets in securities representing secured or
unsecured interests in other types of assets, such as automobile finance or
credit card receivables.
Traditionally, a debt security's "term to maturity" has been used to
evaluate the sensitivity of the security's price to changes in interest rates
(the security's interest-rate "volatility"). However, a security's term to
maturity measures only the period of time until the last payment of principal or
interest on the security, and does not take into account the timing of the
various payments of principal or interest to be made prior to the instrument's
maturity. By contrast, "duration" is a measure of the full stream of payments to
be received on a debt instrument, including both interest and principal
payments, based on their present values. Duration measures the periods of time
between the present time and the time when the various interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by their present values.
There are some situations where even the standard duration calculation does
not properly reflect the interest-rate volatility of a security. For example,
floating and variable rate securities often have final maturities of ten years
or more; however, their interest-rate volatility is determined based principally
on the period of time until their interest rates are reset and on the terms on
which they may be reset. Another example where a security's interest-rate
volatility is not properly measured by its duration is the case of
mortgage-related securities. The stated final maturity of such securities may be
up to 30 years, but the actual cash flow on the securities will be determined by
the anticipated prepayment rates on the underlying mortgage loans. Therefore,
the duration of such a security can change if anticipated prepayment rates
change. In these and other similar situations, Commonwealth Investment Counsel
will estimate a security's duration using sophisticated analytical techniques
that take into account such factors as the expected prepayment rate on the
security and how the prepayment rate might change under various market
conditions, although there can be no assurance that any such estimation will
accurately predict actual prepayment rates or their effect on the volatility or
value of a security.
The Portfolio will invest in investment grade debt securities and preferred
stocks and, under normal market conditions, the Portfolio will seek to maintain
a portfolio of securities with a dollar-weighted average rating of A or better.
A security will be considered to be of "investment grade" if, at the time of
investment by the Portfolio, it is rated at least Baa3 by Moody's or BBB- by S&P
or the equivalent by another nationally recognized rating organization or, if
unrated, determined by Commonwealth Investment Counsel to be of comparable
quality.
17
<PAGE>
Securities rated Baa or BBB lack outstanding investment characteristics and have
speculative characteristics and are subject to greater credit and market risks
than higher-rated securities. A description of securities ratings is contained
in the Appendix to this Prospectus.
The Portfolio may also engage in a variety of interest rate transactions,
including swaps, caps, floors, and collars. See "Other Investment
Practices -- Interest rate transactions" below for a description of risks
associated with these transactions.
OTHER INVESTMENT PRACTICES
Each of the Portfolios (except as noted below) may engage in the other
investment practices described below. See the Statement of Additional
Information for a more detailed description of these practices and certain risks
they may involve.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. Each of the
Strategy, Short-Duration Income, Quality Income, and Income and Growth
Portfolios may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and, in the
case of the Quality Income and Short-Duration Income Portfolios, "residual"
interests therein (described more fully below). Interest and principal payments
on the mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed securities. Mortgage-backed securities currently
offer yields higher than those available from many other types of fixed-income
securities but because of their prepayment aspects, their price volatility and
yield characteristics will change based on changes in prepayment rates. As a
result, mortgage-backed securities are less effective than other securities as a
means of "locking in" long-term interest rates. Generally, prepayment rates
increase if interest rates fall and decrease if interest rates rise. For many
types of mortgage-backed securities, this can result in unfavorable changes in
price and yield characteristics in response to changes in interest rates and
other market conditions. For example, as a result of their prepayment aspects,
mortgage-backed securities have less potential for capital appreciation during
periods of declining interest rates than other fixed-income securities of
comparable maturities, although such obligations may have a comparable risk of
decline in market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Each of the Strategy, Short-Duration Income, and Quality Income Portfolios
may invest in stripped mortgage-backed securities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
portions of the interest and principal distributions on a pool of mortgage
assets. A Portfolio may invest in both the interest-only -- or "IO" -- class
and the principal-only -- or "PO" -- class. The yield to maturity and price of
an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's net
asset value. This would typically be the case in an environment of falling
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may under some circumstances
fail to fully recoup its initial investment in these securities. Conversely, POs
tend to
18
<PAGE>
increase in value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated. The secondary market for stripped
mortgage-backed securities may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting a Portfolio's ability to
buy or sell those securities at any particular time.
Certain mortgage-backed securities held by the Portfolios may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by a Portfolio during a time of declining interest rates,
the Portfolio may not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
Each of the Quality Income, Short-Duration Income, and Strategy Portfolios
may invest in securities representing interests in other types of financial
assets, such as automobile-finance receivables or credit-card receivables. Such
securities may or may not be secured by the receivables themselves or may be
unsecured obligations of their issuers. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying assets may be
limited. For example, the laws of certain states may prevent or restrict
repossession of collateral from a debtor.
The Quality Income and Short-Duration Income Portfolios may also invest in
other types of mortgage-related securities, including any securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans or real property, including collateralized mortgage
obligation "residual" interests. "Residual" interests represent the right to any
excess cash flow remaining after all other payments are made among the various
tranches of interests issued by structured mortgage-backed vehicles. The values
of such interests are extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgages. In the event of a significant
change in interest rates or other market conditions, the value of an investment
by the Portfolio in such interests could be substantially reduced and the
Portfolio may be unable to dispose of the interests at prices approximating the
values the Portfolio had previously assigned to them or to recoup its initial
investment in the interests. The Portfolios may invest in new types of
mortgage-related securities that may be developed and marketed from time to
time. If any of the Portfolios were to invest in such newly developed
securities, shareholders would, where appropriate, be notified and this
Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolios may
invest in a wide variety of such securities, including mortgage-backed and other
asset-backed securities that will pay principal or interest only under certain
circumstances, or in amounts that may increase or decrease substantially
depending on changes in interest rates or other market factors. Such securities
may experience extreme price volatility in response to changes in interest rates
or other market factors; this may be especially true in the case of securities
where the amounts of principal or interest paid, or the timing of such payments,
varies widely depending on prevailing interest rates.
A Portfolio's investment adviser or sub-adviser may not be able to obtain
current market quotations for certain mortgage-backed or asset-backed securities
at all times, or to obtain market quotations believed by it to reflect the
values of such securities accurately. In such cases, a Portfolio's investment
adviser may be required to estimate the value of such a security using
quotations provided by pricing services or securities dealers making a market in
such securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which a Portfolio may invest may be highly illiquid, and a Portfolio may not
be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, a Portfolio's investment adviser or sub-adviser will be
required to estimate the extent to which the values of the securities are
19
<PAGE>
likely to change in response to changes in interest rates or other market
conditions, and the rate at which prepayments on the underlying mortgages or
other assets are likely to occur under different scenarios. There can be no
assurance that a Portfolio's investment adviser or sub-adviser will be able to
predict the amount of principal or interest to be paid on any security under
different interest rate or market conditions or that its predictions will be
accurate, nor can there be any assurance that a Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
ZERO-COUPON BONDS. Each of the Global, Income and Growth, Municipal Income,
Quality Income, Short-Duration Income, and Strategy Portfolios may at times
invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security. Because zero-coupon bonds do
not pay current interest, their value is subject to greater fluctuation in
response to changes in market interest rates than bonds that pay interest
currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds do
not pay current interest in cash, a Portfolio is nonetheless required for
federal income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolios may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although a Portfolio generally amortizes the amount of any
such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, a Portfolio may recognize a
capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. Each of the Portfolios may buy and sell put and call
options on securities it owns or plans to purchase to hedge against changes in
net asset value or to realize a greater current return. In addition, through the
purchase and sale of futures contracts and related options, each of the
Portfolios may at times seek to hedge against fluctuations in net asset value.
In addition, to the extent consistent with applicable law, the Portfolios may
buy and sell futures contracts and related options to increase investment
return. The Strategy Portfolio may also buy and sell options and futures
contracts (including index options and futures contracts) to implement changes
in its asset allocations among various market sectors, pending the sale of its
existing investments and reinvestments in new securities.
INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index
futures contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
contract is a contract to buy or sell units of a particular bond or stock index
at an agreed price on a specified future date. Depending on the change in value
of the index between the time when a Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolios may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. OPTIONS AND FUTURES
TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN LOSSES. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by a Portfolio that are the subject of a hedge.
The successful use by a Portfolio of the strategies described above further
depends on the ability of its investment adviser or sub-adviser to forecast
market movements correctly.
20
<PAGE>
Other risks arise from a Portfolio's potential inability to close out futures or
options positions. Although a Portfolio will enter into options or futures
transactions only if its investment adviser or sub-adviser believes that a
liquid secondary market exists for such option or futures contract, there can be
no assurance that a Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Transactions in options and futures
contracts involve brokerage costs and may require a Portfolio to segregate
assets to cover its outstanding positions. For more information, see the
Statement of Additional Information. Federal tax considerations may also limit a
Portfolio's ability to engage in options and futures transactions.
Each Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and sell
options in transactions in the over-the-counter markets. A Portfolio's ability
to terminate options in the over-the-counter markets may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of its investment adviser or
sub-adviser, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
LEVERAGE. The Short-Duration Income Portfolio may borrow money to invest in
additional securities to seek current income. This technique, known as
"leverage," increases the Portfolio's market exposure and risk. When the
Portfolio has borrowed money for leverage and its investments increase or
decrease in value, its net asset value will normally increase or decrease more
than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described below) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
SECURITIES LOANS, REPURCHASE AGREEMENTS, FORWARD COMMITMENTS, AND REVERSE
REPURCHASE AGREEMENTS. Each Portfolio, other than the Municipal Income
Portfolio, may lend portfolio securities and may enter into repurchase
agreements with banks, broker/dealers, and other recognized financial
institutions. Each of the Strategy and Short-Duration Income Portfolios may
enter into each type of transaction on up to 25% of its assets, and each of the
Growth, Capital Growth, Global, Income and Growth, and Quality Income Portfolios
may enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk to
a Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral. Each
Portfolio, other than the Growth and Strategy Portfolios, may enter into
"reverse" repurchase agreements. Each of the Capital Growth, Quality Income,
Income and Growth, and Global Portfolios may do so with respect to up to
one-third of its assets, and the Municipal Income Portfolio may do so with
respect to up to 5% of its assets. "Reverse" repurchase agreements generally
involve the sale by a Portfolio of securities held by it and an agreement to
repurchase the securities at an agreed-upon price, date, and interest payment.
Each Portfolio also may enter into forward commitments, in which a Portfolio
buys securities for future delivery. Reverse repurchase agreements and forward
commitments may increase overall investment exposure and may result in losses.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, each Portfolio, other than the Growth, Strategy, and Municipal
Income Portfolios, may engage in dollar roll transactions with
21
<PAGE>
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar roll transaction, a Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon price.
The mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. Dollar-roll transactions may
increase overall investment exposure and may result in losses.
FOREIGN SECURITIES. Each Portfolio other than the Growth and Municipal
Income Portfolios may invest in securities principally traded in foreign
markets. The Capital Growth and Income and Growth Portfolios will limit such
investments to 15% and 10%, respectively, of their total assets. Since foreign
securities are normally denominated and traded in foreign currencies, the values
of a Portfolio's assets may be affected favorably or unfavorably by changes in
currency exchange rates and by exchange control regulations. There may be less
information publicly available about a foreign company than about a U.S.
company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of a Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of a Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. The laws of some foreign countries may limit a
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. A
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments as described more fully below.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing nations,
which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in
foreign securities may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. A
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale of portfolio securities ("transaction hedging") and
to protect against changes in the value of specific portfolio positions
("position hedging").
A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized
22
<PAGE>
exchange-traded contracts and have margin requirements. For transaction hedging
purposes, a Portfolio may also purchase and sell call and put options on foreign
currency futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
a Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of its
portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of the portfolio, the Global, Quality Income, and Short-Duration
Income Portfolios may enter into interest rate swaps and other interest rate
transactions, such as interest rate caps, floors, and collars. Interest rate
swaps involve the exchange by a Portfolio with another party of different types
of interest-rate streams (E.G., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal). The purchase of
an interest rate cap entitles the purchaser to receive payments on a notional
principal amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values. Each Portfolio intends to use these interest rate transactions
as a hedge and not as a speculative investment. A Portfolio's ability to engage
in certain interest rate transactions may be limited by tax considerations. The
use of interest rate swaps and other interest rate transactions is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If a
Portfolio's investment adviser or sub-adviser is incorrect in its forecasts of
market values, interest rates, or other applicable factors, the investment
performance of a Portfolio would be less favorable than it would have been if
this investment technique were not used.
INDEXED SECURITIES. The Global Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." As a result
of each Portfolio's investment policies, under certain market conditions its
portfolio turnover rate may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to a Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such transactions may result in
realization of taxable gains. The portfolio turnover rates for the ten most
recent fiscal years (or for the life of a Portfolio if shorter) are contained in
the section "Financial
23
<PAGE>
Highlights." The relatively high portfolio turnover rate for the Quality Income
Portfolio during fiscal 1994 was due in substantial part to the implementation
of the investment program of Pacific Investment Management Company, which
differed from the investment program of the Portfolio's previous sub-adviser.
VALUING THE PORTFOLIOS' SHARES
Each Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
are valued at their fair values. The net asset value for Class A shares will
generally differ from that of Class B shares due to the variance in daily net
income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five or six years,
depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B shares
provide an investor the benefit of putting all of the investor's money to work
from the time the investment is made, but will have a higher expense ratio and
pay lower dividends than Class A shares due to the 12b-1 fees. See "How to Buy
Shares -- Class B shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. For more information about these sales arrangements, consult
your investment dealer or Mentor Distributors. Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of another Mentor fund and for
shares of Cash Resource U.S. Government Money Market Fund. See "How to Exchange
Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $100. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of The Mentor
Funds or Mentor Distributors. You can buy Portfolio shares BY COMPLETING THE
ENCLOSED NEW ACCOUNT FORM and sending it to Mentor Distributors along with a
check or
24
<PAGE>
money order made payable to The Mentor Funds, THROUGH YOUR FINANCIAL
INSTITUTION, which may be an investment dealer, a bank, or another institution,
OR THROUGH AUTOMATIC INVESTING. If you do not have a dealer, Mentor Distributors
can refer you to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Distributors.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors receives your purchase order. In most
cases, in order to receive that day's public offering price, Mentor Distributors
or your investment dealer must receive your order before the close of regular
trading on the New York Stock Exchange. If you buy shares through your
investment dealer, the dealer must ensure that Mentor Distributors receives your
order before the close of regular trading on the New York Stock Exchange for you
to receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value. The
sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors. The current sales
charges for the GROWTH, CAPITAL GROWTH, STRATEGY, INCOME AND GROWTH, and GLOBAL
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $50,000..................................................... 5.75% 5.82% 5.00%
$50,000 but less than $100,000........................................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>
The current sales charges for the MUNICIPAL INCOME and QUALITY INCOME
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $100,000.................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 4.00% 4.17% 3.25%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>
* At the discretion of Mentor Distributors, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission
has indicated that dealers who receive more than 90% of the sales charge may
be considered underwriters.
Shares of the SHORT-DURATION INCOME PORTFOLIO are sold subject to a sales
charge of 1%.
25
<PAGE>
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. (A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Distributors for more
information.) Any of the shares which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. Mentor Distributors receives the entire amount
of any CDSC you pay.
You may be eligible to buy Class A shares at reduced sales charges. Consult
your investment dealer or Mentor Distributors for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form and in the Statement of Additional
Information. Shares may be sold at net asset value to certain categories of
investors, including to shareholders of other mutual funds who invest in The
Mentor Funds in response to certain promotional activities, and the CDSC may be
waived under certain circumstances. See "How to Buy Shares -- General" below.
Mentor Distributors, the investment advisers, or certain sub-advisers, or
affiliates thereof, at their own expense and out of their own assets, may also
provide other compensation to dealers in connection with sales of shares of the
Portfolios. Compensation may also include, but is not limited to, financial
assistance to dealers in connection with conferences, sales, or training
programs for their employees, seminars for the public, advertising or sales
campaigns, or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell significant amounts of shares. Dealers may not
use sales of The Mentor Funds' shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five or six years of
purchase, depending on the Portfolio. The following types of shares may be
redeemed without charge: (i) shares acquired by reinvestment of distributions
and (ii) shares otherwise exempt from the CDSC, as described in "How to Buy
Shares -- General" below. For other shares, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. The amount of the CDSC will depend on the number
of years since you invested in the shares being redeemed and the dollar amount
being redeemed, according to the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF CHARGE AS A PERCENTAGE OF
APPLICABLE AMOUNT APPLICABLE AMOUNT
REDEEMED (GROWTH, CAPITAL REDEEMED (QUALITY INCOME,
GROWTH, STRATEGY, INCOME MUNICIPAL INCOME, AND
YEARS SINCE PURCHASE PAYMENT AND GROWTH, AND GLOBAL SHORT- DURATION INCOME
MADE PORTFOLIOS) PORTFOLIOS)
<S> <C> <C>
1 4.0% 4.0%
2 4.0% 4.0%
3 3.0% 3.0%
4 2.0% 2.0%
5 1.0% 1.0%
6 None 1.0%
7+ None None
</TABLE>
26
<PAGE>
No CDSC is imposed upon the redemption of Class B shares purchased pursuant
to certain asset-allocation plans and that are not otherwise subject to the CDSC
shown above. However, a CDSC of 1.00% is imposed on redemptions of such shares
within the first year after purchase, based on the lower of the shares' cost and
current net asset value. Consult Mentor Distributors for more information.
Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. For this purpose, the amount of any increase
in a share's value above its initial purchase price is exempt from the CDSC.
Thus, when a share that has appreciated in value is redeemed during the five- or
six-year period, a CDSC is assessed only on its initial purchase price. For
information on how sales charges are calculated if you exchange your shares, see
"How to Exchange Shares."
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:
<TABLE>
<S> <C>
(Bullet) Proceeds of 50 shares redeemed at $12 per share $600
(Bullet) Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment (10
x $12) -120
(Bullet) Minus appreciation on remaining shares, also not
subject to CDSC (40 x $2) -80
(Bullet) Amount subject to a CDSC $400
</TABLE>
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
GENERAL
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by The Mentor Funds' current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Distributors, each investment adviser or sub-adviser, and
each of their affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with Mentor
Distributors, employees (and their families) of financial institutions having
sales agreements with Mentor Distributors (or otherwise having an arrangement
with a broker-dealer or financial institution with respect to sales of Portfolio
shares), financial institution trust departments investing an aggregate of $1
million or more in one or more funds in the Mentor family, clients of certain
administrators of tax-qualified plans, employer-sponsored retirement plans,
tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in funds in the Mentor family, shares redeemed under a
Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's
account in any calendar year), and "wrap accounts" for the benefit of clients of
financial planners adhering to certain standards established by Mentor
Distributors. A Portfolio may sell shares without a sales charge or a CDSC in
connection with the acquisition by the Portfolio of assets of an investment
company or personal holding company. In addition, the CDSC may be waived in the
case of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, including the shares of a shareholder who owns the shares with his or
her spouse as joint tenants with right of survivorship, provided that the
redemption is
27
<PAGE>
requested within one year of the death or initial determination of disability;
(ii) redemptions in connection with the following retirement plan distributions:
(a) lump-sum or other distributions from a qualified retirement plan following
retirement; (b) distributions from an IRA, Keogh Plan, or Custodial Account
under Section 403(b)(7) of the Internal Revenue Code following attainment of age
59 1/2; and (c) a tax-free return of an excess contribution to an IRA; (iii)
redemptions by pension or profit sharing plans sponsored by Mentor Investment
Group, Inc. or an affiliate; and (iv) redemptions by pension or profit sharing
plans of which Mentor or any affiliate serves as a plan fiduciary. In addition,
certain retirement plans with over 200 employees may purchase Class A shares at
net asset value without a sales charge. A Portfolio may sell its Class A shares
without a sales charge to shareholders of the mutual funds who invest in The
Mentor Funds in response to certain promotional activities (in which case a CDSC
of 1% may apply for a period of years after the purchase). Contact Mentor
Distributors.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of a Portfolio at net asset value.
If you are considering redeeming or exchanging shares of a Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
To eliminate the need for safekeeping, The Mentor Funds will not issue
certificates for your shares unless you request them. Mentor Distributors may,
at its expense, provide additional promotional incentives or payments to dealers
that sell shares of the Portfolios. In some instances, these incentives or
payments may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
Because of the relatively high cost of maintaining accounts, each Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however, avoid
such a redemption by a Portfolio by increasing his investment in shares of that
Portfolio to a value of $500 or more during such 60-day period.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any Portfolio,
you have a one-time right, within 60 days, to reinvest the redemption proceeds
plus the amount of CDSC you paid, if any, at the next-determined net asset
value. Front-end sales charges will not apply to such reinvestment. Mentor
Distributors must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in any of the Portfolios, there may be tax
consequences.
DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, Inc., having its principal offices at 901 East Byrd
Street, Richmond, Virginia 23219, is the principal distributor for the
Portfolios' shares.
Each of the Portfolios has adopted a Distribution Plan under Rule 12b-1
with respect to its Class B shares (each, a "Class B Plan") providing for
payments by the Portfolio to Mentor Distributors from the assets attributable to
the Portfolio's Class B shares at the annual rate set out under "Summary of
Portfolio Expenses -- Annual Portfolio Operating Expenses" above. The Trustees
may reduce the amount of payments or suspend the Class B Plan for such periods
as they may determine. Mentor Distributors also receives the proceeds of any
CDSC imposed on redemptions of shares.
28
<PAGE>
Payments under the Plans are intended to compensate Mentor Distributors for
services provided and expenses incurred by it as principal underwriter of a
Portfolio's Class B shares. Mentor Distributors may select financial
institutions (such as a broker/dealer or bank) to provide sales support services
as agents for their clients or customers who beneficially own Class B shares of
the Portfolios. Financial institutions will receive fees from Mentor
Distributors based upon Class B shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by Mentor Distributors. Mentor Distributors may
suspend or modify such payments to dealers. Such payments are also subject to
the continuation of the relevant Class B Plan, the terms of any agreements
between dealers and Mentor Distributors, and any applicable limits imposed by
the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares in any Portfolio to the Portfolio any day the New
York Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. The Portfolio will only redeem shares for which it has
received payment.
SELLING SHARES DIRECTLY TO A PORTFOLIO. Send a signed letter of instruction
or stock power form, along with any certificates that represent shares you want
to sell, to The Mentor Funds, c/o Boston Financial Data Services, Inc. ("BFDS"),
2 Heritage Drive, North Quincy, Massachusetts 02171. The price you will receive
is the net asset value next calculated after your request is received in proper
form less any applicable CDSC. In order to receive that day's net asset value,
your request must be received before the close of regular trading on the New
York Stock Exchange. If you sell shares having a net asset value of $50,000 or
more or if you want your redemption proceeds payable to you at a different
address or to someone else, the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer, or certain other
financial institutions. See the Statement of Additional Information for more
information about where to obtain a signature guarantee. Stock power forms are
available from your investment dealer, Mentor Distributors, and many commercial
banks. Mentor Distributors usually requires additional documentation for the
sale of shares by a corporation, partnership, agent, or fiduciary, or surviving
joint owner. Contact Mentor Distributors for details.
SELLING SHARES BY TELEPHONE. You may use Mentor Distributors' Telephone
Redemption Privilege to redeem shares from your account unless you have notified
Mentor Distributors of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Distributors will
be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Distributors with his or her account
registration and address as it appears on Mentor Distributors' records. Mentor
Distributors will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For information, consult Mentor
Distributors. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting Mentor Distributors by telephone in
which case you may wish to submit a written redemption request, as described
above, or contact your investment dealer, as described below. The Telephone
Redemption Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Distributors, and may charge
you for its services.
29
<PAGE>
The Portfolio generally sends you payment for your shares the business day
after your request is received. Under unusual circumstances, the Portfolio may
suspend redemptions, or postpone payment for more than seven days, as permitted
by federal securities law.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of a
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact Mentor Distributors for more information.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in a
Portfolio worth at least $1,000 for shares of the same class of any other
Portfolio at net asset value beginning 15 days after purchase. You may also
exchange shares of any Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange. (If you exchange your shares for shares of the Cash Fund, the period
when you hold shares of the Cash Fund will not be included in calculating the
length of time you have owned the shares subject to the CDSC, and any CDSC
payable on redemption of your shares will be reduced by the amount of any
payment collected by the Cash Fund under its distribution plan in respect of
those shares. Contact Mentor Distributors for information.)
To exchange your shares, simply complete an Exchange Authorization Form and
send it to The Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing Mentor Distributors. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Distributors'
procedures for telephonic transactions are described above under "How to Sell
Shares." The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask your investment dealer or
Mentor Distributors for a prospectus relating to the Cash Fund. Shares of
certain of the Portfolios may not available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of a Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Distributors before requesting an exchange by calling 1-800-382-0016. See the
Statement of Additional Information to find out more about the exchange
privilege.
DISTRIBUTIONS AND TAXES
Dividends, if any, are declared daily and paid monthly for the Quality
Income, Short-Duration Income, and Municipal Income Portfolios. Any dividends
for the other Portfolios are declared and paid as follows: quarterly for the
Income and Growth Portfolio; and annually for the Capital Growth, Global,
Growth, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of
30
<PAGE>
net capital gain will be invested in additional shares of the same class of a
Portfolio unless a shareholder requests in writing to receive the dividend or
distribution in cash.
Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year The Mentor Funds will notify
you of the amount and tax status of distributions paid to you by your Portfolio
for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. You should consult your tax adviser to determine the
precise effect of an investment in a Portfolio on your particular tax situation.
To permit the Quality Income, Municipal Income, and Short-Duration Income
Portfolios to maintain more stable monthly distributions, each of those
Portfolios may from time to time pay out less than the entire amount of net
investment income earned in any particular period. Any such amount retained by a
Portfolio would be available to stabilize future distributions. As a result, the
distributions paid by either Portfolio for any particular period may be more or
less than the amount of net investment income actually earned by the Portfolio
during that period.
MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Portfolio as
"exempt-interest dividends" are not generally subject to federal income tax. The
Portfolio may engage in investment activities that produce taxable income, the
distribution of which will be taxable to shareholders as described above. If you
receive Social Security and railroad retirement benefits, you should consult
your tax adviser to determine what effect, if any, an investment in the
Portfolio may have on the taxation of your benefits. In addition, an investment
in the Portfolio may result in liability for federal alternative maximum tax and
for state and local taxes, both for individual and corporate shareholders.
MANAGEMENT
The Trustees of The Mentor Funds are responsible for generally overseeing
the conduct of its business. COMMONWEALTH ADVISORS, INC. acts as investment
manager of each of the Portfolios other than the Growth, Short-Duration Income,
Global, and Strategy Portfolios. CHARTER ASSET MANAGEMENT, INC. acts as
investment manager to the Growth Portfolio; COMMONWEALTH INVESTMENT COUNSEL,
INC. acts as investment manager to the Short-Duration Income Portfolio; MENTOR
PERPETUAL ADVISORS, L.L.C. acts as investment manager to the Global Portfolio;
WELLESLEY ADVISORS, INC. acts as investment manager to the Strategy Portfolio.
Each of the investment advisers, except Mentor Perpetual, is a wholly-owned
subsidiary of Mentor Investment Group, Inc. ("Mentor"), which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Wheat First Butcher Singer,
through other subsidiaries, also engages in securities brokerage, investment
banking, and related businesses. Mentor Perpetual is owned equally by Mentor and
Perpetual plc, a diversified financial services holding company. Each of the
investment advisers is located at 901 East Byrd Street, Richmond, Virginia.
31
<PAGE>
Each of the Portfolios pays management fees to its manager at the annual
rates described above under "Summary of Portfolio Expenses -- Annual Portfolio
Operating Expenses", except that the Global Portfolio pays fees equal to 1.10%
of its average daily net assets up to and including $75 million and 1.00% of the
average daily net assets of the Portfolio in excess of $75 million. The advisory
fees paid by the Growth, Capital Growth, Income and Growth, and Global
Portfolios are higher than those paid by many other mutual funds. An investment
adviser may from time to time voluntarily waive some or all of its investment
advisory fees and may terminate any such voluntary waiver of some or all of its
investment advisory fees at any time in its sole discretion.
Commonwealth Advisors was incorporated under the laws of Virginia in 1991
and has assets under management in excess of $300 million. All of its directors
and officers serve as directors or officers of other investment advisory firms
affiliated with Wheat First Butcher Singer. Commonwealth Advisors has served as
investment adviser to each of the Portfolios identified above since their
inception; however, prior to April 12, 1995, all investment decisions for each
of the Portfolios were made by sub-advisers to those Portfolios. For certain of
the Portfolios, Commonwealth Advisors now furnishes a continuous investment
program. All of the investment advisory personnel of Commonwealth Advisors have
substantial experience in the investment advisory field and provide advisory
services to other mutual funds in the Mentor family.
Charter is a registered investment adviser with total assets under
management exceeding $380 million. Charter provides investment management and
advisory services to a wide variety of individual and institutional clients.
Commonwealth Investment Counsel currently has assets under management in excess
of $4 billion, and serves as investment adviser to Cash Resource Trust and
Mentor Institutional Trust, both open-end investment companies, and Mentor
Income Fund, Inc., a closed-end investment company. Mentor Perpetual is a newly
organized investment advisory firm owned equally by Perpetual plc and Mentor.
The Perpetual organization currently serves as investment adviser for assets of
more than $6 billion. Its clients include 28 unit investment trusts and other
public investment pools for over 150 clients, including private individuals,
charities, pension plans, and life assurance companies. Wellesley is a newly
organized investment advisory firm with assets under management of approximately
$240 million. Each of its directors and officers serves as director and officer
of other investment advisory firms affiliated with Wheat First Butcher Singer.
All investment decisions made for the Portfolios by Commonwealth Advisors,
Charter, Commonwealth Investment Counsel, Mentor Perpetual, and Wellesley are
made by investment committees at the respective firms, made up of investment
professionals at those firms.
THE SUB-ADVISERS
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. ("Van Kampen") serves as
sub-adviser to the Municipal Income Portfolio. Van Kampen, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, was incorporated in 1990 and
commenced operations in 1992. Van Kampen currently provides investment advice to
a wide variety of individual, institutional, and investment company clients. Van
Kampen is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which,
in turn, is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is indirectly controlled by Clayton & Dubilier Associates IV Limited
Partnership, the general partners of which are Joseph L. Rice, III, B. Charles
Ames, William A. Barby, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe, and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc., a New York-based private investment firm. As of December
1, 1995, Van Kampen, together with its affiliates, managed or supervised
approximately $55.5 billion of assets.
David C. Johnson, Senior Vice President of Van Kampen, is manager of the
Municipal Income Portfolio. Mr. Johnson joined Van Kampen in 1989 and has served
as portfolio manager of the Municipal Income Portfolio
32
<PAGE>
since its inception. Mr. Johnson has fourteen years of management experience in
the tax-free fixed-income sector. Currently, he is responsible for the
management and supervision of 52 Van Kampen municipal funds, including both open
and closed-end funds, with total assets exceeding $12 billion.
WELLINGTON MANAGEMENT COMPANY ("Wellington") serves as sub-adviser to the
Income and Growth Portfolio. Wellington, located at 75 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which provides
investment services to investment companies, employee benefit plans, endowments,
foundations, and other institutions and individuals. As of September 30, 1995,
Wellington had discretionary investment management authority with respect to
approximately $102.4 billion in assets. Wellington and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. For its services as
sub-adviser, Commonwealth Advisors pays Wellington a fee at the annual rate
expressed as a percentage of the Portfolio's assets as follows: 0.325% on the
first $50 million in assets, 0.275% on the next $150 million in assets, 0.225%
on the next $300 million in assets, and 0.200% on assets over $500 million.
Paul D. Kaplan, Senior Vice President of Wellington, and Arnold C.
Schneider III, Senior Vice President of Wellington, have served as portfolio
managers to the Portfolio since its inception in May 1993. Mr. Kaplan manages
the fixed-income and U.S. Government securities portion of the Portfolio, and
Mr. Schneider manages the equity securities portion of the Portfolio. Mr. Kaplan
has been a portfolio manager with Wellington since 1982 and Mr. Schneider has
been a portfolio manager with Wellington since 1987.
GENERAL. Subject to the general oversight of the Trustees, each Portfolio's
investment adviser or sub-adviser manages its respective Portfolio in accordance
with the stated policies of the Portfolio. Each makes investment decisions for a
Portfolio and places the purchase and sale orders for the Portfolio's
transactions. In addition, each pays the salaries of all officers and employees
who are employed by both it and The Mentor Funds. The Mentor Funds pays all
expenses not assumed by the investment advisers and sub-advisers, or Mentor,
including, among other things, Trustees' fees, auditing, accounting, legal,
custodial, investor servicing, and shareholder reporting expenses, and payments
under the Portfolios' Class B Plans.
In selecting broker-dealers, the investment adviser or sub-adviser may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the best overall terms available, a Portfolio's investment
adviser or sub-adviser may consider sales of shares of The Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
Until April 12, 1995, Scudder, Stevens & Clark served as sub-adviser to the
Perpetual Global Portfolio; Phoenix Investment Counsel, Inc. served as
sub-adviser to the Mentor Capital Growth Portfolio; and Pacific Investment
Management Company served as sub-adviser to the Mentor Quality Income Portfolio
(when that Portfolio was known as the Cambridge Government Income Portfolio).
OTHER SERVICES
ADMINISTRATIVE SERVICES. Mentor Investment Group, Inc., located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as bookkeeping and accounting services. Mentor provides these services to each
of the Portfolios at an annual rate of 0.10% of each Portfolio's average net
assets.
SHAREHOLDER SERVICING PLAN. The Mentor Funds 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 Mentor Funds to provide
administrative support services
33
<PAGE>
to their customers who are Portfolio shareholders. In return for providing these
support services, a financial institution may receive payments at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of a Portfolio. These administrative services may include, but are not limited
to, the following functions; providing office space, equipment, telephone
facilities, and various personnel, including clerical, supervisory, and computer
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.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by a Portfolio's 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 a Portfolio's investment adviser,
sub-adviser, and/or Mentor and will not be made from the assets of any of the
Portfolios.
GENERAL
The Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust of The Mentor Funds, which is governed
by Massachusetts law, is on file with the Secretary of State of the Commonwealth
of Massachusetts.
The Mentor Funds is an open-end, diversified, series management investment
company with an unlimited number of authorized shares of beneficial interest.
Shares of The Mentor Funds may, without shareholder approval, be divided into
two or more series of shares representing separate investment portfolios. Any
such series of shares may be further divided without shareholder approval into
two or more classes of shares having such preferences and special or relative
rights and privileges as the Trustees determine. The Mentor Funds' shares are
currently divided into nine series, eight of which are being offered by this
Prospectus. Each series offered by this prospectus issues shares of two classes,
Class A and Class B. Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of each
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
that Portfolio. The Mentor Funds may suspend the sale of shares at any time and
may refuse any order to purchase shares. Although The Mentor Funds is not
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
In June, 1995, Mentor Growth Fund, Mentor Strategy Fund, and Mentor
Short-Duration Income Fund, series of shares of Mentor Series Trust, a
Massachusetts business trust, were reorganized as the Mentor Growth Portfolio,
Mentor Strategy Portfolio, and Mentor Short-Duration Income Portfolio,
respectively.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as custodian for each Portfolio, except that State Street
Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts 02266 serves as
custodian for the Global Portfolio. Boston Financial Data Services, Inc. is
transfer agent and dividend disbursing agent for the Portfolios. The Trust's
independent auditors are KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110.
34
<PAGE>
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolios. A Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share during a
recent 30-day period by the maximum public offering price per share on the last
day of that period. "Total return" for the one-, five- and ten-year periods (or
for the life of the Portfolio, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return on an investment
of $1,000 in the Portfolio at the maximum public offering price (in the case of
Class A shares) and reflecting (in the case of Class B shares) the deduction of
any applicable CDSC. Total return may also be presented for other periods or
based on investment at reduced sales charge levels or at net asset value.
Investment performance of different classes of shares of a Portfolio will
differ. Any quotation of investment performance not reflecting a CDSC would be
reduced if such sales charges were reflected. Quotations of yield or total
return for a period when an expense limitation was in effect will be greater
than if the limitation had not been in effect. A Portfolio's performance may be
compared to various indices. See the Statement of Additional Information for
more information. Information may be presented in advertisements about a
Portfolio describing the background and professional experience of the
Portfolio's investment adviser, sub-adviser, or any of their personnel.
ALL DATA ARE BASED ON A PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio, the
Portfolio's operating expenses, and which class of shares you purchase.
Investment performance also often reflects the risks associated with a
Portfolio's investment objective and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles.
As permitted by applicable law, performance information for a Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
35
<PAGE>
APPENDIX
MOODY'S INVESTORS SERVICE, INC., LONG-TERM MUNICIPAL DEBT RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, (I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD AND POOR'S LONG-TERM MUNICIPAL DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
36
<PAGE>
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposure to adverse
conditions.
PLUS (+) OR MINUS (-): The ratings from "A" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM LOAN RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
STANDARD AND POOR'S MUNICIPAL NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2 -- Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1 -- Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2 -- Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
37
<PAGE>
THE MENTOR FUNDS
PROSPECTUS
AN OPEN-END MANAGEMENT
INVESTMENT COMPANY
(Bullet) Mentor Growth Portfolio
(Bullet) Mentor Capital Growth Portfolio
(Bullet) Mentor Strategy Portfolio
(Bullet) Mentor Income and Growth Portfolio
(Bullet) Mentor Perpetual Global Portfolio
(Bullet) Mentor Quality Income Portfolio
(Bullet) Mentor Municipal Income Portfolio
(Bullet) Mentor Short-Duration Income Portfolio
January 15, 1996
MENTOR FUNDS LOGO
<PAGE>
P R O S P E C T U S January 15, 1996
Mentor Balanced Portfolio
Mentor Balanced Portfolio seeks capital growth and current income. The
Portfolio is a series of shares of beneficial interest of The Mentor Funds, an
open-end, diversified management investment company. The Portfolio invests in a
diversified portfolio of debt and equity securities which Commonwealth
Investment Counsel, Inc., the Portfolio's investment adviser, believes will
produce both capital growth and current income. The Portfolio may use "leverage"
- -- that is, it may borrow money to purchase additional portfolio securities,
which involves special risks. See "Other investment practices and risk factors
- -- Leverage" on page 7.
This Prospectus sets forth concisely the information about the
Portfolio that a prospective investor should know before investing. Please read
this Prospectus and retain it for future reference. You can find more detailed
information in the January 15, 1996 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement or for other
information, call 1-800-382-0016. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23286-0109.
--------------------
Mentor Distributors, Inc.
Distributor
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in the
Portfolio. The following table summarizes your maximum transaction costs
from investing in the Portfolio and expenses incurred by the Portfolio
based on its most recent fiscal year. The Example shows the cumulative
expenses attributable to a hypothetical $1,000 investment in the Portfolio
over specified periods.
Shareholder Transaction Expenses:
Maximum Sales Load Imposed On Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fees None
Contingent Deferred Sales Charge
(as a percentage of the lower of the original purchase
price or redemption proceeds of shares redeemed): 5.0% in the
first year,
declining to
1.0% in the
fifth year,
and
eliminated
thereafter
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees 0.75%(1)
12b-1 Fees 0.75%(1)
Shareholders Service Fee 0.25%(1)
Other Expenses 0.30%(2)
-----
Total Portfolio Operating Expenses 2.05%(2)
- ---------------
(1) During the Portfolio's last fiscal year, Commonwealth Investment
Counsel Inc. ("Commonwealth"), the Portfolio's investment adviser,
waived all Management Fees, and Wheat, First Securities, Inc.
("Wheat"), and Mentor Distributors, Inc., the distributors of the
Portfolio for fiscal 1995, waived all 12b-1 Fees and Shareholder
Service Fees. Commonwealth and/or Mentor Distributors may waive all
or a portion of such fees for the current fiscal year. The amounts
shown in the table show expenses in the absence of the waivers.
(2) Reflects the waiver by Mentor Investment Group, Inc. ("Mentor") of
fees pursuant to its Administration Agreement with the Portfolio. In
the absence of the waiver, Other Expenses would be 0.40%, and Total
Portfolio Operating Expenses would be 2.15%.
-2-
<PAGE>
Examples
Your investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each
period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
71 94 120 238
You would pay the following expenses on the same investment, assuming no
redemption:
1 year 3 years 5 years 10 years
------ ------- ------- --------
21 64 110 238
This information is provided to help you understand the expenses of
investing in the Portfolio and your share of the estimated operating
expenses of the Portfolio. The information concerning the Portfolio is
based on the expenses the Portfolio expects to incur during its first full
fiscal year. The Example should not be considered a representation of
future performance; actual expenses may be more or less than those shown.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
-3-
<PAGE>
Financial Highlights
The financial highlights presented below for the Portfolio have been
audited by KPMG Peat Marwick LLP, independent auditors. The report of KPMG
Peat Marwick LLP is contained in the Statement of Additional Information,
which may be obtained in the manner described on the cover page of this
Prospectus. See "Financial Statements" and "Independent Auditor's Report"
in the Statement of Additional Information.
<TABLE>
<CAPTION>
Mentor Balanced Portfolio
----------------------------------
Period Ended Year Ended
9/30/95* 12/31/94**
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of
period.............................................. $12.44 $ 12.50
Net Investment income (loss)........................ 0.36 0.22
Net realized and unrealized gain (loss)
on investments.................................... 2.08 (0.09)
Total from investment operations...................... 2.44 0.13
Less distributions
Dividends from net investment income................ (0.03) (0.19)
Net asset value, end of period........................ $14.85 $ 12.44
Total return.......................................... 19.28% 1.00%
Ratios/Supplemental Data
Net assets, end of period
(in 000's)......................................... $3,210 $2,911
Ratio of expenses to average
net assets.......................................... 0.50%(a) 0.50%(a)
......................................................
Ratio of net investment income (loss)
to average net assets............................... 3.26%(a) 3.32%(a)
Portfolio turnover rate............................... 65% 71%
</TABLE>
------------
* For the period January 1, 1995 to September 30, 1995.
**For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
(a) Annualized.
-4-
<PAGE>
Investment objective and policies
Mentor Balanced Portfolio's investment objective is to seek capital
growth and current income. The Portfolio invests in a diversified portfolio
of equity and fixed-income securities which Commonwealth believes will
produce both capital growth and current income. There can, of course, be no
assurance that the Portfolio will achieve its investment objective. The
Portfolio is a series of The Mentor Funds (the "Trust"), a diversified,
open-end series investment company. The Trustees would not materially
change the Portfolio's investment objective without shareholder approval.
The Portfolio may invest in almost any type of security. The
Portfolio's securities will include some securities selected primarily to
provide for growth in value, others selected for current income, and other
for stability of principal.
Commonwealth will adjust the proportions of the Portfolio's assets
invested in the different types of securities in order to adjust to
changing market conditions. For example, under certain market conditions,
Commonwealth may judge that most of the Portfolio's assets should be
invested in equity securities, and that only a relatively small portion of
the Portfolio's assets should be invested in fixed-income securities. At
other times, Commonwealth may invest most of the Portfolio's assets in
fixed-income securities, with a corresponding reduction in the portion of
the Portfolio's assets invested in equity securities. Under normal
circumstances, the Portfolio will invest at least 25% of its assets in
fixed-income securities and 25% of its assets in equity securities.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market
conditions to maintain a portfolio of securities with a dollar-weighted
average rating of A or better. A security will be considered to be of
"investment grade" if, at the time of investment by the Portfolio, it is
rated at least Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Corporation or the equivalent by another nationally recognized
rating organization or, if unrated, determined by Commonwealth to be of
comparable quality. Securities rated Baa or BBB lack outstanding investment
characteristics and have speculative characteristics and are subject to
greater credit and market risks than higher-rated securities. See the
Statement of Additional Information for descriptions of securities ratings
assigned by Moody's and Standard & Poor's.
At times Commonwealth may decide that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy
inconsistent with the best interests of its shareholders. At such times,
Commonwealth may temporarily use alternative investment strategies
primarily designed to reduce fluctuations in the value of the Portfolio's
assets. In implementing these "defensive" strategies, the Portfolio would
be permitted to hold all or any portion of its assets in high quality
fixed-income securities, cash, or money market instruments. It is
impossible to predict when, or for how long, the Portfolio will use these
alternative strategies.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including
collateralized mortgage obligations and certain stripped mortgage-backed
securities and "residual" interests therein. Interest and principal
payments on the mortgages underlying mortgage-backed securities are passed
through to the holders of the mortgage-backed securities. Mortgage-backed
securities currently offer yields higher than those available from many
other types of fixed-income securities but because of their prepayment
aspects, their price volatility and yield characteristics will change based
on changes in prepayment rates. As a result, mortgage-backed securities are
less effective than other securities as a means of "locking in" long-term
interest rates. Generally, prepayment rates increase if interest rates fall
and decrease if interest rates rise. For many types of mortgage-backed
securities, this can result in unfavorable changes in price and yield
characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the
Portfolio's mortgage-backed securities have less potential for capital
appreciation during periods of declining interest rates than other
fixed-income securities of comparable maturities, although such obligations
may have a comparable risk of decline in market value during periods of
rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional
debt securities, which may pay a fixed rate of interest until maturity when
-5-
<PAGE>
the entire principal amount comes due, payments on these securities may
include both interest and a partial payment of principal. In addition to
scheduled loan amortization, payments of principal may result from the
voluntary prepayment, refinancing, or foreclosure of the underlying
mortgage loans. Such prepayments may significantly shorten the effective
durations of mortgage-backed securities, especially during periods of
declining interest rates. Similarly, during periods of rising interest
rates, a reduction in the rate of prepayments may significantly lengthen
the effective durations of such securities.
Stripped mortgage-backed securities are usually structured with two
classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets. The Portfolio may invest in
both the interest-only -- or "IO" -- class and the principal-only -- or
"PO" -- class. The yield to maturity and price of an IO class are extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments
may have a material adverse effect on the Portfolio's average duration and
net asset value. This would typically be the case in an environment of
falling interest rates. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may under
some circumstances fail to recoup fully its initial investment in these
securities. Conversely, POs tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower than
anticipated. The secondary market for stripped mortgage-backed securities
may be more volatile and less liquid than that for other mortgage-backed
securities, potentially limiting the Portfolio's ability to buy or sell
those securities at any particular time.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates,
the Portfolio might not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers.
The ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans or
real property, including collateralized mortgage obligation "residual"
interests, as well as new types of mortgage-related securities that may be
developed and marketed from time to time. "Residual" interests represent
the right to any excess cash flow remaining after all other payments are
made among the various tranches of interests issued by structured
mortgage-backed vehicles. The values of such interests are extremely
sensitive to changes in interest rates and in prepayment rates on the
underlying mortgages. In the event of a significant change in interest
rates or other market conditions, the value of an investment by the
Portfolio in such interests could be substantially reduced and the
Portfolio may be unable to dispose of the interests at prices approximating
the values the Portfolio had previously assigned to them or to recoup its
initial investment in the interests.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio
may invest in a wide variety of such securities, including mortgage- and
other assetbacked securities that will pay principal or interest only under
certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market
factors. Such securities may experience extreme price volatility in
response to changes in interest rates or other market factors; this may be
especially true in the case of securities where the amounts of principal or
interest paid, or the timing of such payments, varies widely depending on
prevailing interest rates.
Commonwealth may not be able to obtain current market quotations for
certain mortgage-backed or assetbacked securities at all times, or to
obtain market quotations believed by it to reflect the values of such
securities accurately. In such cases, Commonwealth may be required to
estimate the value of such a security using quotations provided by pricing
services or securities dealers making a market in such securities, or based
on other comparable
-6-
<PAGE>
securities or other bench-mark securities or interest rates.
Mortgage-backed and other asset-backed securities in which the Portfolio
may invest may be highly illiquid, and the Portfolio may not be able to
sell such a security at a particular time or at the value it has placed on
it.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Commonwealth will be required to estimate the
extent to which the values of the securities are likely to change in
response to changes in interest rate or other market conditions, and the
rate at which prepayments on the underlying mortgages or other assets are
likely to occur under different scenarios. There can be no assurance that
Commonwealth will be able to predict the amount of principal or interest to
be paid on any security under different interest rate or market conditions
or that its predictions will be accurate, nor can there be any assurance
that the Portfolio will recover the entire amount of the principal paid by
it to purchase any such securities.
Zero-coupon bonds. The Portfolio may at times invest in so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Because zero-coupon bonds do not pay
current interest, their value is subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zerocoupon bonds allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds
do not pay current interest in cash, the Portfolio is nonetheless required
for federal income tax purposes to accrue interest income on such
investments and to distribute such amounts at least annually to
shareholders. Thus, the Portfolio could be required at times to liquidate
other investments in order to satisfy this distribution requirement.
Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal
amount payable on maturity. Although the Portfolio generally amortizes the
amount of any such premium into income, the Portfolio may recognize a
capital loss if such premium securities are called or sold prior to
maturity and the call or sale price is less than the purchase price.
Additionally, the Portfolio may elect not to amortize the premium, in which
case it would likely recognize a capital loss if it holds such securities
to maturity and may recognize a larger loss if the security is sold or
called prior to its maturity.
Other investment practices and risk factors
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
Leverage. The Portfolio may borrow money to invest in additional
portfolio securities to see current income. This technique, known as
"leverage," increases the Portfolio's market exposure and risk. When the
Portfolio has borrowed money for leverage and its investments increase or
decrease in value, the Portfolio's net asset value will normally increase
or decrease more than if it had not borrowed money for this purpose. The
interest that the Portfolio must pay on borrowed money will reduce its net
investment income, and may also either offset any potential capital gains
or increase any losses. The Portfolio currently intends to use leverage in
order to adjust the dollar-weighted average duration of its portfolio, and
the Portfolio will not always borrow money for investment. The extent to
which the Portfolio will borrow money, and the amount it may borrow, depend
on market conditions and interest rates. Successful use of leverage depends
on Commonwealth's ability to predict market movements correctly. The amount
of leverage that can exist at any one time will not exceed 33-1/3% of the
value of the Portfolio's total assets (less all liabilities of the
Portfolio other than the leverage).
Options and futures. The Portfolio may buy and sell call and put
options on securities it owns to hedge against changes in net asset value
or to realize a greater current return. In addition, through the purchase
and sale of futures contracts and related options, the Portfolio may at
times seek to hedge against fluctuations in net asset value and, to the
extent consistent with applicable law, to increase its investment return.
In addition, the Portfolio may buy and sell options and futures contracts
(including index futures contracts, described below) to implement changes
in its asset allocations among various market sectors, pending the sale of
its existing investments and reinvestment in new securities.
-7-
<PAGE>
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures contracts. Therefore, there is no
assurance that the Portfolio will be able to utilize these instruments
effectively for the purposes stated above. Although the Portfolio will only
engage in options and futures transactions for limited purposes, those
transactions involve certain risks which are described below and in the
Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs
and may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see "Options" and "Futures Contracts" in
the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the
value from time to time of one or more foreign securities indices). An
"index future" is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when the Portfolio enters
into and terminates an index futures or option transaction, the Portfolio
realizes a gain or loss. The Portfolio may also, to the extent consistent
with applicable law, buy and sell index futures and options to increase its
investment return. Certain provisions of the Internal Revenue Code may
limit the Portfolio's ability to engage in futures and options
transactions.
Risks related to options and futures strategies. Futures and options
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in
the prices of futures and options and movements in the prices of the
underlying security or index or of the securities in the Portfolio's
portfolio that are the subject of a hedge. The successful use by the
Portfolio of the strategies described above further depends on
Commonwealth's ability to forecast market movements correctly. Other risks
arise from the Portfolio's potential inability to close out futures or
options positions. Although the Portfolio will enter into options or
futures transactions only if Commonwealth believes that a liquid secondary
market exists for such option or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at
any particular time or at an acceptable price. Transactions in options and
futures contracts involve brokerage costs and may require the Portfolio to
segregate assets to cover its outstanding positions. For more information,
see the Statement of Additional Information.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain
instances, however, the Portfolio may purchase and sell options in the
over-the-counter markets. The Portfolio's ability to terminate options in
the over-the-counter markets may be more limited than for exchange-traded
options and may also involve the risk that securities dealers participating
in such transactions would be unable to meet their obligations to the
Portfolio. The Portfolio will, however, engage in over-the-counter
transactions only when appropriate exchange-traded transactions are
unavailable and when, in the opinion of Commonwealth, the pricing mechanism
and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets.
(For options that are "in-the-money" at the time of purchase, the amount by
which the option is "in-the-money" is excluded from this calculation.)
Securities loans, repurchase agreements, forward commitments, and
reverse repurchase agreements. The Portfolio may lend portfolio securities
amounting to not more than 25% of its assets to broker-dealers and may
enter into repurchase agreements on up to 25% of its assets. These
transactions must be fully collateralized at all times, but involve some
risk to the Portfolio if the other party should default on its obligations
and the Portfolio is delayed or prevented from recovering the collateral.
The Portfolio may also purchase securities for future delivery. The
Portfolio may also enter into "reverse" repurchase agreements and
"dollar-roll" transactions, which generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities (or, in the case of dollar rolls, similar securities), at an
agreed-upon price, date and interest payment. Reverse repurchase
-8-
<PAGE>
agreements, dollar-roll transactions, and forward commitments may increase
the Portfolio's overall investment exposure and may result in losses.
Foreign securities. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally
denominated and traded in foreign currencies, the values of the Portfolio's
assets may be affected favorably or unfavorably by currency exchange rates
and exchange control regulations. There may be less information publicly
available about a foreign company than about a U.S. company, and foreign
companies are not generally subject to accounting, auditing, and financial
reporting standards and practices comparable to those in the United States.
The securities of some foreign companies are less liquid and at times more
volatile than securities of comparable U.S. companies. Foreign brokerage
commissions and other fees are also generally higher than in the United
States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of the Portfolio's assets held abroad) and expenses not present in
the settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls,
confiscatory taxation, political or financial instability, and diplomatic
developments which could affect the value of the Portfolio's investments in
certain foreign countries. Legal remedies available to investors in certain
foreign countries may be more limited than those available with respect to
investments in the United States or in other foreign countries. In the case
of securities issued by a foreign governmental entity, the issuer may in
certain circumstances be unable or unwilling to meet its obligations on the
securities in accordance with their terms, and the Portfolio may have
limited recourse available to it in the event of default. The laws of some
foreign countries may limit the Portfolio's ability to invest in securities
of certain issuers located in those foreign countries. Special tax
considerations apply to foreign securities. The Portfolio may buy or sell
foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
Interest rate transactions. In order to attempt to protect the value of
the Portfolio's portfolio from interest rate fluctuations and to adjust the
interest-rate sensitivity of the Portfolio's portfolio, the Portfolio may
enter into interest rate swaps and other interest rate transactions, such
as interest rate caps, floors, and collars. Interest rate swaps involve the
exchange by the Portfolio with another party of different types of interest
rate streams (e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). The purchase of
an interest rate cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that
a specified index exceeds a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent
that a specified index falls below a predetermined interest rate or amount.
A collar is a combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates or values. The
Portfolio intends to use these interest rate transactions as a hedge and
not as a speculative investment. The Portfolio's ability to engage in
certain interest rate transactions may be limited by tax considerations.
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If Commonwealth is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment
performance of the Portfolio would be less favorable than what it would
have been if this investment technique were not used.
Management of the Portfolio
The Trustees of the Trust are responsible for generally overseeing the
conduct of the Trust's and the Portfolio's business. Commonwealth
Investment Counsel, Inc., located at 901 East Byrd Street, Richmond,
Virginia 23219, acts as investment adviser to the Portfolio. Mentor
Investment Group, Inc. serves as administrator to the Portfolio. As
compensation for its services as administrator, the Portfolio pays Mentor a
fee, accrued daily and paid monthly, at an annual rate of .10% of the
average value of the Portfolio's daily assets. In order to limit the
Portfolio's expenses, Mentor has agreed to waive its fee for the current
fiscal year. Commonwealth is a wholly-owned subsidiary of Mentor, which is
a wholly-owned subsidiary of Wheat First Butcher Singer, Inc. ("WFBS").
WFBS, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses. Commonwealth currently has
assets under management in excess of $4 billion,
-9-
<PAGE>
and serves as investment adviser to Cash Resource Trust and certain
portfolios of Mentor Institutional Trust, both open-end investment
companies, and Mentor Income Fund, Inc., a closed-end investment company,
and the Mentor Capital Growth, Mentor Quality Income, and Mentor
Short-Duration Income Portfolios of The Mentor Funds.
Subject to the general oversight of the Trustees, Commonwealth, as
investment adviser, manages the Portfolio's securities in accordance with
the stated policies of the Portfolio. Commonwealth makes investment
decisions for the Portfolio and places the purchase and sale orders for the
Portfolio's portfolio transactions. In addition, Commonwealth pays the
salaries of all officers and employees who are employed by both it and the
Trust. The Portfolio pays all expenses not assumed by Commonwealth or
Mentor, including, among other things, Trustee's fees, auditing, legal,
accounting, custodial, investor servicing, and shareholder reporting
expenses, and payments under its Plans of Distribution. All investment
decisions made for the Portfolio are made by an investment committee at
Commonwealth made up of investment professionals at Commonwealth.
Commonwealth places all orders for purchases and sales of the
Portfolio's securities. In selecting broker-dealers, Commonwealth may
consider research and brokerage services furnished to it and its
affiliates. Subject to seeking the best overall terms available,
Commonwealth may consider sales of shares of the Portfolio (and, if
permitted by law, of the other funds in the Mentor family) as a factor in
the selection of broker-dealers.
The length of time the Portfolio has held a particular security is not
generally a consideration in investment decisions. A change in the
securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market
conditions the Portfolio's portfolio turnover rate may be higher than that
of other mutual Portfolios. Portfolio turnover generally involves some
expense to the Portfolio, including brokerage commissions or dealer
mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. Such transactions may result in
realization of taxable capital gains. The Portfolio's portfolio turnover
rate for its first fiscal year is shown in the section "Financial
Highlights."
Valuing the Portfolio's shares
The Portfolio calculates the net asset value of its shares by dividing
the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on
the New York Stock Exchange each day the Exchange is open. Portfolio
securities for which market quotations are readily available are stated at
market value. Short-term investments that will mature in 60 days or less
are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair values.
How to buy shares
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $100. Investments
under IRAs and investments under qualified retirement plans are subject to
a minimum initial investment of $250. The minimum initial investment may be
waived for current and retired Trustees, and current and retired employees
of The Mentor Funds or Mentor Distributors. You can buy Portfolio shares
from Mentor Distributors by check or money order, through your financial
institution, which may be an investment dealer, a bank, or another
institution, or through automatic investing. If you do not have a dealer,
Mentor Distributors can refer you to one.
Automatic Investment Plan. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or on a
monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment
dealer or through Mentor Distributors.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors receives your purchase order. In most
cases, in order to receive that day's public offering price, Mentor
Distributors or your investment dealer must receive your order before the
close of regular trading on the New York Stock Exchange. If you buy shares
through your investment dealer, the dealer must receive your order before
the close of regular trading on the New York Stock Exchange to receive that
day's public offering service.
-10-
<PAGE>
Shares of the Portfolio are sold without an initial sales charge,
although a contingent deferred sales charge ("CDSC") will be imposed if you
redeem shares within five years of purchase. The following types of shares
may be redeemed without charge: (i) shares acquired by reinvestment of
distributions and (ii) shares otherwise exempt from the CDSC, as described
above. For other shares, the amount of the charge is determined as a
percentage of the lesser of the current market value or the cost of the
shares being redeemed. The amount of the CDSC will depend on the number of
years since you invested and the dollar amount being redeemed, according to
the following table:
Contingent Deferred Sales
Year Since Charge as a Percentage of
Purchase Payment Made Applicable Amount Redeemed
1 5.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
No CDSC is imposed upon the redemption of shares purchased pursuant to
certain asset-allocation plans and that are not otherwise subject to the
CDSC shown above. However, a CDSC of 1.00% is imposed on redemptions of
such shares within the first year after purchase, based on the lower of the
shares' cost and current net asset value. Consult Mentor Distributors for
more information.
Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC. In determining whether
a CDSC is payable in respect of the shares redeemed, the Portfolio will
first redeem shares not subject to any charge. For this purpose, the amount
of any increase in a share's value above its initial purchase price is
exempt from the CDSC. Thus, when a share that has appreciated in value is
redeemed during the five- or six-year period, a CDSC is assessed only on
its initial purchase price. For information on how sales charges are
calculated if you exchange your shares, see "How to Exchange Shares."
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
Example:
You have purchased 100 shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by
$2 to $12, and you have gained 10 additional shares through dividend
reinvestment. If you redeem 50 of those shares (including shares purchased
through reinvestment of distributions on those 100 shares) at this time,
your CDSC will be calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(bullet) Proceeds of 50 shares redeemed at $12 per share $600
(bullet) Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment
(10 x $12) -120
(bullet) Minus appreciation on remaining shares, also not subject
to CDSC (40 x $2) -80
(bullet) Amount subject to a CDSC $400
</TABLE>
-11-
<PAGE>
General
The Portfolio may waive the CDSC on shares redeemed by the Trust's
current and retired Trustees (and their families), current and retired
employees (and their families) of Mentor Distributors, Commonwealth, each
their affiliates, registered representatives and other employees (and their
families) of broker-dealers having sales agreements with Mentor
Distributors, employees (and their families) of financial institutions
having sales agreements with Mentor Distributors (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to
sales of Portfolio shares), financial institution trust departments
investing an aggregate of $1 million or more in one or more funds in the
Mentor family, clients of certain administrators of tax-qualified plans,
employer-sponsored retirement plans, tax-qualified plans when proceeds from
repayments of loans to participants are invested (or reinvested) in funds
in the Mentor family, shares redeemed under the Portfolio's Systematic
Withdrawal Plan (limited to 10% of a shareholder's account in any calendar
year), and "wrap accounts" for the benefit of clients of financial planners
adhering to certain standards established by Mentor Distributors. In
addition, the Portfolio may sell shares without a CDSC in connection with
the acquisition by the Portfolio of assets of an investment company or
personal holding company. In addition, the CDSC may be waived in the case
of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, including the shares of a shareholder who owns the shares with
his or her spouse as joint tenants with right of survivorship, provided
that the redemption is requested within one year of the death or initial
determination of disability; (ii) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other
distributions from a qualified retirement plan following retirement; (b)
distributions from an IRA, Keogh Plan, or Custodial Account under Section
403(b)(7) of the Internal Revenue Code following attainment of age 59 1/2;
and (c) a tax-free return of an excess contribution to an IRA; (iii)
redemptions by pension or profit sharing plans sponsored by Mentor or an
affiliate; and (iv) redemptions by pension or profit sharing plans of which
Mentor or any affiliate serves as a plan fiduciary.
If you are considering redeeming or exchanging shares of the Portfolio
or transferring shares to another person shortly after purchase, you should
pay for those shares with a certified check to avoid any delay in
redemption, exchange or transfer. Otherwise the Portfolio may delay payment
until the purchase price of those shares has been collected or, if you
redeem by telephone, until 15 calendar days after the purchase date.
To eliminate the need for safekeeping, the Trust will not issue
certificates for your shares unless you request them. Mentor Distributors
may, at its expense, provide additional promotional incentives or payments
to dealers that sell shares of the Portfolios. In some instances, these
incentives or payments may be offered only to certain dealers who have sold
or may sell significant amounts of shares. Certain dealers may not sell all
classes of shares.
Because of the relatively high cost of maintaining accounts, the
Portfolio reserves the right to redeem, upon not less than 60 days' notice,
any account below $500 as a result of redemptions. A shareholder may,
however, avoid such a redemption by the Portfolio by increasing his
investment in shares to a value of $500 or more during such 60-day period.
Reinvestment Privilege. If you redeem shares of the Portfolio, you have
a one-time right, within 60 days, to reinvest the redemption proceeds plus
the amount of CDSC you paid, if any, at the next-determined net asset
value. Mentor Distributors must be notified in writing by you or by your
financial institution of the reinvestment for you to recover the CDSC. If
you redeem shares in the Portfolio, there may be tax consequences.
How to sell shares
You can sell your shares in the Portfolio to the Portfolio any day the
New York Stock Exchange is open, either directly to the Portfolio or
through your investment dealer. The Portfolio will only redeem shares for
which it has received payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction or stock power form, along with any certificates that represent
shares you want to sell to The Mentor Funds, c/o Boston Financial Data
Services, Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts
02171. The price you will receive is the next net
-12-
<PAGE>
asset value calculated after your request is received in proper form less
any applicable CDSC. In order to receive that day's net asset value, your
request must be received before the close of regular trading on the New
York Stock Exchange. If you sell shares having a net asset value of $50,000
or more or if you want your redemption proceeds payable to you at a
different address or to someone else, the signatures of registered owners
or their legal representatives must be guaranteed by a bank, broker-dealer
or certain other financial institutions. See the Statement for more
information about where to obtain a signature guarantee. Stock power forms
are available from your investment dealer, Mentor Distributors and many
commercial banks. Mentor Distributors usually requires additional
documentation for the sale of shares by a corporation, partnership, agent
or fiduciary, or surviving joint owner.
Contact Mentor Distributors for details.
Selling shares by telephone. You may use Mentor Distributors Telephone
Redemption Privilege to redeem shares from your account unless you have
notified Mentor Distributors of an address change within the preceding 15
days. Unless an investor indicates otherwise on the New Account Form,
Mentor Distributors will be authorized to act upon redemption and transfer
instructions received by telephone from a shareholder, or any person
claiming to act as his or her representative, who can provide Mentor
Distributors with his or her account registration and address as it appears
on Mentor Distributors' records. Mentor Distributors will employ these and
other reasonable procedures to confirm that instructions communicated by
telephone are genuine; if it fails to employ reasonable procedures, Mentor
Distributors may be liable for any losses due to unauthorized or fraudulent
instructions. For information, consult Mentor Distributors. During periods
of unusual market changes and shareholder activity, you may experience
delays in contacting Mentor Distributors by telephone in which case you may
wish to submit a written redemption request, as described above, or contact
your investment dealer, as described below. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling share through your investment dealer. Your dealer must receive
your request before the close of regular trading on the New York Stock
Exchange to receive that day's net asset value. Your dealer will be
responsible for furnishing all necessary documentation to Mentor
Distributors, and may charge you for its services.
The Portfolio generally sends you payment for your shares the business
day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
Systematic Withdrawal Program. You may redeem shares of a Portfolio
through periodic withdrawals for a predetermined amount. Only shareholders
with accounts valued at $10,000 or more are eligible to participate. Shares
redeemed under the Systematic Withdrawal program are not subject to a CDSC,
but the aggregate withdrawals of shares in any year are limited to 10% of
the value of the account at the time of enrollment. Contact Mentor
Distributors for more information.
How to exchange shares
Except as otherwise described below, you can exchange your shares in
the Portfolio worth at least $1,000 for shares of the same class of certain
other funds in the Mentor family at net asset value beginning 15 days after
purchase. You may also exchange shares of the Portfolio for shares of Cash
Resource U.S. Government Money Market Fund the ("Cash Fund"). If you
exchange shares subject to a CDSC, the transaction will not be subject to
the CDSC. However, when you redeem the shares acquired through the
exchange, the redemption may be subject to the CDSC, depending upon when
you originally purchased the shares, using the schedule of any Portfolio
into or from which you have exchanged your shares that would result in your
paying the highest CDSC applicable to your shares. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange. (If you exchange your shares for shares of the Cash Fund, the
period when you hold shares of the Cash Fund will be included in
calculating the length of time you have owned the shares subject to the
CDSC; alternatively, Mentor Distributors may elect not to include the
length of time you hold shares of the Cash Fund, in which case any CDSC
payable on redemption of your shares will be reduced by the amount of any
payment collected by the Cash Fund under its distribution plan in respect
of those shares. Contact Mentor Distributors for information.)
-13-
<PAGE>
To exchange your shares, simply complete an Exchange Authorization Form
and send it to The Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling
or writing Mentor Distributors. For federal income tax purposes, an
exchange is treated as a sale of shares and generally results in a capital
gain or loss. A Telephone Exchange Privilege is currently available.
Mentor Distributors' procedures for telephonic transactions are described
above under "How to sell shares." The Telephone Exchange Privilege is not
available if you were issued certificates for shares which remain
outstanding. Ask your investment dealer or Mentor Distributors for a
prospectus of the Mentor Family of Funds which relates to the other
Portfolios or a prospectus relating to Cash Resource U.S. Government Money
Market Fund. Shares of certain of the Portfolios may not available to
residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio
management and have an adverse effect on all shareholders. In order to
limit excessive exchange activity and in other circumstances where Mentor
Distributions or the Trustees believe doing so would be in the best
interests of the Fund, the Portfolio reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges
or reject any exchange. Shareholders would be notified of any such action
to the extent required by law. Consult Mentor Distributors before
requesting an exchange by calling 1-800-382-0016. See the Statement of
Additional Information to find out more about the exchange privilege.
Exchanges to and from the Portfolio are not available at the date of
this Prospectus. Consult Mentor Distributors as to the availability of such
exchanges in the future.
Distributions and Taxes
Dividends, if any, are declared and paid semi-annually. Any next
realized capital gain will be distributed at least annually. All
dividends and distributions will be invested in additional shares
unless a shareholder requests in writing to receive the dividend or
distribution in cash.
The Portfolio intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
All Portfolio distributions will be taxable to you as ordinary income,
except that any distributions of net long-term capital gains will be taxed
as such, regardless of how long you have held the shares (although the loss
on a sale of shares held for less than six months will be treated as
long-term capital loss to the extent of any capital gain distribution
received with respect to those shares). Distributions will be taxable as
described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Mentor Family of
Funds will notify you of the amount and tax status of distributions paid to
you by the Portfolio for the preceding year.
The foregoing is a summary of certain federal income tax consequences
of investing in the Portfolio. You should consult your tax adviser to
determine the precise effect of an investment in the Portfolio on your
particular tax situation.
The Portfolio has agreed to indemnify Mentor Distributors against
certain liabilities, including liabilities under the Securities Act of
1933, as amended.
Shareholder services
The Mentor Funds has adopted a Shareholder Servicing Plan (the "Service
Plan") with respect to the Portfolio. Under the Service Plan, financial
institutions will enter into shareholder service agreements with the
Portfolio to provide administrative support services to their customers who
are Portfolio shareholders. In return for providing these support services,
a financial institution may receive payments from the Portfolios at a rate
not exceeding 0.25% of the average daily net assets of the Portfolio. These
administrative services may include, but
-14-
<PAGE>
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
Portfolio; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the
Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Commonwealth and/or The Mentor Funds, or
affiliates thereof, for providing administrative support services to
holders of the Portfolio's shares. These payments will be made directly by
Commonwealth and/or The Mentor Funds and will not be made from the assets
of the Portfolio.
The Mentor Funds
The Mentor Funds is a Massachusetts business trust organized on January
20, 1992. A copy of the Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Mentor Funds is an open-end, diversified, series management
investment company with an unlimited number of authorized shares of
beneficial interest. Shares of The Mentor Funds may, without shareholder
approval, be divided into two or more series of shares representing
separate investment portfolios. Any such series of shares may be further
divided without shareholder approval into two or more classes of shares
having such preferences and special or relative rights and privileges as
the Trustees determine. The Mentor Funds' shares are currently divided into
nine series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. Each share has
one vote, with fractional shares voting proportionally. Shares of each
class will vote together as a single class except when required by law or
determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and,
if the Portfolio were liquidated, would receive the net assets of the
Portfolio. The Mentor Funds may suspend the sale of shares at any time and
may refuse any order to purchase shares. Although The Mentor Funds is not
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
For additional information concerning the Mentor Family of Funds or any
of its Portfolios being offered for sale, contact Mentor Distributors, by
calling 1-800-382-0016 or writing to Mentor Distributors at 901 East Byrd
Street, Richmond, Virginia 23219.
Custodian and transfer and dividend agent
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. Boston Financial Data
Services, Inc. serves as the Portfolio's transfer and dividend agent.
Performance information
Yield and total return data may from time to time be included in
advertisements about the Portfolio. The Portfolio's "yield" is calculated
by dividing the Portfolio's annualized net investment income per share of
the class during a recent 30-day period by the maximum public offering
price per share on the last day of that period. A "total return" for the
one, five- and ten-year periods (or for the life of the Portfolio, if
shorter) through the most recent calendar quarter represents the average
annual compounded rate of return on an investment of $1,000 in the
Portfolio reflecting the deduction of any applicable contingent deferred
sales charge. Total return may also be
-15-
<PAGE>
presented for other periods or based on investment at reduced sales charge
levels or at net asset value. Any quotation of investment performance not
reflecting the contingent deferred sales charge would be reduced if such
sales charges were used. Quotations of yield or total return for any period
when an expense limitation was in effect will be greater than if the
limitation had not been in effect. The Portfolio's performance may be
compared to various indices. See the Statement of Additional Information.
Information may be presented in advertisements about the Portfolio
describing the background and professional experience of Commonwealth or
any of its personnel.
All data are based on the Portfolio's past investment results and do
not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's securities, and the Portfolio's operating expenses. Investment
performance also often reflects the risks associated with the Portfolio's
investment objective and policies. These factors should be considered when
comparing the Portfolio's investment results to those of other mutual funds
and other investment vehicles.
-16-
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in
which, or to any person to whom, such offering may not lawfully be made.
This Prospectus omits certain information contained in the Registration
Statement, to which reference is made, filed with the Securities and
Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the secu rities offered hereby and
the Portfolio is to be found in the Registration Statement, including
various exhibits thereto and financial statements included or incorporated
therein, which may be inspected at the office of the Commission.
MENTOR
BALANCED
PORTFOLIO
----------
PROSPECTUS
----------
Mentor Distributors, Inc.
-17-
<PAGE>
THE MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 15, 1996
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 January
15, 1996 and the prospectus of Mentor Balanced Portfolio dated January 15, 1996.
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 Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio,
Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, and
Mentor Perpetual Global Portfolio. Part II contains information with respect to
Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor ShortDuration 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.
-1-
<PAGE>
TABLE OF CONTENTS
INTRODUCTION............................................................... II
PART I..................................................................... 1
INVESTMENT RESTRICTIONS.................................................... 1
PART II.................................................................... 6
INVESTMENT RESTRICTIONS.................................................... 6
PART III................................................................... 10
CERTAIN INVESTMENT TECHNIQUES ............................................. 10
MANAGEMENT OF THE TRUST.................................................... 31
INVESTMENT ADVISORY SERVICES............................................... 34
ADMINISTRATIVE SERVICES.................................................... 37
SHAREHOLDER SERVICING PLAN................................................. 38
BROKERAGE TRANSACTIONS..................................................... 39
HOW TO BUY SHARES.......................................................... 42
DISTRIBUTION............................................................... 43
DETERMINING NET ASSET VALUE................................................ 45
REDEMPTIONS IN KIND........................................................ 47
TAXES...................................................................... 47
INDEPENDENT ACCOUNTANTS.................................................... 52
CUSTODIAN.................................................................. 52
PERFORMANCE INFORMATION.................................................... 52
ADVISERS' OFFICERS......................................................... 56
PERFORMANCE COMPARISONS.................................................... 59
SHAREHOLDER LIABILITY...................................................... 65
FINANCIAL STATEMENTS....................................................... 65
-i-
<PAGE>
INTRODUCTION
The Mentor Funds is a Massachusetts business trust organized on January
20, 1992. As of the date of this Statement, the Trust consisted of the following
nine portfolios (collectively, the "Portfolios" and each individually, the
"Portfolio"): Mentor Balanced Portfolio (the "Balanced Portfolio"); Mentor
Capital Growth Portfolio (the "Capital Growth Portfolio"); Mentor Perpetual
Global Portfolio (the "Global Portfolio"); Mentor Income and Growth Portfolio
(the "Income and Growth Portfolio"); Mentor Municipal Income Portfolio (the
"Municipal Income Portfolio"); Mentor Short-Duration Income Portfolio (the
"Short-Duration Income Portfolio"); and Mentor Strategy Portfolio (the "Strategy
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 shares and Class B shares.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed below as fundamental or to the extent designated as such in
the Prospectus in respect of a Portfolio, the other investment policies
described in this Statement or in 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, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of a
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.
PART I
THE FOLLOWING INFORMATION RELATES TO EACH OF THE 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
securities 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
-1-
<PAGE>
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.
-2-
<PAGE>
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 illiquid 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.
-3-
<PAGE>
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 and
Short-Duration Income Portfolios) 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 and Short-Duration Income Portfolios) has the
intention of doing so in the coming fiscal year.
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
-4-
<PAGE>
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
Capital Growth Portfolio and the 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.)
-5-
<PAGE>
PART II
THE FOLLOWING INFORMATION RELATES TO EACH OF THE BALANCED, GROWTH,
SHORT-DURATION INCOME, AND STRATEGY PORTFOLIOS, EXCEPT WHERE OTHERWISE NOTED.
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.
-6-
<PAGE>
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.
-7-
<PAGE>
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 (except as specified below), 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.
-8-
<PAGE>
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.
(This restriction applies to the Growth Portfolio.)
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.
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.
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.
-9-
<PAGE>
PART III
THE FOLLOWING INFORMATION RELATES TO ALL OF THE PORTFOLIOS OF THE
TRUST, EXCEPT WERE OTHERWISE NOTED.
All information with respect to fees, expenses and performance (except
where otherwise indicated) is based on a Portfolio's fiscal year end. All of the
Portfolios have a September 30 fiscal year end. Prior to September 30, 1995,
each of the Balanced, Growth, Short-Duration Income, and Strategy Portfolios had
a December 31 fiscal year end. Information concerning the expenses of those
Portfolios is provided for the fiscal period January 1, 1995 through September
30, 1995. Certain information with respect to certain Portfolios is given for
partial fiscal years. See "Financial Highlights" in the Trust's prospectus for
information concerning the commencement of operations of the Portfolios.
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 the Prospectus relating to a particular Portfolio for a
description of the investment techniques generally applicable to that Portfolio.
For purposes of this section, a Portfolio's investment adviser or subadviser (if
any) is referred to as an "Adviser".
OPTIONS
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
COVERED CALL OPTIONS. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying
-10-
<PAGE>
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
-11-
<PAGE>
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.
OPTIONS ON FOREIGN SECURITIES. A Portfolio may purchase and sell
options on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
-12-
<PAGE>
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures and related options will, as may be
required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself
to make the future delivery of the security against payment of the agreed
price. Open futures positions on debt securities will be valued at the most
recent settlement price, unless that price does not, in the judgment of persons
acting at the direction of the Trustees as to the valuation of a Portfolio's
assets, reflect the fair value of the contract, in which case the positions
will be valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
-13-
<PAGE>
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular securities when it has the necessary
cash, but expects the rate of return available in the securities markets at that
time to be less favorable than rates currently available in the futures markets.
If the anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise in
the value of the futures position taken in anticipation of the subsequent
purchase.
Successful use by a Portfolio of futures contracts on debt securities
is subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. (Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although
-14-
<PAGE>
such futures contracts are expected to become available in the future.) A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Portfolio enters into a futures contract to buy 100 units of the S&P 100
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $184 on that future date, the Portfolio will gain $400 (100 units x
gain of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180 and
the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or subindexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
OPTIONS ON STOCK INDEX FUTURES. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
-15-
<PAGE>
OPTIONS ON INDICES. As an alternative to purchasing and selling call
and put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the price of the
underlying security rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the market price of the securities underlying the futures contract. Conversely,
if the price of the underlying security falls below the delivery price of the
contract, the Portfolio's futures position increases in value. The broker then
must make a variation margin payment equal to the difference between the
delivery price of the futures contract and the market price of the securities
underlying the futures contract.
-16-
<PAGE>
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a Portfolio
has purchased puts on futures contracts to hedge its portfolio against a decline
in the market, the securities or index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in
-17-
<PAGE>
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
Adviser may still not result in a successful hedging transaction over a short
time period.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security for a
relatively short period (usually
-18-
<PAGE>
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. A Portfolio's Adviser
will monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults, a
Portfolio could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, a Portfolio
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if a Portfolio is treated as an unsecured
creditor and required to return the underlying collateral to the seller's
estate.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS; OTHER MORTGAGE-RELATED SECURITIES
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the
-19-
<PAGE>
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.
-20-
<PAGE>
FOREIGN SECURITIES
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. A Portfolio may incur costs in connection with conversion
between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact of
foreign taxes on the net yield available to the Portfolio and its shareholders.
Income received by a Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Portfolio's assets to be invested
in various countries is not known, and tax laws and their interpretations may
change from time to time and may change without advance notice. Any such taxes
paid by a Portfolio will reduce its net income available for distribution to
shareholders.
FOREIGN CURRENCY TRANSACTIONS
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency.
-21-
<PAGE>
By transaction hedging a Portfolio will attempt to protect against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the applicable foreign currency during the period between the date on
which the security is purchased or sold or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, a Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Portfolio may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency a Portfolio is obligated to deliver and if a
-22-
<PAGE>
decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase 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.
-23-
<PAGE>
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such
-24-
<PAGE>
delivery. Such investments may also involve the risk that an entity involved in
the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and 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.
-25-
<PAGE>
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective and policies, not
for investment leverage, but a Portfolio may sell such securities prior to
settlement date if such a sale is considered to be advisable. No income accrues
to a Portfolio on securities in connection with such transactions prior to the
date the Portfolio actually takes delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause a
Portfolio to miss a price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
BANK INSTRUMENTS
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are
-26-
<PAGE>
U.S. dollar-denominated deposits issued by branches of major Canadian banks
located in the U.S.; and Yankee Certificates of Deposit ("Yankee CDS"), which
are U.S. dollar- denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the U.S.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. A
Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar rolls
and reverse repurchase agreements involve the risk that, in the event of the
bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio would be
unable to recover the security which is the subject of the agreement, the amount
of cash or other property transferred by the counterparty to the Portfolio under
the agreement prior to such insolvency or bankruptcy is less than the value of
the security subject to the agreement, or the Portfolio may be delayed or
prevented, due to such insolvency or bankruptcy, from using such cash or
property or may be required to return it to the counterparty or its trustee or
receiver.
CONVERTIBLE SECURITIES
A Portfolio may invest in convertible securities. Convertible
securities are fixed income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
-27-
<PAGE>
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for a variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Portfolio's Adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
WARRANTS
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the 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
-28-
<PAGE>
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
LOW-RATED SECURITIES
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will
-29-
<PAGE>
generally result in an increase in the value of the Portfolio's assets.
Conversely, during periods of rising interest rates, the value of the
Portfolio's assets will generally decline. In addition, the values of such
securities are also affected by changes in general economic conditions and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities generally will not affect cash income derived from such securities,
but will affect the Portfolio's net asset value. A Portfolio will not
necessarily dispose of a security when its rating is reduced below its rating at
the time of purchase, although its Adviser will monitor the investment to
determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
INDEXED SECURITIES
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to
-30-
<PAGE>
zero, and any further declines in the value of the security may then reduce the
principal amount payable on maturity. Finally, indexed securities may be more
volatile than the reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "D-mark"), the Portfolio
holds securities denominated in schillings and the Adviser believes that the
value of schillings will decline against the U.S. dollar, the Adviser may enter
into a contract to sell D-marks and buy dollars.
EURODOLLAR INSTRUMENTS
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The officers and Trustees of the Trust are listed below, along with
their addresses, principal occupations, and present positions, including any
positions held with affiliated persons or Mentor Distributors, Inc.
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
Daniel J. Ludeman(1)(2) Chairman and Trustee Chairman and Chief
901 East Byrd Street Executive Officer since
Richmond, Virginia 23219 July 1991, Mentor
Investment Group, Inc.;
Managing Director of
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.
-31-
<PAGE>
Peter J. Quinn, Jr.(1)(2) Trustee President, Mentor
901 E. Byrd Street Distributors, Inc.;
Richmond, Virginia 23219 Managing Director, Mentor
Investment 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
P. O. Box 27205 Executive Officer, E.R.
Richmond, Virginia 23261 Carpenter Company
Incorporated; Trustee,
Cash Resource Trust and
Mentor Institutional
Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business
University of Richmond and Finance, University of
Richmond, Virginia 23173 Richmond; Trustee, Cash
Resource Trust and Mentor
Institutional Trust.
Thomas F. Keller Trustee Dean, Fuqua School of
Duke University Business, Duke University;
Durham, North Carolina 27706 Trustee, Cash Resource
Trust and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Retired. Formerly,
5100 Cary Street Road Chairman and Chief
Richmond, Virginia 23225 Executive Officer,
Hamilton
Beach/Proctor-Silex, Inc.
Trustee, Cash Resource
Trust and Mentor
Institutional Trust.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers
2235 Staples Mill Road Company. Trustee, Cash
Richmond, Virginia 23230 Resource Trust and Mentor
Institutional Trust.
Paul F. Costello President Managing Director, Wheat
901 East Byrd Street First Butcher Singer,
Richmond, Virginia 23219 Inc., Mentor Investment
Group, Inc.; President,
Cash Resource Trust,
Mentor Income Fund, Inc.,
and Mentor Institutional
Trust; Director, Mentor
Perpetual Advisors,
L.L.C.; Senior Vice
President, Mentor
Distributors, 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
901 East Byrd Street Investment Group, Inc.;
Richmond, Virginia 23219 Treasurer, Cash Resource
Trust; Cash Resource
Trust, Mentor Income Fund,
Inc., and Mentor
Institutional Trust;
formerly, Treasurer and
Comptroller, Ryland
Capital Management, Inc.;
Treasurer, Mentor Series
Trust.
-32-
<PAGE>
Michael Wade Assistant Treasurer Associate Vice
901 East Byrd Street President, Mentor
Richmond, Virginia 23219 Investment Group, Inc.
since April 1994;
Assistant Treasurer,
Cash Resource Trust,
Mentor Income Fund, Inc.,
and Mentor Institutional
Trust; formerly, Senior
Accountant, Wheat First
Butcher Singer, Inc.,
April 1993 through March
1994; Audit Senior, BDO
Seidman, July 1989
through March 1993.
John M. Ivan Secretary Managing Director since
901 East Byrd Street October 1992, Director of
Richmond, Virginia 23219 Compliance since October
1992, Senior Vice
President 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.
(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.
TRUSTEES' COMPENSATION
The table below shows the estimated fees to be paid to each Trustee by
the Trust for fiscal 1995 and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1995 calendar year.
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM ALL
TRUSTEES FROM THE TRUST COMPLEX FUNDS
Daniel J. Ludeman $ 0 $ 0
Arnold H. Dreyfuss 6,500 17,200
Thomas F. Keller 5,500 14,700
Louis W. Moelchert, Jr. 6,000 16,700
Stanley F. Pauley 6,000 16,675
Troy A. Peery, Jr. 6,000 16,175
Peter J. Quinn, Jr. 0 0
- --------------------
The Trustees do not receive pension or retirement benefits from the
Trust.
-33-
<PAGE>
The Trust's Declaration of Trust provides that the Trustees will be
liable for their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
PRINCIPAL HOLDERS OF SECURITIES
The officers and Trustees of the Trust own as a group less than 1% of
the outstanding shares of any class of each Portfolio. To the knowledge of the
Trust, no person owned of record or beneficially more than 5% of the outstanding
shares of any Portfolio as of December 15, 1995, except as set forth below:
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP
Growth Portfolio-Class A Bank of New York TTEE 70.00
Wheat First Butcher Singer 401K
Wheat First FBO 13.03
Plumbers & Pipe Fitters Local
Union 354 Pen FD J D Wright
& Richard G. Hall TTEES UA
DTD
Strategy Portfolio-Class Bank of New York TTEE 41.85
A Wheat First Butcher Singer 401K
Wheat First FBO 20.81
Plumbers & Pipe Fitters Local
Union 354 Pen FD J. D. Wright
& Richard G. Hall TTEES UA
DTD
Global Portfolio-Class A Saxon & Co. 7.76
FBO Vested Interest Omnibus
Asset Account
Quality Portfolio-Class A Wheat First FBO 8.39
Danville Region Medical CTR
S D Account
Attn: William Isemann
Short-Duration Income Wheat First FBO 17.69
Portfolio-Class A John L. Irvin
Wheat First FBO 5.92
B & B Communications Inc.
Robert B. Baine Jr., President
-34-
<PAGE>
Wheat First FBO 9.13
Robert L. Pack
Wheat First FBO 8.14
Univ. Path Assoc. PSP Fergus O
Shiel & D. S. Wilkinson TTES
DTD
Balanced Portfolio The Wheat Foundation 89.74
INVESTMENT ADVISORY SERVICES
Commonwealth Advisors, Inc. (formerly Cambridge Investment Advisors,
Inc.) serves as investment adviser to the Capital Growth, Quality Income, Income
and Growth, and Municipal Income Portfolios. Commonwealth Advisors 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 ("Wellington") 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 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.L.C. ("Mentor
Perpetual") serves as investment adviser to the Global Portfolio. Mentor
Investment Group, Inc. (formerly Investment Management Group, Inc.) ("Mentor")
serves as administrator to all of the Portfolios. Each of Commonwealth
Advisors, 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/or 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 (except as may be approved
from time to time by the Trustees) and pay the salaries of all officers and
employees who are employed by
-35-
<PAGE>
them and the Trust.
Each Portfolio's investment adviser and/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 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.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, compensation paid under a Portfolio's 12b-1 plan
and the Shareholder Service Plan, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat and subsidiaries, SEC fees and
related expenses, state Blue Sky qualification fees, charges of the custodian
and transfer and dividend disbursing agents, outside auditing, accounting, and
legal services, charges for the printing of prospectuses and statements of
additional information for regulatory purposes or for distribution, and certain
costs incurred by Mentor in responding to shareholder inquiries as approved by
the Trustees from time to time, to shareholders, certain shareholder report
charges and charges relating to corporate matters are borne by the Portfolio.
MANAGEMENT FEES
The investment adviser of each Portfolio receives an annual management
fee from such Portfolio (which is described in the relevant Prospectus). The
investment adviser pays a portion of that fee to any sub-adviser to the
Portfolio.
The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
-36-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $ 535,270 $ 590,693 $ 465,031
Global Portfolio............................ -- 69,515 174,547
Growth Portfolio............................ 1,105,694 1,327,384 1,143,696
Income and Growth Portfolio................. 45,081 374,462 460,486
Municipal Income Portfolio.................. 4,130 387,074 380,281
Quality Income Portfolio.................... 658,652 893,139 563,032
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... 147,585 1,368,325 1,262,809
</TABLE>
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 48,884 $14,563
Capital Growth Portfolio.................... $ 35,435 -- --
Global Portfolio............................ -- 69,515 10,545
Municipal Income Portfolio.................. 374,138 81,713 --
Quality Income Portfolio.................... 230,311 -- 41,651
Short-Duration Income Portfolio -- 11,536 65,901
</TABLE>
Commonwealth Advisors paid sub-advisory fees to the Portfolios'
sub-advisers in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Capital Growth Portfolio (1) $286,476 $295,347 $126,880
Global Portfolio (2) -- 34,757 49,880
Income and Growth Portfolio 22,521 187,231 193,845
Municipal Income Portfolio 2,065 234,393 190,141
Quality Income Portfolio (3) 400,501 419,570 157,161
</TABLE>
- --------------------
(1) Prior to April 13, 1995, Phoenix Investment Counsel, Inc. ("Phoenix")
served as sub-adviser to the Capital Growth Portfolio. Commonwealth
Advisors paid subadvisory fees of $126,880 to Phoenix for fiscal year
1995.
(2) Prior to April 13, 1995, Scudder, Stevens & Clark ("Scudder") served as
sub-adviser to the Global Portfolio. Commonwealth Advisors paid
subadvisory fees of $49,880 to Scudder for fiscal year 1995.
(3) Prior to April 13, 1995, Pacific Investment Management Company
("Pacific") served as sub-adviser to the Quality-Income Portfolio
(formerly the Cambridge Government Income Portfolio). Commonwealth
Advisors paid $157,161 in subadvisory fees to Pacific for fiscal year
1995.
-37-
<PAGE>
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 pursuant to an Administration Agreement. Prior to June 1, 1994,
Cambridge Administrative Services ("CAS") provided administrative services to
the Capital Growth, Quality Income, Municipal Income, and Income and Growth
Portfolios.
Pursuant to the Administration Agreement, Mentor provides continuously
business management services to the Portfolios and, subject to the general
oversight of the Trustees, manages all of the business and affairs of the
Portfolios subject to the provisions of the Trust's Declaration of Trust,
By-laws and the 1940 Act, and other policies and instructions the Trustees may
from time to time establish. Mentor pays the compensation of all officers and
executive employees of the Trust (except those employed by or serving at the
request of an investment adviser or sub-adviser) and makes available to the
Trust the services of its directors, officers, and employees as elected by the
Trustees or officers of the Trust. In addition, Mentor provides all clerical
services relating to the Portfolios' business. As compensation for its services,
Mentor receives a fee from each Portfolio calculated daily at the annual rate of
.10 of 1% of a Portfolio's average daily net assets.
The Administration Agreement must be approved (beginning May 30, 1997)
at least annually with respect to each Portfolio by a vote of a majority of the
Trustees who are not interested persons of Mentor or the Trust. The Agreement
may be terminated at any time without penalty on 30 days notice by Mentor, or
immediately in respect of any Portfolio upon notice by the Trustees or by vote
of a majority of the outstanding voting securities of that Portfolio. The
Agreement terminates automatically in the event of any assignment.
The Portfolios paid administrative service fees in the following
amounts for the periods indicated below (amounts shown reflect fee waivers where
applicable):
-38-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $ 68,158 $ 92,278 $ 66,032
Global Portfolio............................ -- 7,140 19,082
Growth Portfolio............................ -- -- 108,285
Quality Income Portfolio.................... 143,075 151,234 65,234
Municipal Income Portfolio.................. 62,849 97,653 72,055
Income and Growth Portfolio................. 4,509 47,282 69,316
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... -- 29,422 146,572
</TABLE>
The administrators waived administrative fees in the amounts and for
the periods indicated below:
-39-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 2,307 --
Capital Growth Portfolio.................... $ 36,269 -- --
Global Portfolio............................ -- 530 --
Growth Portfolio............................ -- -- --
Income and Growth Portfolio................. 3,005 15,033 --
Municipal Income Portfolio.................. 34,261 -- --
Quality Income Portfolio.................... 41,518 23,563 --
Short-Duration Income Portfolio -- 9,776 --
Strategy Portfolio.......................... 17,363 131,557 --
</TABLE>
During 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: During Fiscal 1995, the amounts of these reimburse-
ments were $6,579, $6,117, and $0, respectively.
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors 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 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 owned by the financial institution's
customers for whom it is the 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 Balanced,
Growth, ShortDuration Income, and Strategy Portfolios were parties to
shareholder servicing arrangements with Wheat, First Securities, Inc. ("Wheat")
pursuant to which each Portfolio made payments to Wheat at the annual rate of
0.25% of such 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.
SHAREHOLDER SERVICES FEES
During fiscal 1995, the Portfolios incurred shareholder service fees
under the Service Plan (and, in the case of the Balanced, Growth, Short-Duration
Income, and Strategy Portfolios, the shareholder servicing arrangements with
Wheat) as follows (amounts shown reflect fee waivers where applicable):
Balanced Portfolio..................................... $ --
Capital Growth Portfolio............................... 145,322
Global Portfolio....................................... 42,065
Growth Portfolio....................................... 404,213
Income and Growth Portfolio............................ 153,495
Municipal Income Portfolio............................. 158,450
Quality Income Portfolio............................... 234,597
Short-Duration Income Portfolio 32,505
Strategy Portfolio..................................... 371,429
During 1995, Wheat waived $5,965 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
-40-
<PAGE>
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 subadviser 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
-41-
<PAGE>
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 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.
BROKERAGE COMMISSIONS
The Portfolios paid brokerage commissions on brokerage transactions in
the following aggregate amounts for the periods indicated:
-42-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 1,641 $ 3,436
Capital Growth Portfolio.................... $334,227 195,086 416,744
Global Portfolio............................ -- 45,449 148,625
Growth Portfolio............................ 275,570 374,267 1,354,359
Income and Growth Portfolio................. 25,668 116,782 125,986
Municipal Income Portfolio.................. -- -- 4,037
Quality Income Portfolio.................... -- -- 20,250
Short-Duration Income Portfolio -- 1,307 2,717
Strategy Portfolio.......................... 159,275 651,172 1,297,178
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $113,126 $ 78,085 $22,411
Global Portfolio............................ -- -- --
Growth Portfolio............................ 71,806 34,881 53,120
Income and Growth Portfolio................. 4,303 22,606 47,723
Municipal Income Portfolio.................. -- -- --
Quality Income Portfolio.................... -- -- --
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... -- 1,757 1,138
</TABLE>
The brokerage commissions paid to Wheat for fiscal year 1995 amounted
to the following percentages of the aggregate brokerage commissions paid by each
Portfolio:
<TABLE>
<CAPTION>
PERCENT OF AGGREGATE
PERCENT OF AGGREGATE DOLLAR AMOUNT OF
COMMISSIONS BROKERAGE TRANSACTIONS
<S> <C> <C>
Balanced Portfolio.......................... -- --
Capital Growth Portfolio.................... 5.38% 6.49%
Global Portfolio............................ -- --
Growth Portfolio............................ 3.92% 7.07%
Income and Growth Portfolio................. 37.88% 21.21%
Municipal Income Portfolio.................. -- --
Quality Income Portfolio.................... -- --
Short-Duration Income Portfolio -- --
Strategy Portfolio.......................... 0.09% 0.19%
</TABLE>
-43-
<PAGE>
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 (where
applicable) 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 relevant
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 Mentor Distributors and not a
Portfolio or its shareholders.
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, Inc. in
accordance with its respective Distribution Plan adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940. Prior to June 1, 1995, each of the
Balanced, Growth, Short-Duration Income, and Strategy Portfolios made payments
under Rule 12b-1 plan to Wheat.
During fiscal year 1995, the Portfolios paid the following 12b-1 fees
to Wheat and Mentor Distributors as shown below:
WHEAT MENTOR DISTRIBUTORS TOTAL
Balanced Portfolio.............. -- -- --
Capital Growth Portfolio........ -- $288,262 $ 288,262
Global Portfolio................ -- 68,125 68,125
Growth Portfolio................ $886,494 335,790 1,222,284
Income and Growth Portfolio..... -- 322,260 322,260
Municipal Income Portfolio...... -- 207,611 207,611
Quality Income Portfolio........ -- 334,771 334,771
Short-Duration Income Portfolio 25,133 13,921 39,054
Strategy Portfolio.............. 707,663 397,832 1,105,495
-44-
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1994, Mentor Distributors received the following
contingent deferred sales charges:
MENTOR DISTRIBUTORS
Balanced Portfolio....................... --
Capital Growth Portfolio................. $ 9,588
Global Portfolio......................... 11,406
Growth Portfolio......................... 100,433
Income and Growth Portfolio.............. 12,813
Municipal Income Portfolio............... 404
Quality Income Portfolio................. 3,994
Short-Duration Income Portfolio 4,215
Strategy Portfolio....................... 137,594
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1995, Wheat and Mentor Distributors received the
following contingent deferred sales charges:
WHEAT MENTOR DISTRIBUTORS
Balanced Portfolio.................. -- --
Capital Growth Portfolio............ -- $ 7,52l
Global Portfolio.................... -- 4,920
Growth Portfolio.................... $112,189 105,097
Income and Growth Portfolio......... -- 10,421
Municipal Income Portfolio.......... -- 2,083
Quality Income Portfolio............ -- 4,460
Short-Duration Income Portfolio -- 320
Strategy Portfolio.................. 412,928 274,069
UNDERWRITING COMMISSIONS
The following table shows the approximate amount of underwriting
commissions retained by the principal underwriter for each Portfolio for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... 79,450 17,055 1,314
Global Portfolio............................ -- 6,354 1,829
Growth Portfolio............................ -- -- --
Income and Growth Portfolio................. 35,307 32,761 2,708
Municipal Income Portfolio.................. 29,185 12,958 247
Quality Income Portfolio.................... 39,798 7,951 559
Short-Duration Income Portfolio -- -- --
Strategy Portfolio.......................... -- -- --
</TABLE>
-45-
<PAGE>
DETERMINING NET ASSET VALUE
A Portfolio determines its net asset value per share once each day the
New York Exchange (the "Exchange") is open as of the close of regular trading on
the Exchange. Currently, the Exchange is closed Saturdays, Sundays and the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
the Fourth of July, Labor Day, Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued
at prices which, in the opinion of a Portfolio's 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 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.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the
-46-
<PAGE>
Portfolio's Adviser is typically able to obtain dealer quotations for each of
the securities on at least a weekly basis. On any day when it is not practicable
for the Adviser to obtain an actual dealer quotation for a security, the Adviser
reprices the securities based on changes in the value of a U.S. Treasury
security of comparable duration. When the next dealer quotation is obtained, the
Adviser compares the dealer quote against the price obtained by it using its
U.S. Treasury-spread calculation, and makes any necessary adjustments to its
calculation methodology. The Adviser attempts to obtain dealer quotes for each
security at least weekly, and on any day when there has been an unusual
occurrence affecting the securities which, in the Adviser's view, makes pricing
the securities on the basis of U.S. Treasuries unlikely to provide a fair value
of the securities.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of a Portfolio's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value following procedures approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which a Portfolio's net asset value is not calculated. A Portfolio
calculates net asset value per share, and therefore effects sales, redemptions
and repurchases of its shares, as of the close of the Exchange once on each day
on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such 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. Redemptions
-47-
<PAGE>
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 elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. 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.
-48-
<PAGE>
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.
-49-
<PAGE>
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 obligations 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.
-50-
<PAGE>
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.
-51-
<PAGE>
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 under reported 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.
-52-
<PAGE>
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, 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.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of its foreign assets. A custodian's
responsibilities include generally safeguarding and controlling a Portfolio's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION
The table below shows the average annual total return for the one- and
five-year periods (where applicable) and for the life of the Portfolios:
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
-------------- ------ ------- ---------------
<S> <C> <C> <C>
Balanced Portfolio*.......................... -- -- --
Capital Growth Portfolio..................... 13.25% -- 5.93%
Global Portfolio............................. 5.17% -- 3.67%
Growth Portfolio*............................ -- -- 13.35%
Income and Growth Portfolio.................. 10.52% -- 9.62%
Municipal Income Portfolio................... 4.26% -- 5.86%
Quality Income Portfolio..................... 6.47% -- 3.34%
Short-Duration Income Portfolio* -- -- 0.49%
Strategy Portfolio*.......................... -- -- 6.80%
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR 5 YEARS SINCE INCEPTION
-------------- ------ ------- ---------------
<S> <C> <C> <C>
Balanced Portfolio*.......................... 13.29% -- 12.66%
Capital Growth Portfolio..................... 15.26% -- 6.60%
Global Portfolio............................. 6.74% -- 4.30%
Growth Portfolio*............................ 24.38% 22.93% 13.79%
Income and Growth Portfolio.................. 12.32% -- 10.53%
Municipal Income Portfolio................... 5.01% -- 6.36%
Quality Income Portfolio..................... 7.33% -- 3.90%
Short-Duration Income Portfolio* 5.29% -- 4.34%
Strategy Portfolio*.......................... 19.73% -- 8.85%
</TABLE>
-53-
<PAGE>
- ------------------
* Prior to May 30, 1995, the Balanced, Growth, Short-Duration Income,
and Strategy Portfolios only offered one class of shares. Total return
information for this period is shown under the Class B share table. THE ANNUAL
TOTAL RETURN INFORMATION SHOWN ABOVE FOR THE BALANCED, GROWTH, SHORT-DURATION
INCOME, AND STRATEGY PORTFOLIOS REFLECTS VARIOUS SALES CHARGES CURRENTLY NOT
APPLICABLE TO THE PORTFOLIOS. The Balanced, Growth, Short-Duration, and
Strategy Portfolios are the successors to Mentor Balanced Fund, Mentor Growth
Fund, Mentor Short-Duration Income Fund, and Mentor Strategy 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 each of Mentor Strategy Fund, Mentor Short-Duration Income Fund,
and Mentor Balanced Fund was subject to a maximum contingent deferred sales
charge of 5%.
- - - - - -
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.
-54-
<PAGE>
YIELD AND TAX-EQUIVALENT YIELD
The thirty-day yield for both classes of shares of certain of the
Portfolios for the period ending September 30, 1995, was as follows:
CLASS A CLASS B
Quality Income Portfolio 6.24% 5.74%
Municipal Income Portfolio 5.53% 5.30%
Income and Growth Portfolio 1.89% 1.25%
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, 1995, was 9.16%. The
tax-equivalent yield for the Class B shares was 8.78% 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.
-55-
<PAGE>
TAXABLE YIELD EQUIVALENT FOR 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
Joint Return $1-39,000 $39,000- $94,250- $143,600- Over
94,250 143,600 256,500 $256,500
Single Return $1-23,350 $23,350- $56,550- $117,950- Over
56,550 117,950 256,500 $256,500
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
ADVISERS' OFFICERS
The following persons are officers of the investment advisers or
subadvisers of the Portfolios, as indicated.
-56-
<PAGE>
COMMONWEALTH INVESTMENT COUNSEL, INC.
W. HANCE WEST, JR., CFA MANAGING DIRECTOR, TOTAL RETURN PORTFOLIO
MANAGER
Mr. West has eight years of investment management experience. Mr. West serves
as co- manager for the Mentor Income Fund (formerly RAC Income Fund), a $130
million closed- end bond fund. He holds his undergraduate degree in accounting
from Virginia Polytechnic Institute and his graduate degree in business from
University of Rochester.
JOHN G. DAVENPORT, CFA MANAGING DIRECTOR, CHIEF EQUITY OFFICER AND
PORTFOLIO MANAGER
Mr. Davenport has eleven years of investment management experience. He joined
Commonwealth after heading equity research for Lowe, Brockenbrough, Tierney, &
Tattersall. He earned his undergraduate business degree from the University of
Richmond and his graduate degree in business from the University of Virginia.
Mr. Davenport is also a portfolio manager at Commonwealth Advisors, Inc.
P. BARTON PETERS, CFA SENIOR VICE PRESIDENT, DIRECTOR OF EQUITY RESEARCH
AND PORTFOLIO MANAGER
Mr. Peters has fifteen years of investment management experience and joined
Commonwealth after the sale of his company, Parata Analytics Research, to
Commonwealth. He has an undergraduate degree from the College of William and
Mary and a masters degree in finance and quantitative sciences from Virginia
Commonwealth University.
RICHARD H. SKEPPSTROM II VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Skeppstrom has five years of investment management experience. He has
earned both his undergraduate degree and masters of business administration from
the University of Virginia.
CHRISTOPHER W. RUSBULDT, CFA ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rusbuldt has three years of investment experience. He has an undergraduate
degree from the University of Virginia.
P. MICHAEL JONES, CFA MANAGING DIRECTOR, INCOME PORTFOLIO MANAGER Mr.
Jones has ten years of investment management experience. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He earned his undergraduate degree from the
College of William and Mary. Mr. Jones is also a portfolio manager at
Commonwealth Advisors, Inc.
STEVEN C. HENDERSON ASSOCIATE VICE PRESIDENT, INCOME PORTFOLIO MANAGER
Mr. Henderson has six years of investment management experience. He has an
undergraduate degree from the University of Richmond and a masters in business
administration from George Washington University.
-57-
<PAGE>
STEPHEN R. MCCLELLAND VICE PRESIDENT, TOTAL RETURN PORTFOLIO MANAGER
Mr. McClelland has five years of investment management experience, all of which
have been at Commonwealth. He is a Certified Public Accountant and
received his undergraduate degree in accounting from Iowa State University and
his graduate business degree from Virginia Commonwealth University.
KEITH WANTLING ASSOCIATE VICE PRESIDENT, SENIOR RESEARCH ANALYST
Mr. Wantling has four years of experience. Mr. Wantling performs analysis and
screening for credit sensitive private label mortgage-backed securities and
directs the firm's portfolio analysis effort. He holds his undergraduate degree
in accounting information systems from Virginia Polytechnic Institute.
CHARTER ASSET MANAGEMENT, INC.
THEODORE W. PRICE, CFA PRESIDENT, PORTFOLIO MANAGER
Mr. Price has thirty years of investment management experience, with over
twenty-three years' tenure at Charter. He has managed Mentor Growth Portfolio
since its inception. He earned both his undergraduate degree and masters of
business administration from the University of Virginia.
LINDA A. ZIGLAR, CFA SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Ms. Ziglar has sixteen years of investment management experience. Ms. Ziglar
joined Charter from Federated Investors, where she managed $300 million in
equity assets. She holds an undergraduate degree from Randolph-Macon Woman's
College where she graduated summa cum laude. She also holds a graduate
degree in business administration from the University of Pittsburgh.
JEFFREY S. DRUMMOND, CFA VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Drummond has seven years of investment management experience. Mr.
Drummond began his career as a portfolio analyst in the Investment Strategy
Department at Wheat First Butcher Singer, where he shared responsibility
for directing $100 million in assets following the Strategic Sectors Portfolio.
He received his undergraduate degree in finance from the University of Richmond,
where he graduated cum laude.
EDWARD RICK IV RESEARCH ANALYST
Mr. Rick has one year of investment management experience. He received his
undergraduate degree in finance from the University of Richmond, where he
graduated cum laude.
-58-
<PAGE>
MENTOR PERPETUAL ADVISORS, L.L.C.
SCOTT MCGLASHAN FAR EAST SPECIALIST, PORTFOLIO MANAGER
Mr. McGlashan has eighteen years of investment management experience, twelve
years specializing in the Far East, and ten years' tenure in the Perpetual
organization. He has earned degrees from Yale University and Cambridge
University.
ROBERT YERBURY AMERICAN SPECIALIST, PORTFOLIO MANAGER
Mr. Yerbury has twenty-three years of investment management experience, with
over twenty years experience in North American stock markets, and has been
part of the Perpetual team for twelve years. He received his undergraduate
degree in mathematics from Cambridge University.
STEPHEN WHITTAKER UNITED KINGDOM SPECIALIST, PORTFOLIO MANAGER
Mr. Whittaker has fifteen years of investment management experience. Prior to
his employment at Perpetual, Mr. Whittaker was responsible for a wide range of
UK equity funds for the Save & Prosper Group. He earned a law degree from
Manchester University.
MARGARET RODDAN EUROPEAN SPECIALIST, PORTFOLIO MANAGER
Ms. Roddan has ten years of investment management experience. Ms.
Roddan joined the Perpetual organization from Mercury Asset Management,
where she shared responsibility for managing more than $750 million in
continental European equity holdings. She is a graduate of the Investment
Management Programme at the London Business School, studied Finance at City
University, and holds an undergraduate degree in economic history from
Bristol University.
WELLESLEY ADVISORS, INC.
DON R. HAYS PRESIDENT, PORTFOLIO MANAGER
Mr. Hays has over twenty-seven years of investment experience and is Director
of Investment Strategy for Wheat First Butcher Singer, Inc., a position he
has held since 1984. Mr. Hays began his career as an engineer with Von Braun
rocket-development team in 1968. He is regarded as one of the country's
leading investment strategists and his market outlook is quoted regularly in
the WALL STREET JOURNAL, INVESTOR'S BUSINESS DAILY, USA TODAY, and other
major media. He has been a guest on the PBS series WALL $TREET WEEK with Louis
Rukeyser and is regularly featured by DOW JONES, REUTERS AND BLOOMBERG NEWS
SERVICES.
ASA W. GRAVES VII, CFA PORTFOLIO ANALYST
Mr. Graves has four years of investment management experience and works closely
with Mr. Hays to develop the analytical framework used in managing the Strategy
Portfolio. He earned his undergraduate degree from the University of Richmond.
-59-
<PAGE>
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.
-60-
<PAGE>
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 quasifederal 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
-61-
<PAGE>
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.
-62-
<PAGE>
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.
-63-
<PAGE>
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
-64-
<PAGE>
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."
-65-
<PAGE>
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
FINANCIAL STATEMENTS
-66-
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 88.81%
BASIC INDUSTRIES 1.33%
Alco Standard Corporation 25,400 $ 2,152,650
Citation Corporation* 77,250 1,390,500
3,543,150
BUILDING 2.66%
Blount, Inc.-Class A 57,550 2,740,819
Clayton Homes, Inc. 183,200 4,351,000
7,091,819
CAPITAL GOODS & CONSTRUCTION 1.77%
Fastenal Company 48,440 1,768,060
Flextronics International, Ltd.* 108,600 2,796,450
Computational System* 10,000 162,500
4,727,010
CONSUMER CYCLICAL 9.29%
Apple South, Inc. 126,850 2,885,837
Chromcraft Revington, Inc.* 109,000 2,670,500
Consolidated Products Company* 89,150 1,470,975
Landry's Seafood Restaurant* 100,000 1,800,000
Legget & Platt, Inc. 59,600 1,467,650
Outback Steakhouse* 47,000 1,445,250
Quality Dining, Inc.* 163,000 2,974,750
Regal Cinemas, Inc.* 106,325 4,372,615
Rio Hotel & Casino, Inc.* 104,900 1,363,700
Sonic Corporation* 94,200 2,143,050
Wabash National Corporation 61,900 2,189,713
24,784,040
CONSUMER STAPLES 1.93%
Performance Food Group* 52,500 1,220,625
Richfood Holdings, Inc. 155,700 3,921,694
5,142,319
ENERGY 0.89%
Cairn Energy USA, Inc.* 116,850 1,489,838
Nuevo Energy Company* 38,800 873,000
2,362,838
</TABLE>
19
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 7.72%
Concord Electronic Fleet Services, Inc.* 115,200 $ 3,513,600
Credit Acceptance Company* 45,600 1,231,200
Envoy Corporation* 113,400 1,360,800
First Financial Management Corporation 24,250 2,367,406
Jayhawk Acceptance Corporation* 87,200 1,275,300
Leader Financial Corporation 90,500 3,133,563
Markel Corporation* 66,360 4,877,460
National Commerce Bancorp 114,996 2,817,402
20,576,731
HEALTH 19.97%
Advantage Health Corporation* 51,200 1,740,800
Biomet, Inc.* 168,350 2,904,037
Columbia HCA Healthcare Corporation 64,300 3,126,587
Community Health Systems* 70,600 2,850,475
Compdnet Corporation* 103,200 3,018,600
Gelman Sciences, Inc.* 99,600 2,191,200
Health Management Associates* 67,300 2,162,013
Healthdyne Technologies* 143,200 1,951,100
Healthsource, Inc.* 57,700 2,776,813
Idexx Laboratories, Inc.* 74,200 2,763,950
Manor Care, Inc. 92,900 3,170,213
Omnicare, Inc. 118,300 4,613,700
Phycor, Inc.* 148,650 5,091,262
Physician Sales & Services, Inc.* 70,600 3,388,800
Ren Corporation* 116,400 2,313,450
Renal Treatment Centers* 80,600 2,982,200
Respironics, Inc.* 74,500 1,434,125
Vencor, Inc.* 149,325 4,778,400
53,257,725
RETAIL 8.85%
Barnes and Noble, Inc.* 66,800 2,555,100
Big B, Inc. 181,800 2,704,275
Casey's General Stores, Inc. 172,950 3,912,994
Corporate Express, Inc.* 80,950 1,973,156
Dollar General Corporation 41,041 1,205,579
Heilig-Meyers Company 14,800 344,100
</TABLE>
20
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL (CONTINUED)
Moovies, Inc.* 89,400 $ 1,754,475
Movie Gallery, Inc.* 76,700 3,278,925
Office Depot, Inc.* 89,600 2,699,200
Revco D. S., Inc.* 86,000 2,021,000
S & K Famous Brands, Inc.* 131,000 1,146,250
23,595,054
TECHNOLOGY 26.02%
3Com Corporation* 55,300 2,516,150
ACC Corporation 98,300 1,621,950
Acxiom Corporation* 62,800 1,774,100
Applied Materials, Inc. 19,050 1,947,862
Atmel Corporation* 48,200 1,626,750
Benchmark Electronics, Inc.* 42,800 1,203,750
Cellstar Corporation* 41,400 1,293,750
Cincinnati Microwave, Inc.* 143,700 2,173,463
Cisco Systems, Inc.* 38,800 2,677,200
Computer Management Sciences* 12,500 212,500
Cybex Corporation* 68,900 1,722,500
Danka Business Systems 107,000 3,852,000
Dell Computers Corporation* 18,800 1,598,000
Diamond Multimedia Systems* 84,050 2,710,612
DSC Communications Corporation* 52,300 3,098,775
Emulex Corporation* 80,500 1,066,625
Frontier Corporation 189,300 5,040,113
Gateway 2000, Inc.* 46,300 1,417,937
Informix Corporation* 62,900 2,044,250
Kent Electronics Corporation* 54,250 2,380,218
LAM Research Corporation* 14,700 878,325
Linear Technology Corporation 88,000 3,652,000
LSI Logic Corporation* 47,900 2,766,225
Mysoftware Company* 104,200 1,328,550
Ontrak Systems* 55,700 1,538,713
Palmer Wireless, Inc.* 86,900 1,933,525
Quantum Corporation* 16,000 350,000
SDL, Inc.* 68,900 1,946,425
Silicon Valley Group* 29,700 1,147,163
Symmetricom, Inc.* 142,250 3,200,625
Triquint Semiconductor, Inc.* 64,850 1,483,444
Uniphase Corporation* 46,650 1,644,413
US Long Distance Corporation* 105,700 1,592,106
Worldcom, Inc.* 123,362 3,963,004
69,403,023
</TABLE>
21
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION 2.54%
American Freightways Corporation* 117,350 $ 1,760,250
Atlantic Southeast Airlines, Inc. 92,600 2,164,525
Swift Transportation Company, Inc.* 100,900 1,740,525
USA Truck, Inc.* 84,700 1,101,100
6,766,400
MISCELLANEOUS 5.84%
ABR Information Services* 108,150 2,730,787
Accustaff, Inc.* 81,750 3,004,312
Career Horizons, Inc.* 111,300 3,005,100
Olsten Corporation 50,300 1,955,413
Romac International* 79,750 1,355,750
Scientific Games Holding* 34,900 1,304,388
Xilinx, Inc.* 46,600 2,242,625
15,598,375
TOTAL COMMON STOCKS (COST $160,128,016) 236,848,484
SHORT-TERM INVESTMENT 9.63%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $26,600,000
U.S. Treasury Bill, due 12/28/95,
(cost $25,689,361) $25,689,361 25,689,361
TOTAL INVESTMENTS (COST $185,817,377) 98.44% 262,537,845
OTHER ASSETS LESS LIABILITIES 1.56% 4,156,579
NET ASSETS 100.00% $266,694,424
</TABLE>
* Securities not currently producing income.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 99.93%
BASIC MATERIALS 4.43%
Morton International, Inc. 80,800 $ 2,504,800
Nalco Chemical Company 40,000 1,365,000
3,869,800
CAPITAL GOODS & CONSTRUCTION 11.87%
AMP, Inc. 30,000 1,155,000
Linear Technology Company 66,600 2,763,900
Sherwin Williams Company 68,700 2,404,500
W.W. Grainger, Inc. 34,700 2,095,012
York International Corporation 46,000 1,937,750
10,356,162
CONSUMER CYCLICAL 23.76%
Albertson's, Inc. 58,000 1,979,250
Gannett Company 21,000 1,147,125
May Department Stores Company 64,500 2,821,875
McDonald's Corporation 24,000 918,000
Newell Company 119,900 2,967,525
R.R. Donnelley & Sons 73,600 2,870,400
Sonoco Products Company 101,350 2,812,462
Sunbeam-Oster 17,500 260,313
Sysco Corporation 100,400 2,735,900
Unifi, Inc. 90,200 2,209,900
20,722,750
CONSUMER STAPLES 10.94%
Avon Products 21,900 1,571,325
Johnson & Johnson 39,900 2,957,587
Merck & Company, Inc. 38,000 2,128,000
Pfizer, Inc. 54,000 2,882,250
9,539,162
ENERGY 5.56%
Enron Corporation 41,900 1,403,650
Mobile Corporation 17,000 1,693,625
Schlumberger, Ltd. 26,800 1,748,700
4,845,975
</TABLE>
23
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 12.10%
American Express Company 67,000 $ 2,973,125
Banc One Corporation 69,000 2,518,500
Federal National Mortgage Association 21,800 2,256,300
United Asset Management Corporation 69,900 2,804,738
10,552,663
HEALTH 0.78%
Columbia HCA Healthcare Corporation 14,000 680,750
TECHNOLOGY 15.99%
General Electric Company 51,700 3,295,875
Hewlett Packard Company 21,000 1,750,875
Intel Corporation 20,000 1,202,500
Loral Corporation 43,700 2,490,900
Motorola, Inc. 37,300 2,848,788
Premier Industrial Corporation 94,300 2,357,500
13,946,438
TRANSPORTATION & SERVICES 2.68%
Werner Enterprises, Inc. 112,800 2,340,600
MISCELLANEOUS 11.82%
Corning, Inc. 64,700 1,852,037
Interpublic Group Company 64,000 2,544,000
General Motors Corporation-Class E 24,000 1,092,000
Olsten Corporation 39,500 1,535,563
Tyco International, Ltd. 52,200 3,288,600
10,312,200
TOTAL COMMON STOCKS (COST $76,614,326) 87,166,500
SHORT-TERM INVESTMENT 0.17%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $100,000
U.S. Treasury Note, 11.75%, due 11/15/14,
(cost $145,965) $ 145,965 145,965
TOTAL INVESTMENTS (COST $76,760,291) 100.10% 87,312,465
OTHER ASSETS LESS LIABILITIES (0.10%) (82,504)
NET ASSETS 100.00% $ 87,229,961
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 79.94%
BASIC MATERIALS 5.66%
Alco Standard Corporation 26,500 $ 2,245,875
American Buildings Company* 43,000 1,015,875
Federal Paper Board Company, Inc. 62,800 2,409,950
J&L Specialty Steel, Inc. 48,000 1,008,000
NL Industries, Inc.* 132,400 2,184,600
The Scotts Company - Class A* 96,200 2,128,425
Union Carbide Corp Holding 58,000 2,305,500
13,298,225
COMMERCIAL SERVICES & PRODUCTS 1.21%
Paychex, Inc. 61,537 2,846,086
CAPITAL GOODS & CONSTRUCTION 4.10%
AGCO Corporation 48,600 2,211,300
Bel Fuse, Inc.* 82,600 1,011,850
Insituform Technologies* 147,400 2,063,600
Microchip Technology, Inc.* 57,800 2,189,175
USA Waste Services, Inc.* 111,200 2,168,400
9,644,325
CONSUMER CYCLICAL 2.88%
Clear Channel Communications* 36,000 2,727,000
First Team Sports* 82,000 1,312,000
Primark Corporation* 109,700 2,728,787
6,767,787
CONSUMER STAPLES 4.51%
Amgen, Inc.* 45,000 2,244,375
Dura Pharmaceuticals* 39,700 1,181,075
Richfood Holdings, Inc. - Class A 95,000 2,392,812
Terra Industries, Inc. 176,700 2,517,975
Watson Pharmaceuticals* 55,400 2,271,400
10,607,637
ENERGY 0.98%
Panhandle Eastern Corporation 84,900 2,313,525
</TABLE>
25
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 23.05%
Alex. Brown, Inc. 47,300 $ 2,761,137
Bank of New York Company, Inc. 50,800 2,362,200
City National Corporation 162,200 2,149,150
Concord Electronic Fleet Services, Inc.* 80,400 2,452,200
Credit Acceptance Corporation* 93,700 2,529,900
First USA, Inc. 43,400 2,354,450
Green Tree Financial Corporation 44,300 2,702,300
Hibernia Corporation - Class A 220,300 2,230,537
Lehman Brothers Holdings, Inc. 94,000 2,173,750
MBNA Corporation 64,950 2,703,543
Mercury Finance Company 110,000 2,681,250
Meridian Bancorp, Inc. 57,900 2,214,675
Morgan Stanley, Inc. 25,800 2,480,025
North Fork Bancorp, Inc. 111,000 2,303,250
Republic New York Corporation 38,100 2,228,850
Standard Federal Bancorp, Inc. 60,300 2,351,700
Student Loan Marketing Association 40,600 2,192,400
Synovus Financial Corporation 87,200 2,278,100
T. Rowe Price Associates, Inc. 60,500 3,100,625
The Money Store, Inc. 14,400 682,200
Travelers, Inc. 48,500 2,576,563
UJB Financial Corporation 66,900 2,140,799
Waterhouse Investor Service 100,000 2,550,000
54,199,604
HEALTH 6.36%
Loewen Group, Inc. 69,400 2,862,750
ORNDA Healthcorp* 110,000 2,337,500
Research Industries Corporation* 44,100 1,284,412
Respironics, Inc.* 127,300 2,450,525
Service Corporation International 65,600 2,566,600
Target Therapeutics, Inc.* 49,300 3,451,000
14,952,787
INDUSTRIAL PRODUCTS 4.73%
JLG Industries, Inc. 69,000 3,105,000
Owens-Corning Fiberglass Company* 49,700 2,217,863
Thermo Electron Corporation* 59,250 2,747,719
Toll Brothers, Inc.* 161,600 3,050,200
11,120,782
</TABLE>
26
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL 2.21%
Compucom Systems, Inc.* 177,000 $ 1,150,500
Discount Auto Parts* 38,000 1,149,500
Staples, Inc.* 102,375 2,892,094
5,192,094
TECHNOLOGY 19.20%
Analog Devices, Inc.* 60,800 2,105,200
Andrew Corporation* 43,500 2,658,938
Aspen Technology, Inc.* 41,600 1,248,000
BMC Software, Inc.* 49,000 2,254,000
Cognex Corporation* 57,500 2,774,375
Continuum Company, Inc.* 61,100 2,344,713
Cordis Corporation* 27,500 2,330,625
Dell Computer Corporation* 39,300 3,340,500
Indigo N.V.* 18,200 420,875
Intervoice, Inc.* 99,500 2,276,063
KLA Instruments Corporation* 29,700 2,383,425
Maxim Integrated Products, Inc.* 43,200 3,196,800
Mylex Corporation* 137,100 2,330,700
Oracle Systems Corporation* 52,300 2,007,013
Parametric Technologies Corporation* 50,000 3,075,000
Pioneer Standard Electronics, Inc. 118,800 2,079,000
TCA Cable TV, Inc. 76,400 2,196,500
Vicor Corporation* 109,000 2,636,438
Wind River Systems* 63,000 1,480,500
Zebra Technologies* 37,900 2,018,175
45,156,840
TRANSPORTATION 1.16%
Wisconsin Central Transportation Corporation* 41,000 2,736,750
UTILITIES 2.37%
Equifax, Inc. 61,100 2,558,563
US Robotics Corporation* 35,200 3,000,800
5,559,363
</TABLE>
27
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS 1.52%
Corrections Corporation of America* 27,000 $ 1,299,375
DSC Communications Corporation* 80,300 2,268,475
3,567,850
TOTAL COMMON STOCKS (COST $150,219,271) 187,963,655
SHORT-TERM INVESTMENT 22.87%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/2/95,
collateralized by $36,400,000
U.S. Treasury Note, 11.75%, 11/15/14
(cost $53,775,569) $53,775,569 53,775,569
TOTAL INVESTMENTS (COST $203,994,840) 102.81% 241,739,224
OTHER ASSETS LESS LIABILITIES (2.81%) (6,598,058)
NET ASSETS 100.00% $235,141,166
</TABLE>
* Securities not currently producing income.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 57.74%
BASIC INDUSTRIES 10.72%
Aluminum Company of America 51,000 $2,696,625
Goodrich BF 8,700 573,112
IMC Global, Inc. 9,000 570,375
International Paper Company 46,400 1,948,800
International Specialty Products, Inc. 32,600 297,475
Precision Castparts 11,700 427,050
Rayonier, Inc. 5,100 199,537
Rhone Poulenc SA~ 16,055 325,114
Wyman-Gordon Company* 7,200 99,450
7,137,538
CAPITAL GOODS & CONSTRUCTION 4.79%
BE Aerospace, Inc.* 42,700 357,612
Boeing Company 7,000 477,750
Centex Construction Products, Inc.* 36,200 475,125
Curtiss-Wright Corporation 9,700 429,225
Giddings & Lewis, Inc. 6,000 104,625
Sequa Corporation* 18,100 484,175
Standard Pacific Corporation 77,200 540,400
York International Corporation 7,500 315,938
3,184,850
CONSUMER STAPLES 3.98%
Chiquita Brands International 13,600 232,900
Dimon Incorporated 17,000 255,000
Hills Stores Company* 27,549 313,370
Interstate Bakeries Corporation 20,200 426,725
Kmart Corporation 25,000 362,500
Universal Corporation 47,000 1,057,500
2,647,995
ENERGY 10.38%
Amerada Hess Corporation 18,000 875,250
Anderson Exploration* 18,216 229,977
Ashland Oil, Inc. 8,300 277,013
Burlington Resources, Inc. 19,200 744,000
Cooper Cameron Corporation* 3,348 86,630
Enserch Corporation 10,600 174,900
Gerrity Oil & Gas Corporation* 87,000 271,875
Gulf Canada Resources, Ltd.* 69,300 294,525
Lone Star Technologies, Inc.* 25,100 238,450
Noble Drilling Corporation* 59,500 461,125
Oryx Energy* 26,500 344,500
Petroleum Heat & Power Company 57,600 489,600
Seagull Energy Corporation* 26,000 526,500
Sonat Offshore Drilling, Inc. 11,500 375,188
</TABLE>
29
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY (CONTINUED)
Teekay Shipping Corp.* 3,400 $ 81,600
U.S.X. Marathon Group, Inc. 28,300 558,925
Unocal Corporation 21,400 609,900
YPF Associadad 15,000 270,000
6,909,958
FINANCIAL 11.28%
ACE, Ltd. 32,500 1,117,187
California Federal Bank* 15,556 245,007
California Federal Bank Certificates* 1,555 8,941
Chubb Corporation 7,300 700,800
CIGNA Corporation 20,900 2,176,213
Danielson Holding Company* 56,000 420,000
Horace Mann Educator 6,800 187,000
Koger Equity, Inc. REIT* 37,900 374,263
Lehman Brothers Holding, Inc. 24,840 574,425
Loews Corporation 2,400 349,200
Long Island Bancorp 4,700 115,150
Newhall Land & Farming Company 26,100 349,088
Old Republic International Corporation 16,000 462,000
Patroit American Hospital - REIT* 2,400 61,500
Paul Revere Corporation 10,000 188,750
Tucker Properties Company 11,000 122,375
Zurich Reinsurance Company* 1,900 56,525
7,508,424
TECHNOLOGY 3.20%
Alcatel Alsthom 14,900 253,300
B.C.E., Inc. 25,400 847,725
Cooper Industries, Inc. 3,812 134,373
Portugal Telecom ADS* 1,300 25,025
Raychem Corporation 9,500 427,500
Worldcom, Inc.* 13,781 442,714
2,130,637
TRANSPORTATION & SERVICES 3.40%
AMR Corporation* 6,000 432,750
Bergesen Dyas 5,000 111,095
Canadian Pacific, Ltd. 23,500 376,000
Flightsafety International 7,300 334,887
Midwest Express Holding Company* 700 15,750
Nordic American Tanke - Warrants* 20,000 97,500
OMI Corporation* 25,900 181,300
Overseas Shipholding Group 25,000 496,875
Trans World Airlines* 34,200 220,162
2,266,319
</TABLE>
30
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
UTILITIES 2.08%
Illinova Corporation 10,000 $ 271,250
Niagara Mohawk Power 30,700 402,937
Public Service Company of New Mexico* 27,200 445,400
Unicom Corporation 8,600 260,150
1,379,737
MISCELLANEOUS 4.50%
Brascan, Ltd.-Class A 19,200 314,400
CBI Industries 16,600 394,250
Comsat Corporation 17,500 393,750
Corning, Inc. 17,300 495,213
Eastman Kodak Company 10,500 622,125
Essex Property Trust, Inc. 19,900 350,738
W.M.X. Technologies, Inc. 14,800 421,800
2,992,276
FOREIGN SECURITIES 3.41%
CAE, Inc. 75,000 517,049
Onex Corporation 23,400 259,419
St. Lawrence Cement, Inc. 45,000 276,691
Pichney SA 7,000 447,511
Technip SA 7,500 493,176
Telecom Italia SPA 61,000 100,659
Pohjola Insurance Company* 10,000 177,308
2,271,813
TOTAL COMMON STOCKS (COST $33,483,327) 38,429,547
PREFERRED STOCKS 2.39%
BASIC MATERIALS 0.96%
Boise Cascade Corporation 9,000 302,625
Reynolds Metals Company 6,500 336,375
639,000
FINANCIAL 1.43%
American R E Partners 3,143 18,858
Glendale Federal Bank 21,700 933,100
951,958
TOTAL PREFERRED STOCKS (COST $1,044,653) 1,590,958
</TABLE>
31
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
CORPORATE BONDS 7.00%
BASIC MATERIALS 0.36%
Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 $ 241,665
CAPITAL GOODS & CONSTRUCTION 0.15%
Lockheed Corporation, 6.75%, 3/15/03 100,000 100,942
CONSUMER CYCLICAL 0.69%
Sears Roebuck Company, 9.25%, 4/15/98 175,000 186,926
Time Warner Entertainment, Inc., 8.88%, 10/01/12 250,000 271,828
458,754
CONSUMER STAPLES 0.35%
Gillette Company, 5.75%, 10/15/05 250,000 235,022
FINANCIAL 3.27%
American General Finance Corporation,
5.88%, 7/01/00 250,000 243,982
Associates Corporation of North America,
5.25%, 3/30/00 250,000 238,380
Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 261,530
Comerica Bank, 7.13%, 12/01/13 250,000 237,850
Dean Witter Discover, 6.25%, 3/15/00 100,000 99,203
First National Bank, 8.00%, 9/15/04 250,000 267,682
Ford Motor Credit, 8.88%, 6/15/99 100,000 107,942
Great Western Financial, 6.38%, 7/01/00 250,000 247,668
Home Savings of Americas, 6.00%, 11/01/00 250,000 242,723
Toronto Dominion Bank, 6.13%, 11/01/08 250,000 231,607
2,178,567
TRANSPORTATION 0.39%
AMR Corporation, 6.13%, 11/01/24 250,000 255,450
UTILITIES 1.79%
Duke Power Company, 7.00%, 6/01/00 100,000 102,506
Florida Power & Light Company, 5.38%, 4/01/00 250,000 239,575
Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 238,265
Philadelphia Electric Company, 7.50%, 1/15/99 100,000 103,116
Southwestern Public Service Company, 6.88%, 12/01/99 250,000 254,282
Union Electric Company, 6.75%, 10/15/99 250,000 253,580
1,191,324
TOTAL CORPORATE BONDS (COST $4,774,490) 4,661,724
</TABLE>
32
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
GOVERNMENT BONDS 23.92%
Government National Mortgage Association, 6.50%,
9/15/23-4/15/24 $ 1,429,808 $ 1,379,750
Government National Mortgage Association, 7.00%, 1/15/24 2,276,232 2,250,602
U.S. Treasury Bond, 5.13%, 3/31/98 2,500,000 2,457,125
U.S. Treasury Bond, 7.50%, 11/15/16 3,500,000 3,841,950
U.S. Treasury Note, 6.88%, 2/28/97 2,000,000 2,028,300
U.S. Treasury Note, 6.50%, 4/30/97 2,000,000 2,020,260
U.S. Treasury Note, 4.75%, 9/30/98 1,000,000 968,520
U.S. Treasury Note, 5.75%, 8/15/03 1,000,000 973,980
Total Government Bonds (cost $15,209,920) 15,920,487
SHORT-TERM INVESTMENT 9.05%
REPURCHASE AGREEMENT
Swiss Bank
Dated 9/29/95, 6.43%, Due 10/02/95,
collateralized by $5,890,000,
U.S. Treasury Note, 7.13%, 2/29/00
(cost $6,024,000) 6,024,000 6,024,000
TOTAL INVESTMENTS (COST $60,536,390) 100.10% 66,626,716
OTHER ASSETS LESS LIABILITIES (0.10%) (60,905)
NET ASSETS 100.00% $ 66,565,811
</TABLE>
* Securities not currently producing income.
American Depository Receipts.
REIT -- Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 90.10%
AUSTRALIA 0.17%
Broken Hill Proprietary Company* 2,434 $ 33,572
CANADA 1.36%
Sherritt, Inc. 20,000 264,580
DENMARK 1.75%
Danisco A/S 4,100 179,001
Sophus Berendsen 1,500 162,367
341,368
FINLAND 1.93%
Nokia AB-A 2,400 168,419
Cultor OY 5,500 208,419
376,838
FRANCE 3.52%
AXA 3,060 161,283
Carrefour Supermarch 320 187,691
LVMH Moet Hennessy 850 160,262
Roussel-UCLAF 1,150 178,314
687,550
GERMANY 2.89%
Allianz AD Holding 96 173,324
Veba AG 5,900 233,894
Wella AG- Preferred Stock 220 157,033
564,251
GREAT BRITAIN 11.92%
Argyll Group, PLC 20,000 106,277
B.A.T. Industries, PLC 15,000 125,492
British Aerospace PLC 11,000 127,342
British Gas PLC 30,500 128,066
British Telecom 20,000 125,255
Glaxo Wellcome 10,000 121,301
Grand Metro 25,000 175,942
H.W. Smith Group PLC 15,000 87,536
Inchcape PLC 20,000 101,849
</TABLE>
34
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Land Securities 10,000 $ 97,262
Prudential Corporation PLC 20,000 119,561
Rank Organisation PLC 15,000 100,821
Scott & Newcastle 15,000 143,521
Smithkline Beecham 15,000 151,824
Standard Chartered 20,000 142,651
Sun Alliance Group PLC 20,000 115,291
Tate & Lyle PLC 15,000 106,514
Transport Development Group 45,000 150,163
Unigate 15,000 100,583
2,327,251
HONG KONG 4.99%
Bank of East Asia 15,000 48,597
Cheung Kong Holdings 33,000 179,682
Citic Pacific Limited 20,000 60,398
Dah Sing Financial 12,000 27,005
Henderson Investment 53,000 44,212
Hong Kong Electric 25,000 83,581
Hong Kong Telecom, Ltd.~ 200 363
Hong Kong & China Gas 20,000 32,204
HSBC Holdings PLC 12,000 166,839
Hopewell Holdings 27,000 18,333
Hutchison Whampoa, Ltd. 14,000 75,867
Hysan Developement 28,000 67,175
Liu Chong Hing Investment 30,000 31,428
National Mutual Asia 25,000 19,238
Sun Hung Kai Property 3,000 24,347
Swire Pacific Limited 12,000 95,059
974,328
INDONESIA 0.06%
Sorini (Sorbitol) 2,000 11,344
ITALY 0.61%
Spirti SPA 19,000 119,529
JAPAN 13.02%
Acom Company, Ltd. 5,000 162,312
Chudenko Corporation 3,000 117,588
</TABLE>
35
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Daiichi Pharmaceutical 7,000 $ 96,382
Dainippon Ink & Chemical 1,000 46,935
Hitachi, Ltd. 15,000 162,814
Kao Corporation 6,000 74,171
Mitsubishi Heavy Industries 7,000 53,467
Mitsubishi Motors Company 10,000 83,719
Mitsui Bank & Trust 1,000 9,296
NEC Corporation 8,000 110,955
Nichiei Company 1,000 63,920
Nippon Meat Packery 12,000 160,402
Nippon Yusen Kabushi 10,000 58,995
NKK Corporation 30,000 79,900
PS Corporation 7,000 137,889
Raito Kogyo 4,000 82,814
Rinnai 5,000 109,548
Shizouka Bank 13,000 177,688
Sumitomo Electric 10,000 121,608
Sumitomo Realty & Development 9,000 62,864
Taisho Pharmaceutical 7,000 130,854
Tokyo Electric Power 4,040 110,034
Tokyo Electron, Ltd. 2,000 86,633
Toshiba Corporation 6,000 43,719
Yokogawa Bridge Corporation 6,000 87,437
Yokohama Reito 10,000 109,548
2,541,492
MALAYSIA 0.37%
Land & General Holdings 3,000 7,876
Petronas Gas Berhad 10,000 34,905
Sriwani Holdings 20,000 29,117
71,898
NETHERLANDS 3.60%
Fortis Amev NV 3,000 174,959
Philips Electronics 3,600 175,522
Polygram NV 2,900 188,524
Wolter Kluwer 1,780 163,446
702,451
</TABLE>
36
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
PHILIPPINES 0.53%
Filinvest Land 100,000 $ 32,239
Pilipino Telephone 74,300 70,579
102,818
SINGAPORE 1.13%
Development Bank Singapore 5,000 56,902
DBS- Land 40,000 118,581
Straits Trading Company 20,000 45,803
221,286
SPAIN 1.93%
Banco Popular Espano 1,200 186,836
Gas Natural 1,500 189,194
376,030
SWEDEN 3.86%
Ericsson LM 15,000 193,441
MO OCH Domsjoe AB-B 2,900 182,009
Securitas AB B-F 5,400 193,554
Volvo AB 7,500 183,535
752,539
SWITZERLAND 0.98%
Roche Holding AG 27 190,671
THAILAND 1.86%
PTT Exploration 5,000 48,615
Shinawatra Computer 1,000 23,192
Siam City Bank, Ltd. 50,000 67,743
Thai Military Bank, Ltd. 37,000 147,440
Tipco Asphalt Company 15,000 76,509
363,499
UNITED STATES 32.50%
Aetna Life & Casualty 4,000 293,500
Arethusa Off-Shore, Ltd. 12,000 247,500
Capital One Financial 10,000 293,750
</TABLE>
37
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
CITC Seoul Exel IDR 2 $ 22,060
Columbia Gas Systems* 8,000 309,000
Columbia HCA Healthcare 4,000 194,500
Compaq Computer Corporation* 4,000 193,500
CWM Mortgage 14,000 189,000
Deere & Company 3,000 244,125
Dovatron International* 6,000 207,750
Equifax 6,000 251,250
Gilead Sciences, Inc.* 8,000 176,000
Gujarat Ambuja 5,000 42,500
HBO & Company 4,000 250,000
Jardine Matheson Holding 18,000 121,500
Jardine Strategic Holding 18,125 52,925
Jardine Strategic-Warrants* 3,125 1,125
Kohl's Corporation* 5,000 259,375
Korea-Europe Fund 18 84,690
LG Electronics 6,400 76,800
Lockheed Martin Corporation 4,000 268,500
Motorola, Inc. 4,000 305,500
Office Depot, Inc. 10,000 301,250
PT Indonesia Satellite A 1,800 63,225
Readers Digest 6,000 282,750
Reynolds & Reynolds Company 7,000 240,625
Schlumberger, Ltd. 3,200 208,800
SCI Systems* 6,000 207,000
Scott Paper Company 4,000 194,000
Taipei Fund 1,000 76,380
Teekay Shipping Corporation 12,000 288,000
The Carbide/Graphite Group 10,000 141,250
Worldcom, Inc.* 8,000 257,000
6,345,130
VENEZUELA 1.12%
Venezolana De Prerredicidos (4/13/94, $260,293)* (a) (b) 35,600 218,050
TOTAL COMMON STOCKS (COST $16,612,885) 17,586,475
CORPORATE BOND 0.81%
MALAYSIA
Telekom Malaysia Berhad, 4.00%, 10/3/04
(9/22/94, cost $170,000) (a) (b) $ 170,000 158,738
</TABLE>
38
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 6.67%
Repurchase Agreement
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/2/95,
collateralized by $1,310,000,
U.S. Treasury Note, 6.75%, 2/28/97
(cost $1,302,557) $1,302,557 $ 1,302,557
TOTAL INVESTMENTS (COST $18,085,442) 97.58% 19,047,770
OTHER ASSETS LESS LIABILITIES 2.42% 473,363
NET ASSETS 100.00% $19,521,133
</TABLE>
* Securities not currently producing income.
~ 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) 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>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 92.84%
ASSET-BACKED SECURITIES 5.20%
Advanta Mortgage Loan Trust, Series 1993-3 A5, 5.55%,
1/25/25 $ 1,892,821 $ 1,775,561
Old Stone Credit Corporation Home Equity Trust,
Series 1993-1 B1, 6.00%, 3/15/08 1,970,813 1,920,813
World Omni, Series 1993-B, 5.05%, 8/15/99 826,786 810,788
TOTAL ASSET-BACKED SECURITIES 4,507,162
U.S. GOVERNMENT SECURITIES AND AGENCIES 42.10%
FEDERAL HOME LOAN MORTGAGE CORPORATION - REMIC 8.77%
5.50%, 9/15/21 5,000,000 4,410,700
6.00%, 7/15/20 3,500,000 3,182,340
7,593,040
FEDERAL NATIONAL MORTGAGE ASSOCIATION - REMIC 7.01%
PO, Class G92-56B, 7/25/20 1,557,953 1,369,538
PO, Class G93-37B, 11/25/22 5,000,000 4,292,700
PO, 1993 Class 202T, 11/25/23 1,073,529 411,296
6,073,534
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 19.94%
6.00%, 12/15/08 - 6/15/09 7,464,908 7,257,234
6.00%, 10/01/25, TBA (a) 10,000,000 10,012,500
17,269,734
TREASURY SECURITIES 6.38%
U.S. Treasury Bond, 7.50%, 11/15/24* 1,750,000 1,946,420
U.S. Treasury Note, 6.50%, 8/15/05* 3,500,000 3,584,455
5,530,875
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES 36,467,183
NON-CONVERTIBLE CORPORATE BONDS 21.31%
ENERGY 1.81%
Occidental Petroleum, 8.75%, 2/14/03 1,500,000 1,568,385
</TABLE>
40
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
NON-CONVERTIBLE CORPORATE BONDS (CONTINUED)
FINANCE 17.99%
Developers Diversified Realty, 7.63%, 5/15/00 $ 2,000,000 $ 2,000,300
Lehman Brothers, Inc., 9.88%, 10/15/00 4,000,000 4,480,560
Nationsbank Corporation, 9.38%, 9/15/09 3,500,000 4,167,380
Salomon, Inc., 6.00%, 1/12/98 3,000,000 2,925,360
Travelers, Inc., 6.88%, 6/01/25 2,000,000 2,007,480
15,581,080
UTILITIES 1.51%
Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,308,650
TOTAL NON-CONVERTIBLE CORPORATE BONDS 18,458,115
COLLATERALIZED MORTGAGE OBLIGATIONS 16.78%
Chase Mortgage Finance Corporation,
Series 1993-L2 M, 7.00%, 10/25/24 3,089,857 2,960,948
First Boston Mortgage Securities Corporation,
Series 1993-5 M2, 7.30%, 7/25/23 2,448,703 2,401,345
General Electric Capital Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%, 2/25/09 2,308,576 2,138,411
Securitized Asset Sales, Inc., Series 1994-5 AM, 7.00%,
7/25/24 7,401,233 7,039,165
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 14,539,869
RESIDUAL INTERESTS 7.45%
General Mortgage Securities, Inc., 1995-1, 6/25/20 20,644 190,242
General Mortgage Securities II, Inc., 1995-2, 6/27/25 41,643 569,731
National Mortgage Funding I, Inc., 1995-1, 4/28/25 38,943 584,275
National Mortgage Funding I, Inc., 1995-2, 5/22/25 42,531 519,362
National Mortgage Funding I, Inc., 1995-3, 5/22/25 40,435 943,943
National Mortgage Funding I, Inc., 1995-4, 3/20/21 18,900 290,898
National Mortgage Funding I, Inc., 1995-5, 3/25/22 17,606 915,938
National Mortgage Funding I, Inc., 1995-6, 8/27/25 43,953 785,170
National Mortgage Funding I, Inc., 1995-7, 9/17/25 45,000 831,465
National Mortgage Funding I, Inc., 1995-8, 9/28/25 45,000 822,118
TOTAL RESIDUAL INTERESTS 6,453,142
TOTAL LONG-TERM INVESTMENTS (COST $79,796,076) 80,425,471
</TABLE>
41
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENT 17.77%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $15,950,000
U.S. Treasury Bill, 12/28/95
(cost $15,396,050) $15,396,050 $15,396,050
TOTAL INVESTMENTS (COST $95,192,126) 110.61% 95,821,521
OTHER ASSETS LESS LIABILITIES (10.61%) (9,194,630)
NET ASSETS 100.00% $86,626,891
</TABLE>
INVESTMENT ABBREVIATIONS
PO - Principal Only
REMIC - Real Estate Mortgage Investment Conduit
(a) At September 30, 1995, the cost of securities purchased on a when-issued
basis totaled $10,001,875.
* $5,250,000 principal amount of these securities have been segregated for a
commitment to purchase when-issued securites at September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
ASSET-BACKED SECURITIES 7.88%
General Motors Acceptance Corporation, 6.30%, 6/15/99 $ 514,977 $ 515,394
Old Stone Credit Corporation, 6.20%, 6/15/08 816,186 800,596
World Omni 1993 B, 5.05%, 8/15/99 335,184 328,698
Total Asset-Backed Securities (cost $1,628,485) 1,644,688
U.S. GOVERNMENT SECURITIES AND AGENCIES 61.45%
Federal Home Loan Mortgage Corporation
Series 1323 B, PAC 1, 6.47%, 7/15/97 90,253 90,004
Federal National Mortgage Association
11.00%, 7/01/01 271,467 286,507
10.00%, 6/01/05* 627,833 663,199
Government National Mortgage Association II, TBA, 6.00%,
10/01/25 (a) 3,175,000 3,178,969
U.S. Treasury Note, 7.50%, 10/31/99* 8,175,000 8,607,376
Total U.S. Government Securities and Agencies
(cost $12,603,208) 12,826,055
COLLATERALIZED MORTGAGE OBLIGATION 2.56%
Ryland Acceptance Corporation, 9.63%, 9/25/17,
(cost $529,944) 539,618 534,081
CORPORATE BONDS 25.68%
Developers Diversified Realty, 7.63%, 5/15/00 200,000 200,030
Lehman Brothers, Inc., 9.88%, 10/15/00 1,350,000 1,512,189
Mississippi Power & Electric, 8.80%, 4/1/05 750,000 785,190
Occidental Petroleum, 8.75%, 2/14/03 1,000,000 1,045,590
Paine Webber, 9.18%, 3/12/99 750,000 796,335
Salomon Inc., 8.62%, 2/17/97 1,000,000 1,020,390
Total Corporate Bonds (cost $5,322,892) 5,359,724
TOTAL INVESTMENTS (COST $20,084,529) 97.57% 20,364,548
OTHER ASSETS LESS LIABILITIES 2.43% 507,997
NET ASSETS 100.00% $20,872,545
</TABLE>
(a) At September 30, 1995 cost of securities purchased on a when-issued basis
totaled $3,182,383.
* $3,400,000 principal amount of these securities have been segregated for a
commitment to purchase when-issued securities at September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES 97.16%
ARIZONA 3.73%
Pima County Arizona, 7.25%, 7/15/10 $2,000,000 $2,239,040
CALIFORNIA 11.02%
California Educational Facilities, College of
Osteopathic Medicine, 7.50%, 6/01/18 965,000 1,089,958
Carson Improvement Board Act 1915, Special
Assessment District 92, 7.38%, 9/02/22 730,000 748,761
Los Angeles Convention, Series A, 5.13%, 8/15/21 1,750,000 1,558,322
Orange County Community Facilities District,
Series A, 7.35%, 8/15/18 300,000 353,121
San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,010,670
San Francisco City Sewer Revenue Refunding,
5.38%, 10/01/22 2,000,000 1,846,380
6,607,212
COLORADO 8.04%
Arapahoe County, Capital Improvement, 7.00%, 8/31/26 1,000,000 1,034,330
Colorado HFA, SFM, Series A-3, 7.00%, 11/01/24 640,000 663,309
Denver City & County Airport Revenue, 7.75%, 11/15/13 1,000,000 1,194,160
Denver City & County Airport Revenue, 8.50%, 11/15/23 1,700,000 1,929,500
4,821,299
DISTRICT OF COLUMBIA 1.38%
Metropolitan Washington, General Airport Revenue,
Series A, 6.63%, 10/01/19 800,000 829,328
FLORIDA 5.54%
Dade County, 6.50%, 10/01/26 680,000 721,072
Hillsborough County, 6.25%, 12/01/34 1,250,000 1,285,287
Sarasota County, Health Facilities Authority Revenue,
10.00%, 7/01/22 1,190,000 1,314,569
3,320,928
GEORGIA 3.55%
Cobb County Development Authority Revenue Bonds,
Series 92A, 8.00%, 6/01/22 1,000,000 1,020,000
Monroe County Development Authority PCR, 6.75%, 1/01/10 1,000,000 1,105,550
2,125,550
ILLINOIS 11.27%
Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,068,220
Chicago Heights Residential Mortgage,
(effective yield-2.67%) (a), 6/01/09 3,465,000 1,317,324
</TABLE>
44
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
ILLINOIS (CONTINUED)
Chicago O'Hare International Airport Special
Facilities Revenue, 6.75%, 1/01/18 $1,350,000 $1,402,528
Chicago, Capital A, (effective yield-1.62%) (a),
7/01/16 2,000,000 516,540
Illinois Health Facilities Authority Revenue,
9.50%, 10/01/22 1,250,000 1,352,313
Robins, Illinois Residential, 9.25%, 10/15/14 1,000,000 1,100,720
6,757,645
INDIANA 0.45%
Indiana Transportation Finance Authority,
Series A, (effective yield-1.59%) (a), 6/01/17 1,000,000 269,070
IOWA 1.11%
Student Loan Liquidity Corporation, Student Loan
Revenue, Series C, 6.95%, 3/01/06 625,000 667,169
KENTUCKY 3.41%
Jefferson County, Hospital Revenue, 8.29%, 10/01/08 500,000 556,250
Kenton County Airport Board Revenue, OID, 7.50%,
2/01/20 1,400,000 1,486,072
2,042,322
MAINE 1.72%
Maine State Housing Authority, Series C, 6.88%,
11/15/23 1,000,000 1,030,740
MASSACHUSETTS 4.39%
Massachusetts State Health and Educational Facilities
Authority, OID Revenue Bonds, Series A, 6.00%,
10/01/23 2,000,000 1,557,380
Massachusetts State Health and Education, 6.88%,
4/01/22 1,000,000 1,077,560
2,634,940
MICHIGAN 0.89%
Romulus Community Schools, Refunding, (effective
yield-1.34%) (a), 5/01/20 2,385,000 531,426
MONTANA 0.80%
Montana State Resource Recovery Revenue Bonds, 7.00%,
12/31/19 500,000 482,430
NEBRASKA 0.69%
Nebraska Finance Authority, SFM, 9.10%, 9/15/24 400,000 411,500
</TABLE>
45
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
NEVADA 0.89%
Henderson Local Improvement District, Special
Assessment, Series A, 8.50%, 11/01/12 $ 500,000 $ 532,015
NEW YORK 7.82%
Clifton Springs Hospital Refunding & Improvement,
8.00%, 1/01/20 930,000 937,896
Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 1,065,350
New York City, Series H, 7.20%, 2/01/13 1,500,000 1,595,985
New York State Dorm Authority, 6.75%, 7/01/24 1,000,000 1,087,320
4,686,551
NORTH DAKOTA 1.82%
Ward County, Healthcare Facilities, 8.88%, 11/15/24 1,000,000 1,093,270
OKLAHOMA 1.71%
Oklahoma City, Industrial and Cultural Facilities
Trust, 6.75%, 9/15/17 1,000,000 1,027,960
PENNSYLVANIA 3.96%
Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 495,535
Pennsylvania Intergovernmental Cooperative Authority,
Special Tax Revenue, 6.80%, 6/15/12 750,000 843,817
Philadelphia Hospital and Higher Education Facilities,
6.50%, 11/15/08 1,000,000 1,034,770
2,374,122
RHODE ISLAND 0.77%
West Warwick, Series A, G.O. Bonds, 6.80% - 7.30%,
7/15/98 - 7/15/08 435,000 460,431
TENNESSEE 7.66%
Memphis, Shelby County Airport Authority, Special
Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,682,070
Tennessee Housing, 7.38%, 7/01/23 2,750,000 2,911,508
4,593,578
TEXAS 4.94%
Brazos Higher Education Authority Student Loan Revenue,
7.10%, 11/01/04 1,000,000 1,097,420
Dallas-Fort Worth International Airport Facility
Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,048,680
Texas State Department of Housing and Community Affairs
Refunding, Series C, 9.54%, 7/02/24 750,000 812,812
2,958,912
</TABLE>
46
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
UTAH 3.54%
Bountiful Hospital Revenue, 9.50%, 12/15/18 $ 245,000 $ 262,701
Utah State Housing Finance Commission, 7.20%, 1/01/27 1,750,000 1,857,958
2,120,659
WEST VIRGINIA 6.06%
Harrison County, 6.75%, 8/01/24 2,000,000 2,127,900
West Virginia State Hospital Finance Authority Revenue,
7.50%, 1/01/18 1,500,000 1,503,765
3,631,665
TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $55,629,527) 58,249,762
SHORT-TERM MUNICIPAL SECURITIES (B) 1.33%
OHIO 0.67%
Hamilton County, 4.80%, 3/01/17, VRDN 400,000 400,000
NEW YORK 0.66%
City of New York, A-7, 4.80%, 8/01/21, VRDN 100,000 100,000
New York, New York, Series B, 4.65%, 10/01/21, VRDN 100,000 100,000
New York City Municipal Water, 4.40%, 6/15/24, VRDN 200,000 200,000
400,000
TOTAL SHORT-TERM MUNICIPAL SECURITIES (COST $800,000) 800,000
TOTAL INVESTMENTS (COST $56,429,527) 98.49% 59,049,762
OTHER ASSETS LESS LIABILITIES 1.51% 903,417
NET ASSETS 100.00% $59,953,179
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<S> <C>
GO - General Obligation PCR - Pollution Control Revenue
HFA - Housing Finance Authority PFA - Public Financing Authority
IDA - Industrial Development Authority SFM - Single Family Mortgage
OID - Original Issue Discount VRDN - Variable Rate Demand Note, rate shown represents
current interest rate at 9/30/95.
</TABLE>
(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.
(b) Interest rates represent annualized yield to date of maturity. For each
security, cost (for financial reporting and federal income tax purposes) and
carrying value are the same.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
MENTOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Mentor
Mentor Capital Mentor
Growth Growth Strategy
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
ASSETS
Investments, at market value * (Note 2)
Investments securities $236,848,484 $87,166,500 $187,963,655
Repurchase agreements 25,689,361 145,965 53,775,569
Total investments 262,537,845 87,312,465 241,739,224
Cash - 1,125 -
Receivables
Investments sold 6,719,367 2,354,746 146,250
Fund shares sold 16,217,235 264,849 7,170,445
Dividends and interest 63,296 128,332 105,916
Forward foreign currency exchange contracts held
(Note 8) - - -
Closed forward foreign currency contracts - - -
Due from Management Company - - -
Deferred expenses (Note 2) 27,607 - 65,544
Other assets - - -
Total assets 285,565,350 90,061,517 249,227,379
LIABILITIES
Payables
Investments purchased 3,885,112 2,485,380 9,187,919
Fund shares redeemed 14,876,548 228,102 4,790,689
Dividends - - -
Closed forward foreign currency contracts - - -
Accrued expenses and other liabilities 109,266 118,074 107,605
Total liabilities 18,870,926 2,831,556 14,086,213
NET ASSETS $266,694,424 $87,229,961 $235,141,166
Net Assets represented by: (Note 2)
Additional paid-in capital $165,184,322 $75,969,320 $194,466,839
Undistributed net investment income (loss) - - 47,636
Accumulated distributions in excess of net investment
income - - -
Accumulated net realized gain (loss) on investment
transactions 24,789,634 708,467 2,882,307
Net unrealized appreciation of investments and foreign
currency related transactions 76,720,468 10,552,174 37,744,384
NET ASSETS $266,694,424 $87,229,961 $235,141,166
NET ASSET VALUE PER SHARE
Class A Shares $ 16.08 $ 16.02 $ 15.24
Class B Shares $ 16.05 $ 15.79 $ 15.21
OFFERING PRICE PER SHARE
Class A Shares $ 17.06(a) $ 17.00(a) $ 16.17(a)
Class B shares $ 16.05 $ 15.79 $ 15.21
REDEMPTION PROCEEDS PER SHARE
Class A Shares $ 16.08 $ 16.02 $ 15.24
Class B Shares (d) $ 15.41 $ 15.16 $ 14.60
SHARES OUTSTANDING
Class A Shares 1,266,659 1,846,405 688,803
Class B Shares 15,350,398 3,651,052 14,773,679
Total Shares Outstanding 16,617,057 5,497,457 15,462,482
</TABLE>
* Investments at cost $185,817,377, $76,760,291, $203,994,840, $60,536,390,
$18,085,442, $95,192,126, $20,084,529 and $56,429,527 respectively.
(a) Computation of offering price: 100/94.25 of net asset value.
(b) Computation of offering price: 100/95.25 of net asset value.
(c) Computation of offering price: 100/99 of net asset value.
(d) Computation of redemption proceeds: 96/100 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor Mentor Mentor Mentor
Income and Perpetual Quality Short-Duration Municipal
Growth Global Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
$60,602,716 $17,745,213 $80,425,471 $ 20,364,548 $59,049,762
6,024,000 1,302,557 15,396,050 - -
66,626,716 19,047,770 95,821,521 20,364,548 59,049,762
- 35,318 49,968 3,132,129 -
344,489 1,389,696 1,913,965 - -
193,515 457,457 181,376 428,678 13,529
507,061 54,182 820,591 406,415 1,075,321
- 20 - - -
- 3,831 - - -
- - 41,651 - -
- 33,238 - 37,701 -
- - 6,585 - -
67,671,781 21,021,512 98,835,657 24,369,471 60,138,612
903,812 1,423,528 11,757,662 3,169,405 -
93,176 14,563 191,227 193,977 32,033
- - 242,891 108,828 132,279
- 19,676 - - -
108,982 42,612 16,986 24,716 21,121
1,105,970 1,500,379 12,208,766 3,496,926 185,433
$66,565,811 $19,521,133 $86,626,891 $ 20,872,545 $59,953,179
$58,165,300 $17,642,535 $99,907,822 $ 20,712,902 $60,073,272
- (40,808) - - -
(4) - (242,890) (85,490) (52,543)
2,310,185 956,483 (13,667,436) (34,886) (2,687,785)
6,090,330 962,923 629,395 280,019 2,620,235
$66,565,811 $19,521,133 $86,626,891 $ 20,872,545 $59,953,179
$ 17.13 $ 15.88 $ 13.29 $ 12.68 $ 14.92
$ 17.14 $ 15.67 $ 13.31 $ 12.67 $ 14.95
$ 18.18(a) $ 16.85(a) $ 13.95(b) $ 12.81(c) $ 15.66(b)
$ 17.14 $ 15.67 $ 13.31 $ 12.67 $ 14.95
$ 17.13 $ 15.88 $ 13.29 $ 12.68 $ 14.92
$ 16.45 $ 15.04 $ 12.78 $ 12.16 $ 14.35
1,161,248 431,462 1,840,920 79,010 1,371,150
2,723,279 808,434 4,669,766 1,568,467 2,641,371
3,884,527 1,239,896 6,510,686 1,647,477 4,012,521
</TABLE>
49
<PAGE>
MENTOR FUNDS
STATEMENTS OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Mentor
Mentor Capital Mentor
Growth Growth Strategy
Portfolio* Portfolio Portfolio*
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 966,811 $ 349,284 $ 2,468,076
Dividends (Net of withholding taxes)*** 486,045 947,404 1,008,606
Total investment income (Note 2) 1,452,856 1,296,688 3,476,682
EXPENSES
Distribution fees (Note 5) 1,222,284 288,262 1,105,495
Management fee (Note 4) 1,143,696 465,031 1,262,809
Shareholder services fees (Note 5) 404,213 145,322 371,429
Transfer agent fee 203,678 282,107 192,068
Administration fee (Note 4) 108,285 66,032 146,572
Custodian and accounting fees 103,778 41,911 75,012
Registration expenses 92,518 32,032 135,544
Shareholder reports and postage expenses 70,207 36,707 75,405
Legal and Audit fees 55,886 32,895 57,572
Organizational expenses 6,377 4,834 15,072
Directors' fees and expenses 6,195 5,254 6,690
Miscellaneous 1,798 4,187 450
Total expenses 3,418,915 1,404,574 3,444,118
Deduct
Waiver of administration fee (Note 4) - - -
Waiver of management fee (Note 4) - - -
NET EXPENSES 3,418,915 1,404,574 3,444,118
NET INVESTMENT INCOME (LOSS) (1,966,059) (107,886) 32,564
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS
Net realized gain (loss) on investments
and futures contracts (Note 2) 24,885,052 5,567,739 13,062,170
Change in unrealized appreciation (depreciation) 38,888,234 8,926,628 30,325,565
Net realized and unrealized gain (loss) on
investments and futures contracts 63,773,286 14,494,367 43,387,735
Net increase in net assets from operations $61,807,227 $14,386,481 $43,420,299
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Net of interest expense $125,954 for the Mentor Quality Income Portfolio and
$170,196 for the Mentor Short-Duration Income Portfolio.
*** Withholding taxes were $2,161, $8,690, $27,135, $15,273 and $32,044 for the
Mentor Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy
Portfolio, Mentor Income and Growth Portfolio and Mentor Perpetual Global
Portfolio, respectively for the period ended September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor Mentor Mentor Mentor
Income and Perpetual Quality Short-Duration Municipal
Growth Global Income Income Income
Portfolio Portfolio Portfolio Portfolio* Portfolio
<S> <C> <C> <C> <C>
$ 1,641,651 $ 78,660 $ 7,539,556** $ 980,167** $ 4,455,047
954,545 313,054 - - -
2,596,196 391,714 7,539,556 980,167 4,455,047
322,260 68,125 334,771 39,054 207,611
460,486 185,092 563,032 65,901 380,281
153,495 42,065 234,597 32,505 158,450
175,478 40,084 220,401 40,460 133,905
69,316 19,082 106,885 - 72,055
58,810 25,280 68,335 18,070 42,662
44,727 19,139 43,798 17,815 30,923
36,473 7,004 54,672 6,552 38,850
29,828 4,551 51,170 4,869 33,184
1,957 6,640 4,485 - 8,405
4,831 1,946 7,316 652 4,991
1,962 18 7,304 - 5,826
1,359,623 419,026 1,696,766 225,878 1,117,143
- - 41,651 - -
- 10,545 - 65,901 -
1,359,623 408,481 1,655,115 159,977 1,117,143
1,236,573 (16,767) 5,884,441 820,190 3,337,904
2,495,422 862,461 (1,948,938) 258,876 (2,056,061)
5,833,996 942,613 5,945,462 423,995 4,099,300
8,329,418 1,805,074 3,996,524 682,871 2,043,239
$ 9,565,991 $ 1,788,307 $ 9,880,965 $ 1,503,061 $ 5,381,143
</TABLE>
51
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Capital Growth
Mentor Growth Portfolio Portfolio Mentor Strategy Portfolio
Period Year Year Year Period Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 9/30/95 9/30/94 9/30/95* 12/31/94
<S> <C> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN NET
ASSETS FROM:
OPERATIONS
Net investment income (loss) $ (1,966,059) $ (2,273,855) $ (107,886) $ 29,871 $ 32,564 $ (879,139)
Net realized gain (loss) on
investments and futures
contracts 24,885,052 13,751,586 5,567,739 1,128,751 13,062,170 (10,179,850)
Change in unrealized
appreciation (depreciation) 38,888,234 (20,155,668) 8,926,628 (2,465,351) 30,325,565 5,285,954
Increase (decrease) in net
assets from operations 61,807,227 (8,677,937) 14,386,481 (1,306,729) 43,420,299 (5,773,035)
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - - (87,466) - (14,753)
Class B - - - - - -
In excess of net investment
income - (7,106)
Class A - - - - - -
Class B - (14,441,603) - - -
Net realized gain on
investments
Class A - - (2,027,725) (241,102) - -
Class B - (186,774) (4,095,792) (445,582) - -
Net decrease from
distributions - (14,628,377) (6,123,517) (774,150) - (21,859)
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from
portfolio share
transactions 14,761,239 26,454,231 16,680,084 (24,022,232) 12,447,061 62,891,677
Increase (decrease) in net
assets 76,568,466 3,147,917 24,943,048 (26,103,111) 55,867,360 57,096,783
NET ASSETS
Beginning of period 190,125,958 186,978,041 62,286,913 88,390,024 179,273,806 122,177,023
End of period $266,694,424 $190,125,958 $87,229,961 $62,286,913 $235,141,166 $179,273,806
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** For the period from March 29, 1994 (commencement of operations) to September
30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
<TABLE>
<CAPTION>
Mentor Income and Growth Mentor Perpetual Global Mentor Quality Income
Portfolio Portfolio Portfolio
Year Year Year Period Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94 9/30/95 9/30/94** 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
$ 1,236,537 $ 853,291 $ (16,767) $ (25,881) $ 5,884,441 $ 8,732,749
2,495,422 1,523,312 862,461 17,822 (1,948,938) (8,118,106)
5,833,996 (248,910) 942,613 20,310 5,945,462 (5,963,957)
9,565,955 2,127,693 1,788,307 12,251 9,880,965 (5,349,314)
(464,855) (300,723) - - (1,780,925) (2,342,783)
(771,682) (476,423) - - (4,084,639) (5,799,239)
(38,935) - - - (130,142) -
(64,635) - - - (298,487) -
(298,324) (204,420) - - - -
(712,920) (470,138) - - - -
(2,351,351) (1,451,704) - - (6,294,193) (8,142,022)
(1,640,309) 32,339,234 863,287 16,857,288 (24,989,530) (53,605,255)
5,574,295 33,015,223 2,651,594 16,869,539 (21,402,758) (67,096,591)
60,991,516 27,976,293 16,869,539 - 108,029,649 175,126,240
$66,565,811 $60,991,516 $19,521,133 $16,869,539 $ 86,626,891 $108,029,649
</TABLE>
53
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Short-Duration Mentor Municipal Income
Income Portfolio Portfolio
Period Year Year Year
Ended Ended Ended Ended
9/30/95* 12/31/94*** 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
FROM:
OPERATIONS
Net investment income (loss) $ 820,190 $ 509,400 $ 3,337,904 $ 3,986,208
Net realized gain (loss) on
investments and futures contracts 258,876 (293,762) (2,056,061) (527,018)
Change in unrealized appreciation
(depreciation) 423,995 (143,976) 4,099,300 (7,578,461)
Increase (decrease) in net assets
from operations 1,503,061 71,662 5,381,143 (4,119,271)
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (7,777) (509,400) (1,233,641) (1,463,600)
Class B (812,803) - (2,106,334) (2,444,169)
In excess of net
investment income
Class A (2,635) - - -
Class B (39,850) (41,639) - -
Net realized gain on investments
Class A - - - (189,589)
Class B - - - (340,533)
Net decrease from distributions (863,065) (551,039) (3,339,975) (4,437,891)
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from
portfolio share transactions 3,088,707 17,623,219 (13,301,743) (450,171)
Increase (decrease) in net assets 3,728,703 17,143,842 (11,260,575) (9,007,333)
NET ASSETS
Beginning of period 17,143,842 - 71,213,754 80,221,087
End of period $20,872,545 $17,143,842 $59,953,179 $71,213,754
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
*** For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Growth
Portfolio Mentor Capital Growth Portfolio
Period Year Year Year Year
Ended Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.37 $ 14.88 $ 15.26 $ 14.21 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.01) 0.02 0.09 0.14 0.08
Net realized and unrealized gain
(loss) on investments 2.72 2.91 (0.30 ) 1.02 0.03
Total from investment operations 2.71 2.93 (0.21 ) 1.16 0.11
LESS DISTRIBUTIONS
Dividends from net investment income - - (0.04 ) (0.11) (0.08)
In excess of net investment income - - - - -
Distributions from capital gains - (1.79) (0.13 ) - -
Distributions in excess of capital - - - - -
Total Distributions - (1.79) (0.17 ) (0.11) (0.08)
NET ASSET VALUE, END OF PERIOD $ 16.08 $ 16.02 $ 14.88 $ 15.26 $ 14.21
Total Return 20.27% 20.18 % (1.37%) 8.21 % 0.78%
Ratios/Supplemental Data
Net assets, end of period (in
thousands) $ 20,368 $29,582 $21,181 $31,360 $ 20,864
Ratio of expenses to average net
assets 1.36%(a) 1.87 % 1.70% 1.49 % 1.14%(a)
Ratio of expenses to average net asset
excluding waiver 1.36%(a) 1.87 % 1.70% 1.59 % 1.43%(a)
Ratio of net investment income
(loss) to average net assets (0.65%)(a) 0.27 % 0.53% 0.96 % 1.54%(a)
Portfolio turnover rate 70% 157 % 149% 192 % 61%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Strategy
Portfolio Mentor Income and Growth Portfolio
Period Year Year Year
Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93(b)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.45 $ 15.27 $ 14.88 $ 14.14
INCOME FROM INVESTMENT OPERATIONS
Net investment income - 0.40 0.31 0.09
Net realized and unrealized gain (loss) on investments 1.79 2.14 0.64 0.73
Total from investment operations 1.79 2.54 0.95 0.82
LESS DISTRIBUTIONS
Dividends from net investment income - (0.40) (0.30) (0.08)
In excess of net investment income - (0.03) - -
Distributions from capital gains - (0.25) (0.26) -
Distributions in excess of capital - - - -
Total distributions - (0.68) (0.56) (0.08)
NET ASSET VALUE, END OF PERIOD $ 15.24 $ 17.13 $ 15.27 $ 14.88
Total Return 13.31% 17.24% 6.54% 5.54%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 10,503 $19,888 $17,773 $ 9,849
Ratio of expenses to average net assets 1.65%(a) 1.69% 1.75% 1.56%(a)
Ratio of expenses to average net asset excluding waiver 1.65%(a) 1.69% 1.75% 1.94%(a)
Ratio of net investment income (loss) to average net assets (0.06%)(a) 2.53% 2.20% 2.35%(a)
Portfolio turnover rate 122% 62% 78% 13%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
(b) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
(c) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
<TABLE>
<CAPTION>
Mentor Perpetual
Global Portfolio Mentor Quality Income Portfolio
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94 (c) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
$14.23 $ 14.18 $ 12.75 $ 14.04 $ 14.39 $ 14.30
0.05 (0.01) 0.84 0.84 1.06 0.44
1.60 0.06 0.61 (1.30) (0.31) 0.09
1.65 0.05 1.45 (0.46) 0.75 0.53
- - (0.85) (0.83) (1.06) (0.44)
- - (0.06) - (0.04) -
- - - - - -
- - - - - -
- - (0.91) (0.83) (1.10) (0.44)
$15.88 $ 14.23 $ 13.29 $ 12.75 $ 14.04 $ 14.39
11.60% 0.35% 11.82% (3.39%) 5.41% 3.37%
$6,854 $ 8,882 $24,472 $30,142 $47,780 $36,740
2.06% 2.09%(a) 1.32% 1.38% 1.04% 0.36%(a)
2.11% 3.18%(a) 1.36% 1.39% 1.22% 1.21%(a)
0.26% (0.10%)(a) 6.73% 6.33% 7.31% 8.00%(a)
155% 2% 368% 455% 102% 9%
</TABLE>
57
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor
Short-Duration
Income
Portfolio Mentor Municipal Income Portfolio
Period Year Year Year Year
Ended Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $12.74 $ 14.42 $ 16.05 $ 14.76 $ 14.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.22 0.81 0.82 0.92 0.32
Net realized and unrealized gain (loss)
on investments (0.03) 0.51 (1.54) 1.32 0.47
Total from investment operations 0.19 1.32 (0.72) 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net investment income (0.22) (0.82) (0.81) (0.92) (0.32)
In excess of net investment income (0.03) - - (0.03) -
Distributions from capital gains - - (0.10) - -
Distributions in excess of capital - - - - -
Total Distributions (0.25) (0.82) (0.91) (0.95) (0.32)
NET ASSET VALUE, END OF PERIOD $12.68 $ 14.92 $ 14.42 $ 16.05 $ 14.76
Total Return 1.51% 9.46% (4.83%) 16.00% 5.34%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $1,002 $20,460 $25,056 $29,245 $ 18,801
Ratio of expenses to average net assets 0.71%(a) 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to average net asset
excluding waiver 1.00%(a) 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment income to average
net assets 4.10%(a) 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate 126% 43% 87% 88% 0%
</TABLE>
* For the period from June 16, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Growth Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.13) (0.15) (0.08) (0.06) (0.09) 0.02
Net realized and unrealized gain (loss)
on investments 4.03 (0.47) 2.07 1.94 4.30 (1.10)
Total from Investment Operations 3.90 (0.62) 1.99 1.88 4.21 (1.08)
LESS DISTRIBUTIONS
Dividends from net investment income - - - - - (0.05)
Distributions in excess of net investment
income - - - - - -
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 $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37
Total Return 32.10% (4.48%) 15.60% 15.46% 50.30% (11.21%)
Ratios/Supplemental Data
Net assets, end of period (in thousands) $246,326 $190,126 $186,978 $136,053 $108,719 $83,540
Ratio of expenses to average net assets 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25%
Ratio of expenses to average net asset
excluding waiver 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25%
Ratio of net investment income (loss) to
average net assets (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) 0.26%
Portfolio Turnover Rate 70% 77% 64% 50% 40% 50%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
Year Year Year Year
Ended Ended Ended Ended
9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.80 $ 15.23 $ 14.22 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.25 (0.04) 0.05 0.46
Net realized and unrealized gain (loss)
on investments 2.53 (0.26) 1.02 0.04
Total from Investment Operations 2.78 (0.30) 1.07 0.50
LESS DISTRIBUTIONS
Dividends from net investment income - - (0.05) (0.46)
In excess of net investment
income - - (0.01) -
Distributions from capital gains (1.79) (0.13) - -
Distributions in excess of capital gains - - - -
Total Distributions (1.79) (0.13) (0.06) (0.46)
NET ASSET VALUE, END OF PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22
Total Return 19.26 % (2.00 %) 7.52% 0.61%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $57,648 $41,106 $57,030 $ 25,468
Ratio of expenses to average net assets 2.56% 2.46% 2.24% 1.86%(a)
Ratio of expenses to average net asset
excluding waiver 2.56% 2.46% 2.34% 2.16%(a)
Ratio of net investment income to
average net assets (0.41%) (0.22%) 0.21% 0.83%(a)
Portfolio turnover rate 157% 149% 192% 61%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
*** Reflects operations for the period of October 29, 1993 (commencement of
operations), to December 31, 1993.
(a) Annualized.
(b) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
<TABLE>
<CAPTION>
Mentor Strategy Portfolio Mentor Income and Growth Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 12/31/93*** 9/30/95 9/30/94 9/30/93(b)
<S> <C> <C> <C> <C> <C>
$ 12.24 $ 12.70 $ 12.50 $ 15.28 $ 14.91 $ 14.14
- (0.06) - 0.28 0.21 0.05
2.97 (0.40) 0.20 2.14 0.61 0.77
2.97 (0.46) 0.20 2.42 0.82 0.82
- - - (0.28) (0.19) (0.05)
- - - (0.03) - -
- - - (0.25) (0.26) -
- - - - - -
- - - (0.56) (0.45) (0.05)
$ 15.21 $ 12.24 $ 12.70 $ 17.14 $ 15.28 $ 14.91
24.26% (3.61%) 1.60% 16.32 % 5.66 % 5.54%
$224,638 $179,274 $122,177 $46,678 $43,219 $ 18,127
2.08%(a) 2.19% 2.06% 2.43 % 2.44 % 2.31%(a)
2.08%(a) 2.19% 2.06% 2.43 % 2.44 % 2.69%(a)
0.25%(a) (0.54%) 0.08% 1.78 % 1.51 % 1.60%(a)
122% 143% 0% 62 % 78 % 13%
</TABLE>
61
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Perpetual
Global Portfolio Mentor Quality Income Portfolio
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94(c) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.15 $ 14.18 $ 12.76 $ 14.06 $ 14.40 $ 14.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.05) (0.04) 0.79 0.82 0.99 0.41
Net realized and unrealized gain
(loss) on investments 1.57 0.01 0.61 (1.37) (0.31) 0.10
Total from Investment Operations 1.52 (0.03) 1.40 (0.55) 0.68 0.51
LESS DISTRIBUTIONS
Dividends from net investment
income - - (0.79) (0.75) (0.99) (0.41)
In excess of net investment
income - - (0.06) - (0.03) -
Distributions from capital gains - - - - - -
Distributions in excess of
capital gains - - - - - -
Total Distributions - - (0.85) (0.75) (1.02) (0.41)
NET ASSET VALUE, END OF PERIOD $ 15.67 $ 14.15 $ 13.31 $ 12.76 $ 14.06 $ 14.40
Total Return 10.74% (0.21%) 11.33% (3.97%) 4.86% 3.24%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $12,667 $ 7,987 $62,155 $77,888 $127,346 $ 65,661
Ratio of expenses to average
net assets 2.72% 2.79%(a) 1.74% 1.88% 1.54% 0.83%(a)
Ratio of expenses to average
net asset excluding waiver 2.79% 3.93%(a) 1.79% 1.90% 1.72% 1.67%(a)
Ratio of net investment income
(loss) to average net assets (0.40%) (0.82%)(a) 6.24% 6.21% 6.81% 7.53%(a)
Portfolio Turnover Rate 155% 2% 368% 455% 102% 9%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
(c) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
(d) Reflects operations for the period from April 29, 1994 (commencement of
operations), to December 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
<TABLE>
<CAPTION>
Mentor Short-Duration
Income Portfolio Mentor Municipal Income Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94(d) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
$ 12.18 $ 12.50 $ 14.43 $ 16.06 $ 14.78 $ 14.29
0.59 0.41 0.74 0.74 0.82 0.29
0.52 (0.29) 0.52 (1.54) 1.32 0.49
1.11 0.12 1.26 (0.80) 2.14 0.78
(0.59) (0.41) (0.74) (0.73) (0.82) (0.29)
(0.03) (0.03) - - (0.04) -
- - - (0.10) - -
- - - - - -
(0.62) (0.44) (0.74) (0.83) (0.86) (0.29)
$ 12.67 $ 12.18 $ 14.95 $ 14.43 $ 16.06 $ 14.78
9.22% 0.95% 9.01% (5.34%) 15.27% 5.28%
$19,871 $ 17,144 $39,493 $46,157 $50,976 $24,265
1.20%(a) 1.29%(a) 1.92% 1.74% 1.21% 0.50%(a)
1.70%(a) 1.29%(a) 1.92% 1.86% 1.89% 1.76%(a)
5.04%(a) 4.90%(a) 5.07% 4.93% 5.42% 5.80%(a)
126% 166% 43% 87% 88% 0%
</TABLE>
63
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1: ORGANIZATION
Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. On April 12, 1995 the name of the Trust was changed to Mentor Funds
("Mentor Funds"). On April 12, 1995 the portfolios of Mentor Series Trust were
merged into newly formed portfolios of Mentor Funds. Mentor Funds consists of
nine separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1995, as
follows:
Mentor Growth Portfolio (formerly
Mentor Growth Fund)
("Growth Portfolio")
Mentor Capital Growth Portfolio
(formerly Cambridge Capital Growth
Portfolio)
("Capital Growth Portfolio")
Mentor Strategy Portfolio (formerly
Mentor Strategy Fund)
("Strategy Portfolio")
Mentor Income and Growth Portfolio
(formerly Cambridge Income
and Growth Portfolio)
("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio
(formerly Cambridge Global Portfolio)
("Global Portfolio")
Mentor Quality Income Portfolio
(formerly Cambridge Government
Income Portfolio)
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
(formerly Mentor Short-Duration
Income Fund)
("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio
(formerly Cambridge Municipal
Income Portfolio)
("Municipal Income Portfolio")
Mentor Balanced Portfolio
(formerly Mentor Balanced Fund)
("Balanced Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The Balanced Portfolio is not currently being offered to new investors. These
financial statements do not include the Balanced Portfolio.
Mentor Funds currently issues two classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for Quality Income Portfolio
and Municipal Income Portfolio and 1% for Short-Duration Income Portfolio)
payable at the time of purchase. Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption which decreases depending on when
shares were purchased and how long they have been held.
64
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios:
(a) Valuation of Securities
Listed securities held by the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio and Global Portfolio 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 Portfolios 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 under procedures established by and under the general supervision and
responsibility of the Board of Trustees.
U.S. Government obligations held by the Quality Income Portfolio, Short-Duration
Income Portfolio and 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. 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 Portfolio's Board of Trustees. In determining value, the
pricing services use information with respect to transactions in such
securities, market transactions in comparable securities, various relationships
between securities, and yield to maturity.
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. The
pricing service does not rely exclusively on quoted prices. The Board of
Trustees has determined that the fair value of debt securities with remaining
maturities of 60 days or less shall be their amortized cost value unless the
particular circumstances of the security indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, assets and liabilities at the daily
65
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
rate of exchange, purchases and sales of investment, income and expenses at the
rate of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
(b) Repurchase Agreements
It is the policy of Mentor Funds 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. Additionally,
procedures have been established by Mentor Funds 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.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings
Each of the Portfolios (except for Municipal Income Portfolio) may, under
certain circumstances, borrow money directly or through dollar-roll and 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). Each Portfolio may borrow up to one-third of the value of its net assets.
There were no reverse repurchase agreements outstanding at September 30, 1995.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the period ended September 30, 1995 was
approximately $5,286,560 or $0.77 per share based on average shares outstanding
during the year at a weighted average interest rate of 5.23%. The maximum amount
of borrowings outstanding at any week-end during the year was $10,574,536
(including accrued interest), at a weighted average interest rate of 5.23%, and
was 12.19% of total assets.
The average daily balance of reverse repurchase agreements outstanding for
short-duration income portfolio during the period ended September 30, 1995 was
approximately $4,790,610 or $3.14 per share based on average shares outstanding
during the year at an interest rate ranging between 5.80% -- 6.20%. The maximum
amount of borrowings outstanding at any week-end during the year was $8,201,367
(including accrued interest), as of
66
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
April 18, 1995, at a weighted average interest rate of 6.00% and was 33.19% of
total assets.
(d) Security Transactions and Investment Income
Security transactions for the Portfolios are accounted for on the trade date.
Realized gain and losses are computed on the identified cost basis. 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.
(e) Federal Income Taxes
No provision for federal income taxes has been made since it is each Portfolio'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.
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 by considered a tax preference
item to shareholders.
At September 30, 1995, Quality Income Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $11,750,000. Pursuant to the Code,
such capital loss carryforwards expire as follows: $820,000 in 2001 and
$3,680,000 in 2002 and $7,250,000 in 2003.
At September 30, 1995, Short-Duration Income Portfolio for federal tax purposes,
had a capital loss carryforward of approximately $35,000. Pursuant to the
Internal Revenue Code, such capital loss carryforward will expire in 2003.
At September 30, 1995, Municipal Income Portfolio for federal tax purposes, had
a capital loss carryforward of approximately $895,000. Pursuant to the Internal
Revenue Code, such capital loss carryforward will expire in 2003.
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the
67
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 investment
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
In order to gain exposure to or protect against declines in security values,
Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income
Portfolio may buy and sell futures contracts. The Portfolios may also buy or
write put or call options on these futures contracts.
The Portfolios generally sell futures contracts to hedge against declines in the
value of portfolio securities. The Portfolios 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 Portfolios will segregate assets
to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios 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 Portfolios recognize a realized gain or loss when the
contract is closed. For the period ended September 30, 1995, Quality Income
Portfolio had a realized gain of $645,273, Short-Duration Income Portfolio and
Municipal Income Portfolio recorded realized losses of $28,629 and $892,033
respectively on closed futures contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid 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.
68
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(h) Options
In order to produce incremental earnings or protect against changes in the value
of portfolio securities, the Quality Income Portfolio may buy and sell put and
call options, write covered call options on portfolio securities and write
cash-secured put options.
The Portfolio generally purchases put options or writes covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolio may also use options for speculative purposes, although it does not
employ options for this at the present time. The Portfolio will segregate assets
to cover its obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolio will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid. For the period ended
September 30, 1995 Quality Income Portfolio had a realized gain of $134,642 on
closed options contracts.
The risk in writing a call option is that the Portfolio gives up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty.
(i) Residual Interests
A derivative security is any investment that derives its value from an
underlying security, asset, or market index. The Quality Income Portfolio
invests in mortgage security residual interests ("residuals") which are
considered derivative securities. The Portfolio's investment in residuals has
been primarily in securities issued by proprietary mortgage trusts. While these
entities have been highly leveraged, often having indebtedness of up to 95% of
their total value, the Portfolio has not incurred any indebtedness in the course
of making these residual investments; nor have the Portfolio's assets been
pledged to secure the indebtedness of the issuing structure or the Portfolio's
investment in the residuals. In consideration of the risk associated with
investment in residual
69
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
securities, it is the Portfolio's policy to limit its exposure at the time of
purchase to no more than 20% of its total assets. The Portfolio will continue to
invest in residual securities because, in the opinion of the Investment Manager,
these investments can play a key role in fulfilling the Portfolio's objective of
achieving high monthly income through providing a means of economic leverage.
(j) Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
(k) Distributions
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.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Quality Income Portfolio, Short-Duration Income Portfolio and Municipal
Income Portfolio on the record date. Dividends are declared and paid
semi-annually to all shareholders invested in Capital Growth Portfolio on the
record date, dividends are declared and paid annually to all shareholders
invested in the Growth Portfolio, Strategy Portfolio and Global Portfolio on the
record date, and dividends are declared and paid quarterly to all shareholders
invested in 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 cash
payments are requested by shareholders in writing. Capital gains realized by
each Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Commonwealth Investment Advisors, Inc., (formerly Cambridge Investment Advisors,
Inc.), ("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: Capital Growth Portfolio, 0.80%; Quality
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 the sub-adviser to Municipal Income Portfolio an
annual fee of
70
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
assets as follows: 0.325% on the first $50 million in Portfolio assets, 0.275%
on the next $150 million in assets, and 0.200% on assets over $500 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.
The Growth Portfolio has entered into an Investment Advisory and Management
Agreement with Charter Asset Management, Inc. ("Charter"), a wholly-owned
subsidiary of Mentor Investment Group, Inc., (formerly Investment Management
Group, Inc.) ("Mentor") 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 Portfolio.
The Strategy Portfolio has entered into an Investment Advisory Agreement with
Wellesley Advisors, Inc. ("Wellesley"), a wholly-owned subsidiary of Mentor.
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 Portfolio.
The Short-Duration Income Portfolio has entered into an Investment Advisory
Agreement with Commonwealth Investment Counsel, Inc. ("Commonwealth"), a
wholly-owned subsidiary of Mentor. 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 Portfolio.
For the period ended September 30, 1995 the Investment Adviser and sub-advisers,
Charter, Wellesley and Commonwealth earned and voluntarily waived the following
advisory fees:
<TABLE>
<CAPTION>
Adviser Adviser Fee Sub Adviser
Fee Voluntarily Fee
Portfolio Earned Waived Earned
<S> <C> <C> <C>
Growth $1,143,696 - -
Capital Growth 465,031 - -
Strategy 1,262,809 - -
Income and Growth 460,486 - $ 193,845
Global 185,092 $10,545 -
Quality Income 563,032 - -
Short-Duration Income 65,901 65,901 -
Municipal Income 380,281 - 190,141
<CAPTION>
</TABLE>
71
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate 0.10% of the average daily net
assets of each Portfolio. In order to limit the Portfolio's expenses during its
start-up period, Mentor agreed to waive its fee for the first year of each
Portfolios' operations. This waiver period elapsed on April 30,
1995 for the Short-Duration Income Portfolio. In addition, the Growth Portfolio
and Strategy Portfolio provide direct reimbursement to
Mentor for certain accounting and operation related costs not covered under the
Administration Agreement. For the period ended September 30, 1995, the Growth
Portfolio and Strategy Portfolio paid $6,579 and $6,117 respectively to Mentor
for these direct reimbursements.
For the period ended September 30, 1995 Mentor earned the following
administrative fees:
<TABLE>
<CAPTION>
Administrative
Administrative Fee
Fee Voluntarily
Portfolio Earned Waived
<S> <C> <C>
Growth $108,285 -
Capital Growth 66,032 -
Strategy 146,572 -
Income and Growth 69,316 -
Global 19,082 -
Quality Income 106,885 $ 41,651
Short-Duration Income - -
Municipal Income 72,055 -
<CAPTION>
</TABLE>
Charter, Wellesley, and Commonwealth have agreed to reimburse the Portfolios 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 Portfolios. The most stringent state expense limitation
applicable to the Portfolios requires reimbursement of expenses not including
expenses under the Portfolios' Distribution Plan, 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 ended September 30, 1995, no
reimbursement from Charter, Wellesley or Commonwealth was required as a result
of such state expense limitations.
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
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. Under a
Distribution Agreement between the Portfolios and Mentor
Distribu-
72
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
tors, Inc. ("Mentor Distributors") (formerly, Cambridge Distributors, Inc.) a
wholly-owned subsidiary of Mentor, Mentor Distributors was appointed distributor
of the Portfolios. To compensate Mentor Distributors for the services it
provides and for the expenses it incurs under the Distribution Agreement, the
Portfolios pay a distribution fee, which is accrued daily and paid monthly at
the annual rate of 0.75% of the Portfolios' average daily net assets for the
Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio and Global Portfolio, 0.50% of the average daily net assets of
the Quality Income Portfolio and Municipal Income Portfolio, and 0.30% of the
average daily net assets for the Short-Duration Income Portfolio.
Mentor Funds 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 .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.
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the period ended September 30, 1995, distribution fees and shareholder servicing
fees were as follows:
<TABLE>
<CAPTION>
Shareholder-Servicing
Distribution Fees
Portfolio Fees Class A Class B
<S> <C> <C> <C>
Growth $1,222,284 $ 8,517 $395,696
Capital Growth 288,262 49,218 96,104
Strategy 1,105,495 9,417 362,012
Income and Growth 322,260 45,843 107,652
Global 68,125 14,893 27,172
Quality Income 334,771 66,334 168,263
Short-Duration Income 39,054 1,569 30,936
Municipal Income 207,611 54,057 104,393
<CAPTION>
</TABLE>
Distribution fees are only applicable to Class B shares.
73
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments), for the
period ended September 30, 1995, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
<S> <C> <C>
Growth $144,141,344 $137,124,525
Capital Growth 105,485,484 85,952,151
Strategy 196,082,992 199,429,668
Income and Growth 35,406,377 41,334,627
Global 25,080,716 24,953,356
Quality Income 351,397,916 405,788,314
Short-Duration Income 29,355,976 26,775,678
Municipal Income 26,715,099 42,198,478
<CAPTION>
</TABLE>
NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
The cost of investments for federal income tax purposes amounted to
$186,115,335, for the Growth Portfolio, $76,760,291 for the Capital Growth
Portfolio, $204,015,264 for the Strategy Portfolio, $60,560,645 for the Income
and Growth Portfolio, $18,087,647 for the Global Portfolio, $95,192,126 for the
Quality Income Portfolio, $20,084,529 for the Short-Duration Income Portfolio
and $56,429,527 for Municipal Income Portfolio at September 30, 1995. Gross
unrealized appreciation and depreciation of investments at September 30, 1995
based on such costs were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Portfolio Appreciation Depreciation Appreciation
<S> <C> <C> <C>
Growth $ 78,797,576 $(2,375,066) $ 76,422,510
Capital Growth 11,314,295 (762,121) 10,552,174
Strategy 40,434,604 (2,710,644) 37,723,960
Income and Growth 7,103,546 (1,037,475) 6,066,071
Global 1,626,071 (665,948) 960,123
Quality Income 999,511 (370,116) 629,395
Short-Duration Income 303,364 (23,345) 280,019
Municipal Income 3,047,351 (427,116) 2,620,235
<CAPTION>
</TABLE>
74
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8: FORWARD CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time 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 Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At
September 30, 1995 Global Portfolio had outstanding forward contracts as set
forth below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Contracts In Exchange Net Unrealized
Settlement Date to Deliver/Receive For Appreciation
<S> <C> <C> <C>
Sales
10/2/95 Malaysian Ringgit 62,333 $24,814 $20
</TABLE>
NOTE 9: 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 Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Period Mentor Growth Portfolio Year
Ended 9/30/95 Ended 12/31/94
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 1,270,059 $ 19,846,126
Shares issued upon reinvestment of distributions - -
Shares redeemed (3,410) (53,044)
Change in net assets from capital share
transaction 1,266,649 $ 19,793,082
CLASS B**:
Shares sold 2,282,441 $ 32,813,557 2,621,726 $ 35,199,222
Shares issued upon reinvestment of distributions - - 1,176,364 14,274,538
Shares redeemed (2,585,359) (37,845,400) (1,714,715) (23,019,529)
Change in net assets from capital share
transaction (302,918) $ (5,031,843) 2,083,375 $ 26,454,231
<CAPTION>
</TABLE>
75
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 100,226 $ 949,902 155,406 $ 2,353,285
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio+ 671,791 10,681,477 - -
Shares issued upon reinvestment of distributions 125,218 1,954,221 21,385 320,355
Shares redeemed (473,840) (7,405,251) (809,281) (12,181,621)
Change in net assets from capital share
transactions 423,395 $ 6,180,349 (632,490) $ (9,507,981)
CLASS B:
Shares sold 329,014 $ 1,869,220 484,356 $ 7,254,585
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio+ 1,255,213 19,669,182 - -
Shares issued upon reinvestment of distributions 256,857 3,961,731 29,045 435,097
Shares redeemed (968,058) (15,000,398) (1,479,886) (22,203,933)
Change in net assets from capital share
transactions 873,026 $ 10,499,735 (966,485) $(14,514,251)
</TABLE>
<TABLE>
<CAPTION>
PeriodMentor Strategy Portfolio Year
Ended 9/30/95 Ended 12/31/94
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 690,271 $ 10,122,356
Shares issued upon reinvestment of distributions - -
Shares redeemed (1,062) (15,555)
Change in net assets from capital share
transactions 689,209 $ 10,106,801
CLASS B**:
Shares sold 2,247,821 $ 31,437,475 5,670,538 70,664,481
Shares issued upon reinvestment of distributions 1,708 20,979 - -
Shares redeemed (2,121,049) (29,118,194) (642,107) (7,772,804)
Change in net assets from capital share
transactions 128,480 $ 2,340,260 5,028,431 $62,891,677
</TABLE>
76
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 255,128 $ 3,928,730 621,368 $ 9,508,705
Shares issued upon reinvestment of distributions 49,436 741,971 31,362 474,885
Shares redeemed (307,376) (4,818,528) (150,563) (2,281,176)
Change in net assets from capital share
transactions (2,812) $ (147,827) 502,167 $ 7,702,414
CLASS B:
Shares sold 602,055 $ 9,529,693 1,909,839 $29,152,862
Shares issued upon reinvestment of distributions 98,685 1,467,195 59,116 895,345
Shares redeemed (806,196) (12,489,370) (356,385) (5,411,387)
Change in net assets from capital share
transactions (105,456) $ (1,492,482) 1,612,570 $24,636,820
</TABLE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94(a)
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 142,470 $ 2,073,646 713,962 $10,133,334
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (335,189) (4,810,857) (89,781) (1,281,155)
Change in net assets from capital share
transactions (192,719) $(2,737,211) 624,181 $ 8,852,179
CLASS B:
Shares sold 417,981 $ 6,078,915 593,033 $ 8,409,160
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (174,218) (2,478,417) (28,362) (404,051)
Change in net assets from capital share
transactions 243,763 $ 3,600,498 564,671 $ 8,005,109
</TABLE>
77
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 132,285 $ 1,706,716 175,391 $ 2,326,934
Shares issued upon reinvestment of distributions 89,969 1,159,149 104,113 1,395,612
Shares redeemed (745,107) (9,570,406) (1,319,559) (17,795,382)
Change in net assets from capital share
transactions (522,853) $ (6,704,541) (1,040,055) $(14,072,836)
CLASS B:
Shares sold 421,513 $ 5,506,753 895,699 $ 12,254,465
Shares issued upon reinvestment of distributions 223,602 2,883,354 290,900 3,906,462
Shares redeemed (2,078,944) (26,675,096) (4,142,540) (55,693,346)
Change in net assets from capital share
transactions (1,433,829) $(18,284,989) (2,955,941) $(39,532,419)
</TABLE>
<TABLE>
<CAPTION>
Mentor Short-Duration
Period Income Portfolio Period
Ended 9/30/95 Ended 12/31/94***
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 80,087 $ 1,015,595
Shares issued upon reinvestment of distributions 322 4,089
Shares redeemed (1,399) (17,786)
Change in net assets from capital share
transactions 79,010 $ 1,001,898
CLASS B**:
Shares sold 1,116,509 $ 14,138,694 2,235,823 $ 27,846,704
Shares issued upon reinvestment of distributions 56,501 708,003 29,697 366,811
Shares redeemed (1,011,667) (12,759,888) (858,396) (10,590,296)
Change in net assets from capital share
transactions 161,343 $ 2,086,809 1,407,124 $ 17,623,219
</TABLE>
78
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 71,110 $ 1,021,048 192,548 $ 2,946,139
Shares issued upon reinvestment of distributions 45,425 658,265 51,632 797,051
Shares redeemed (483,463) (6,926,047) (328,132) (4,975,320)
Change in net assets from capital share
transactions (366,928) $ (5,246,734) (83,952) $ (1,232,130)
CLASS B:
Shares sold 247,851 $ 3,605,763 723,926 $ 11,283,387
Shares issued upon reinvestment of distributions 99,198 1,439,916 109,721 1,694,171
Shares redeemed (903,907) (13,100,688) (809,227) (12,195,599)
Change in net assets from capital share
transactions (556,858) $ (8,055,009) 24,420 $ 781,959
</TABLE>
* For the period from June 5, 1995 (issuance of Class A shares) to September
30, 1995.
** For the period from January 1, 1995 to September 30, 1995.
*** For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
+ On September 27, 1995, Capital Growth Portfolio acquired the net assets of
Mentor/Cambridge Growth Portfolio in exchange for Class A and Class B
shares of the Capital Growth Portfolio pursuant to a plan of reorganization
approved by the shareholders of Mentor/Cambridge Growth Portfolio on
September 21, 1995. The acquisition was accomplished by a tax free exchange
of 1,927,004 shares of the Capital Growth Portfolio for the net assets of
Mentor/Cambridge Growth Portfolio. The net assets of Mentor/Cambridge
Growth Portfolio on that date including $3,953,496 of unrealized
appreciation on investments, were combined with Capital Growth Portfolio.
The aggregate net assets of Capital Growth Portfolio and Mentor/Cambridge
Growth Portfolio immediately before the acquisition were $56,351,987 and
$30,350,659, respectively. The net assets of Capital Growth Portfolio
immediately after the acquisition were $86,702,646.
(a) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
79
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of the Growth Portfolio, Capital Growth
Portfolio, Strategy Portfolio, Income and Growth Portfolio, Perpetual Global
Portfolio, Quality Income Portfolio, Short-Duration Portfolio and Municipal
Income Portfolio, portfolios of Mentor Funds (the Funds) as of September 30,
1995 and the related statements of operations for the year or period then ended
(pages 50 to 51), the statements of changes in net assets for each of the years
or periods in the two year period then ended (pages 52 to 54) and the financial
highlights for Class A and Class B shares for each of the years or periods in
the six year period then ended (pages 55 to 63). These financial statements and
financial highlights are the responsibility of the Funds' 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 also 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 September 30, 1995 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 Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, Perpetual Global Portfolio, Quality Income Portfolio,
Short-Duration Portfolio and Municipal Income Portfolio, portfolios of Mentor
Funds as of September 30, 1995, the results of their operations for the year
then ended, 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 55 to 63, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 10, 1995
80
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
PERCENT OF NET ASSETS SHARES MARKET VALUE
COMMON STOCKS 65.30%
BASIC MATERIALS 6.71%
Nalco Chemical Company 1,200 $ 40,950
Sherwin Williams Company 1,200 42,000
Sonoco Products Company 2,698 74,870
Unifi, Inc. 2,355 57,698
215,518
CAPITAL GOODS & CONSTRUCTION 7.67%
Amp, Inc. 1,100 42,350
General Electric Company 1,230 78,412
W.W. Grainger, Inc. 850 51,319
York International Company 1,760 74,140
246,221
CONSUMER CYCLICAL 6.10%
Gannett Company 1,000 54,625
Newell Company 3,020 74,745
R.R. Donnelley & Sons 1,700 66,300
195,670
CONSUMER STAPLES 10.77%
Interpublic Group Company 1,890 75,128
Johnson & Johnson, Inc. 1,025 75,978
McDonald's Corporation 1,770 67,702
Pfizer, Inc. 900 48,037
Sysco Corporation 2,900 79,025
345,870
ENERGY 2.32%
Schlumberger, Ltd. 1,140 74,385
FINANCIAL 8.56%
American Express Company 1,700 75,437
Banc One Corporation 1,812 66,138
Federal National Mortgage Association 650 67,275
United Asset Management Company 1,640 65,805
274,655
RETAIL 6.28%
Albertson's, Inc. 1,980 67,568
Avon Products Company 890 63,857
May Department Stores 1,600 70,000
201,425
TECHNOLOGY 9.51%
General Motors Corporation - Class E 1,200 $ 54,600
Intel Corporation 920 55,315
Linear Technology Corporation 1,200 49,800
Motorola, Inc. 1,000 76,375
Premier Industrial Corporation 2,770 69,250
305,340
TRANSPORTATION 2.20%
Werner Enterprises, Inc. 3,400 70,550
MISCELLANEOUS 5.18%
Corning, Inc. 1,600 45,800
Olsten Corporation 1,200 46,650
Tyco International, Ltd. 1,170 73,710
166,160
TOTAL COMMON STOCKS (COST $1,773,254) 2,095,794
FIXED INCOME SECURITIES 34.79%
U.S. GOVERNMENT AND AGENCIES SECURITIES 26.67%
U.S. TREASURY BONDS 12.38%
7.38% 5/15/96 $ 75,000 75,764
7.88% 11/15/04 60,000 66,743
7.25% 5/15/16 40,000 42,784
7.13% 2/15/23 95,000 100,706
7.50% 11/15/24 100,000 111,224
397,221
U.S. TREASURY NOTES 12.73%
6.50% 8/15/97 125,000 126,408
6.50% 4/30/99 120,000 122,012
6.13% 7/31/00 40,000 40,145
7.75% 2/15/01 30,000 32,314
7.50% 5/15/02 45,000 48,406
5.88% 2/15/04 40,000 39,132
408,417
FEDERAL HOME LOAN BANK 1.56%
8.32% 1/30/98 $50,000 $ 50,309
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (COST $816,325] 855,947
CORPORATE BONDS 5.02%
Case Equipment Loan, 4.40%, 11/15/98 14,247 14,195
Nationsbank Corporation, 9.38%, 9/15/09 35,000 41,674
Norwest Corporation, 6.80%, 5/15/02 60,000 60,450
Traveler's, Inc., 8.63%, 2/01/07 40,000 44,950
TOTAL CORPORATE BONDS (COST $159,877) 161,269
SHORT-TERM INVESTMENT 3.10%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $70,000 U.S. Treasury Note,
11.75%, 11/15/14 (cost $99,557) 99,557 99,557
TOTAL FIXED INCOME SECURITIES (COST $1,075,759) 1,116,773
TOTAL INVESTMENTS (COST $2,849,013) 100.09% 3,212,567
OTHER ASSETS LESS LIABILITIES (0.09%) (2,994)
NET ASSETS 100.00% $3,209,573
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
MENTOR
BALANCED
PORTFOLIO
ASSETS
Investments, at market value * (Note 2) $3,212,567
Receivables
Investments sold 54,924
Dividends and interest 21,307
Other assets 3,331
Total assets 3,292,129
LIABILITIES
Payable for investments purchased 82,175
Accrued expenses and other liabilities 381
Total liabilities 82,556
NET ASSETS $3,209,573
Net Assets represented by:
Additional paid-in capital $2,663,556
Undistributed net investment income 77,407
Accumulated net realized gain on
investment transactions 105,056
Net unrealized appreciation of investments (Note 6) 363,554
Net Assets $3,209,573
Shares Outstanding 216,091
NET ASSET VALUE PER SHARE $ 14.85
*Investments at cost $2,849,013.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1995
MENTOR
BALANCED
PORTFOLIO*
INVESTMENT INCOME
Dividends $ 28,094
Interest 61,868
Total investment income 89,962
Expenses
Distribution fee (Note 4) 17,894
Management fee (Note 3) 14,563
Shareholder servicing fee (Note 4) 5,965
Custodian and accounting fees 5,028
Registration expenses 2,119
Shareholder reports and postage expenses 674
Legal and audit fees 4,055
Directors' fees and expenses 271
Miscellaneous expenses 41
Total expenses 50,610
Deduct
Waiver of distribution fee (Note 4) 17,894
Waiver of management fee (Note 3) 14,563
Waiver of shareholder servicing fee (Note 4) 5,965
NET EXPENSES 12,188
NET INVESTMENT INCOME 77,774
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments sold 112,161
Change in unrealized appreciation
(depreciation) of investments 379,762
Net realized and unrealized gain on investments 491,923
Net increase in net assets resulting
from operations $569,697
*For the period from January 1, 1995 to September 30, 1995.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MENTOR
BALANCED PORTFOLIO
PERIOD PERIOD
ENDED ENDED
9/30/95* 12/31/94**
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 77,774 $ 50,691
Net realized gain (loss) on investments sold 112,161 (7,105)
Change in unrealized appreciation (depreciation)
of investments 379,762 (16,208)
Increase in net assets from operations 569,697 27,378
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (7,781) (43,277)
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Change in net assets from capital
share transactions (263,442) 2,926,998
Net increase in net assets 298,474 2,911,099
NET ASSETS
Beginning of period 2,911,099 -
End of period $3,209,573 $2,911,099
</TABLE>
*For the period from January 1, 1995 to September 30, 1995.
**For the period from June 21, 1994 (commencement of operations) to December 31,
1994.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
MENTOR BALANCED
PORTFOLIO
PERIOD PERIOD
ENDED ENDED
9/30/95* 12/31/94**
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 12.50
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.36 0.22
Net realized and unrealized
gain (loss) on investments 2.08 (0.09)
Total from investment operations 2.44 0.13
LESS DISTRIBUTIONS
Dividends from net investment income (0.03) (0.19)
NET ASSET VALUE, END OF PERIOD $ 14.85 $ 12.44
Total Return 19.28% 1.00%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 3,210 $ 2,911
Ratio of expenses to
average net assets 0.50%(a) 0.50%(a)
Ratio of expenses to average
net assets excluding waiver 2.12%(a) 2.72%(a)
Ratio of net investment income
to average net assets 3.26%(a) 3.32%(a)
Portfolio turnover rate 65% 71%
(a) Annualized.
* For the period from January 1, 1995 to September 30, 1995.
** For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
NOTE 1: ORGANIZATION
The Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. On April 12, 1995 the name of the Trust was changed to Mentor Funds
("Mentor Funds"). On April 12, 1995 the portfolios of Mentor Series Trust were
merged into newly formed portfolios of Mentor Funds. Mentor Funds consists of
nine separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1995, as
follows:
Mentor Growth Portfolio (formerly Mentor Growth Fund)
("Growth Portfolio")
Mentor Capital Growth Portfolio (formerly Cambridge Capital Growth
Portfolio) ("Capital Growth Portfolio")
Mentor Strategy Portfolio (formerly Mentor Strategy Fund)
("Strategy Portfolio")
Mentor Income and Growth Portfolio (formerly Cambridge Income and Growth
Portfolio) ("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio (formerly Cambridge Global Portfolio)
("Global Portfolio")
Mentor Quality Income Portfolio (formerly Cambridge Government Income
Portfolio) ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio (formerly Mentor Short-Duration
Income Fund) ("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio (formerly Cambridge Municipal Income
Portfolio) ("Municipal Income Portfolio")
Mentor Balanced Portfolio (formerly Mentor Balanced Fund)
("Balanced Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The financial statements included in this report are for the Balanced Portfolio
(hereinafter referred to as the "Portfolio").
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolio:
(a) Valuation of Securities - Listed securities held by the Portfolio 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 Portfolio 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
<PAGE>
market quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the general
supervision of the Board of Trustees.
U.S. Government obligations held by the Portfolio 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 Portfolio'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- It is the policy of Mentor Funds 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. Additionally, procedures have been established by Mentor Funds 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.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Fund's adviser to be creditworthy pursuant to guidelines established by
the Mentor Fund's Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Security Transactions and Investment Income - Security transactions for the
Portfolio 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 Portfolio'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, if any.
(e) Distributions to Shareholders- Distributions from net investment income and
net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Portfolio.
NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Portfolio has entered into an Investment Advisory Agreement with
Commonwealth Investment Counsel, Inc. ("Commonwealth"), a wholly-owned
subsidiary of Mentor Investment Group, Inc. (formerly Investment Management
Group, Inc.) ("Mentor"), which is a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc. ("Wheat"). 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 Portfolio. In order to limit the Portfolio's
expenses, during the period ended September 30, 1995, Commonwealth has agreed to
reduce its compensation to the extent that expenses of the Portfolio (exclusive
of brokerage, interest, taxes, deferred organization expenses, and
<PAGE>
payments under the Portfolio's Distributions Plan) exceed an annual rate of
0.50% of the Portfolio's average net assets. For the period ended September 30,
1995, Commonwealth earned and voluntarily waived advisory fees of $14,563 for
the Portfolio.
Administrative personnel and services are provided by Mentor to the Portfolio,
under an Administration Agreement, at an annual rate of .10 of 1% of the average
daily net assets of the Portfolio. In order to limit the Portfolio's expenses
during its start-up period, Mentor agreed to waive its fee for the first year of
the Portfolio's operations.
Commonwealth has agreed to reimburse the Portfolio 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 Portfolio.
The most stringent state expense limitation applicable to the Portfolio 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 ended September 30, 1995, 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 Portfolio and Mentor Distributors,
Inc. ("Mentor Distributors") (formerly Cambridge Distributors, Inc.) a
wholly-owned subsidiary of Mentor, was appointed distributor of the Portfolio.
To compensate Mentor Distributors for the services it provides and for the
expenses it incurs under the Distribution Agreement, the Portfolio has adopted a
Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940, under which the Portfolio pays a distribution fee, which is accrued daily
and paid monthly at the annual rate of 0.75% of the Portfolio's average daily
net assets.
Effective, June 21, 1994 the Portfolio 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 Portfolio's average daily net assets.
The total charges to be borne by the Portfolio, under the Distribution and
Shareholder Service Agreements is expected to remain at an annual rate of 1% of
the Portfolio's average daily net assets. For the period ended September 30,
1995 Wheat earned and voluntarily waived distribution and shareholder services
fees of $17,894 and $5,965 respectively.
NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities,
aggregated $1,972,063 and $2,102,048 respectively, for the the period ended
September 30, 1995.
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
At September 30, 1995, the cost of investments for federal income tax purposes
amounted to $2,849,013 and net unrealized appreciation aggregated $363,554, of
which $375,775 related to appreciated securities and $12,221 related to
depreciated securities.
<PAGE>
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 Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Period Period
Ended Ended
9/30/95* 12/31/94**
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
Shares sold 6,784 $ 90,000 233,931 $2,926,998
Shares issued upon reinvestment of distribution 3,998 51,058 - -
Shares redeemed (28,622) (404,500) - -
Change in net assets from capital share
transactions (17,840) $(263,442) 233,931 $2,926,998
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
**For the period from June 21, 1994 (commencement of operations) to December 31,
1994.
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statement of assets and liabilities of the
Mentor Balanced Portfolio, a portfolio of Mentor Funds, including the
portfolio of investments, as of September 30, 1995, and the related statement
of operations for the period from January 1, 1995 to September 30, 1995, and
the statements of changes in net assets and financial highlights for the period
from January 1, 1995 through September 30, 1995 and the period from June 21,
1994 (commencement of operations) to December 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995 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 referred to above present fairly, in
all material respects, the financial position of the Mentor Balanced
Portfolio, a portfolio of Mentor Funds, as of September 30, 1995, and the
results of its operations for the period from January 1, 1995 through
September 30, 1995, and the changes in its net assets and financial
highlights for the period from January 1, 1995 through September 30, 1995 and
the period from June 21, 1994 to December 31, 1994 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 10, 1995
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements
(1) Statement of Assets and Liabilities -- September 30, 1995*
Statement of Operations -- period/year ended September 30, 1995*
Statement of Changes in Net Assets -- years/periods ended
September 30, 1995 and September 30, 1994*
Financial Highlights *(+)
Notes to Financial Statements*
_____________
* Included in Part B to this Registration Statement.
(+) Included in Part A to this Registration Statement.
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant, with Amendments No. 1 and 2 (2);
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Copy of Specimen Certificates for both Class A and
Class B Shares of Beneficial Interest for each New
Portfolio (6);
(5)(i) Conformed copy of Management Agreement of the
Registrant with Mentor Advisors, Inc.(2);
(a)Conformed copy of New Exhibit A to Management
Agreement to include the Global Portfolio(4);
(ii) Conformed copy of Investment Advisory Agreement for
the Cambridge Growth Portfolio (2);
(iii) Conformed copy of Investment Advisory Agreement for
the Capital Growth Portfolio (2);
(iv) Conformed copy of Investment Advisory Agreement for
the Government Income Portfolio (4);
(v)Conformed copy of Investment Advisory Agreement for
the Municipal Income Portfolio (2);
(vi) Conformed copy of Investment Advisory Agreement for
the Income and Growth Portfolio (3);
(vii) Conformed copy of Investment Advisory Agreement for
the Global Portfolio (4);
(viii) Form of Investment Advisory and Management Agreement
for the Growth Portfolio (6);
(ix) Form of Investment Advisory and Management Agreement
for the Strategy Portfolio (6);
(x) Form of Investment Advisory and Management Agreement
for the Short-Duration Income Portfolio (6);
(xi) Form of Investment Advisory and Management Agreement
for the Balanced Portfolio (6);
(6)(i) Conformed copy of Distributor's Contract of the
Registrant with Distributors, Inc., through and
including Exhibit I (3);
(ii) Form of New Exhibit J to the Distributor's Contract in
respect of the Class A and B shares of the Growth,
Strategy, Short-Duration Income Portfolios and the
Balanced Portfolio (6);
(7) Not applicable;
(8)(i) Conformed copy of Custodian Contract of the Registrant
with Investors Fiduciary Trust Company (2);
(ii) Conformed copy of Custodian Contract of the Registrant
with State Street Bank and Trust Company (2);
(iii) Form of Administrative Services Agreement of the
Registrant in respect of each Portfolio (6);
(iv) Form of Custodian Contract with State Street Bank
and Trust Company in respect of foreign securities*;
(9)(i) Conformed copy of Transfer Agency and Registrar
Agreement of the Registrant (2);
(ii) Conformed copy of Shareholder Services Plan of the
Registrant through and including Exhibit B in respect
of the Cambridge Growth, Capital Growth, Government
Income, Municipal Income, Income and Growth, and
Global Portfolios (3);
(iii) Form of New Exhibit C to the Shareholder Services Plan
in respect of the Class A and B shares of the Growth,
Strategy, Short-Duration Income Portfolios and the
Balanced Portfolio (6);
(10) Not applicable;
(11)(i) Conformed copy of Independent Auditors Consent;*
(ii) Conformed copy of KPMG Peat Marwick LLP opinion on
Methodology and Procedures for Accounting for Multiple
Classes of Shares (5);
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding (1);
(14) Not applicable;
(15)(i) Conformed copy of Distribution Plan for each Portfolio
of the Trust (other than the New Portfolios);
(ii) Copy of 12b-1 Agreement (Sales Agreement) with Mentor
Distributors, Inc. (3);
(iii) Form of Plan of Distribution pursuant to Rule 12b-1 in
respect of the Growth Portfolio (6);
(iv) Form of Plan of Distribution pursuant to Rule 12b-1 in
respect of the Strategy Portfolio (6);
(v) Form of Plan of Distribution pursuant to Rule 12b-1 in
respect of the Short-Duration Portfolio (6);
(vi) Form of Plan of Distribution pursuant to Rule 12b-1 in
respect of the Balanced Portfolio (6);
(16)(i) Schedules for Computation of Performance
(all Portfolios)(3)
(18) Rule 18f-3(d) Plan*
(27)(i) Financial Data Schedules of Class A Shares*
(ii) Financial Data Schedules of Class B Shares*
(iii) Financial Data Schedules in respect of the Balanced
Portfolio.*
1. Incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed April 14, 1992.
2. Incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed May 14, 1993.
3. Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed November 26, 1993.
4. Incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed August 3, 1994.
5. Incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed January 27, 1995.
6. Incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on form N-1A filed March 15, 1995.
*Filed herewith
Item 25. Persons Controlled by or Under Common Control with Registrant:
References made to "Principal Holders of Securities" in Part B
of this Registration Statement
Item 26. Number of Holders of Securities as of November 30, 1995:
Multiclass Portfolios Class A Class B
Capital Growth Portfolio 2,019 4,976
Global Portfolio 624 1,573
Growth Portfolio 314 17,529
Income and Growth Portfolios 1,070 3,364
Municipal Income Portfolios 545 1,360
Quality Income Portfolio 1,096 3,348
Short-Duration Income Portfolio 60 1,037
Strategy Portfolio 334 15,458
Single Class Portfolio
Balanced Portfolio 6
Item 27. Indemnification:
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed January 31, 1992 (File Nos.
33-45315 and 811-6550).
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of each director, officer, or partner
of the entities below in which such director, officer, or partner is or has
been, at any time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner, or trustee are set
forth in the following tables.
(a) The following is additional information with respect to the
directors and officers of Commonwealth Advisors, Inc.:
Other Substantial
Position with the Business, Profession,
Name Investment Adviser Vocation or Employment*
Peter J. Quinn, Jr. President and Director President, Mentor
Distributors, Inc.;
Managing Director,
Mentor Investment
Group, Inc. and
Wheat First Butcher
Singer, Inc.;
Trustee, The Mentor
Funds; Mentor
Investment Group,
Inc. and Wheat First
Butcher Singer;
formerly, Senior
Vice President/Director
of Mutual Funds,
Wheat, First
Securities Inc.
John M. Ivan Secretary Managing Director,
Senior Vice
President, Director
of Compliance and
Assistant General
Counsel, Wheat,
First Securities,
Inc.; Managing
Director and
Assistant Secretary,
Wheat First Butcher
Singer, Inc.
(formerly WFS
Financial
Corporation); Clerk,
Cash Resource Trust
and Mentor
Institutional Trust;
Secretary, Mentor
Income Fund, Inc.
Thomas L. Souders Treasurer Managing Director and
Chief Financial Officer,
Wheat, First Securities,
Inc.; formerly, Manager
of Internal Audit,
Heilig-Myers; formerly,
Manager, Peat Marwick &
Mitchell & Company
(b) The following is additional information with respect to the directors and
officers of Charter Asset Management, Inc. ("Charter"):
<TABLE>
OTHER SUBSTANTIAL
POSITION WITH THE BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
<S> <C> <C>
Theodore W. Price Director and President None
Linda A. Ziglar Senior Vice President None
Jeffrey S. Drummond Vice President None
John M. Ivan Secretary See Item 28(a).
Jonathan M. Harris* Assistant Secretary Managing Director,
Secretary and General
Counsel, Wheat, First
Securities, Inc.,
Senior Vice President,
Secretary and General
Counsel, Wheat First
Butcher Singer, Inc.;
Assistant Secretary,
Wellesley Advisors,
Inc.
Thomas L. Souders Treasurer See Item 28(a).
Robert P. Wilson Assistant Treasurer Managing Director and
Treasurer of Wheat
First Butcher Singer,
Inc. and Wheat, First
Securities, Inc.;
Assistant Treasurer,
Wellesley Advisors,
Inc.
(c) The following is additional information with respect to the directors and
officers of Wellesley Advisors, Inc. ("Wellesley"):
Other Substantial
Position with the Business, Profession,
Name Investment Adviser Vocation or Employment
<S> <C> <C>
Donald R. Hays President Managing Director,
Wheat, First
Securities, Inc.
Asa Wesley Graves VII Vice President None
John M. Ivan Secretary See Item 28(a).
Jonathan M. Harris* Assistant Secretary Managing Director,
Secretary and General
Counsel, Wheat, First
Securities, Inc.,
Senior Vice President,
Secretary and General
Counsel, Wheat First
Butcher Singer, Inc.;
Assistant Secretary,
Charter Asset
Management, Inc.
Thomas L. Souders Treasurer See Item 28(a).
Robert P. Wilson Assistant Treasurer See Item 28(b).
</TABLE>
(d) The following is additional information with respect to the directors
and officers of Commonwealth Investment Counsel, Inc. ("CIC"):
<TABLE>
OTHER SUBSTANTIAL
BUSINESS, PROFESSION,
POSITION WITH THE VOCATION OR
NAME INVESTMENT ADVISER EMPLOYMENT
<S> <C> <C>
John G. Davenport President None
William F. Johnston, Senior Vice President None
III
-8-
R. Preston Nuttall Senior Vice President Formerly, Senior Vice
President, Capitoline
Investment Services,
919 East Main Street,
Richmond, VA 23219
Mary A. Beeghly Vice President None
John J. Kelly Vice President None
William H. West, Jr. Vice President Formerly, Vice President,
Mentor Income Fund, Inc.;
Vice President of Ryland
Capital Management,
Inc., Vice President,
RAC Income Fund, Inc.
Steven C. Henderson Vice President None
Stephen R. McClelland Associate Vice Formerly, Associate
President Vice President,
Investment Management
Group, Inc.
Thomas L. Souders Treasurer See Item 28(a).
-9-
John M. Ivan Secretary See Item 28(a).
</TABLE>
(e) The following is additional information with respect to the directors and
officers of Mentor Perpetual Advisors, L.L.C. ("Mentor Perpetual"):
<TABLE>
OTHER SUBSTANTIAL
POSITION WITH THE BUSINESS, PROFESSION,
NAME INVESTMENT ADVISOR VOCATION OR EMPLOYMENT
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited
Martyn Arbib Director Chairman, Perpetual
Portfolio Management
Limited
Roger C. Cormick Director Deputy Chairman -
Marketing, Perpetual
Portfolio Management
Limited
Paul F. Costello Director Managing Director, Wheat
First Butcher Singer, Inc.,;
Mentor Investment Group,
Inc.,; President, Cash Resource
Trust, Mentor Income Fund,
Inc., and Mentor Institutional
Trust.
Daniel J. Ludeman Director Chairman and Chief
Executive Officer,
Mentor Investment
Group; Managing Director,
Wheat First Securities,
Inc.; Managing Director,
Wheat First Butcher
Singer, Inc.
David S. Mossop Director Director, Perpetual
Portfolio Management
Limited
Richard J. Rossi Director Managing Director,
Mentor Investment
Group, Inc.
</TABLE>
(f) The following is additional information with respect to Wellington
Management Company, Inc., located at 75 State Street, Boston Massachusetts
02109:
Catherine A. Smith General Partner --
Stephen A. Soderberg General Partner --
Ralph E. Stuart, Jr. General Partner --
Perry M. Traquina General Partner --
Gene R. Tremblay General Partner --
Mary Ann Tynan General Partner --
Ernst H. Von Metzsch General Partner --
James L. Walters General Partner --
Kim Williams General Partner --
Dena G. Willmore General Partner --
Francil V. Wisneski General Partner --
(g) The following is additional information with respect to the directors
and officers of Van Kampen/American Capital Management Inc., located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486:
Don G. Powell Chairman, Chief Executive --
Officer, Director
Dennis J. McDonnell President, Chief Operating --
Officer, Director
William R. Rybak Executive Vice President,
Chief Financial Officer, Director --
David R. Kowalski Vice President --
Ronald A. Nyberg Executive Vice President, Director --
Edward A. Treichel Senior Vice President --
* The address of Mentor Investment Group, Inc., Wheat, First Securities,
Inc., Wheat First Butcher Singer, Inc., The Mentor Funds, Mentor Income
Fund, Inc., Commonwealth Advisors, Charter, Wellesley, CIC, and Mentor
Perpetual is 901 East Byrd Street, Richmond, VA 23219. The address of
Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000 Broken
Land Parkway, Columbia, MD 21044. The address of Perpetual Portfolio Management
Limited is 48 Hart Street, Henley-on-Thames, Oxon, England, RG92AZ.
Item 29. Principal Underwriters:
(a) Mentor Distributors, Inc. is the principal distributor for the
Registrant's shares and acts as the principal underwriter for the
Registrant.
-10-
Mentor Distributors, Inc. is a Virginia corporation and is an
affiliate of Commonwealth Advisors, Charter, Wellesley, and
Commonwealth.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITERS WITH REGISTRANT
Peter J. Quinn, Jr. President and Director Trustee
901 East Byrd Street
Richmond, VA 23219
Paul F. Costello Senior Vice President President
901 East Byrd Street
Richmond, VA 23219
Thomas L. Souders Treasurer None
901 East Byrd Street
Richmond, VA 23219
John M. Harris Secretary None
901 East Byrd Street
Richmond, VA 23219
John M. Ivan Assistant Secretary Secretary
901 East Byrd Street
Richmond, VA 23219
Item 30. Location of Accounts and Records:
Response is incorporated by reference to Registrant's Initial
Registration on Form N-1A filed January 31, 1992 (File Nos. 33-45315
and 811-6550).
Item 31. Management Services
None.
Item 32. Undertakings:
(a) Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, THE MENTOR FUNDS, certifies that
it meets all of the requirements for effectiveness of the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1993 and has duly caused
this Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond and the Commonwealth of Virginia, on the
12th day of January, 1996.
THE MENTOR FUNDS
By: /s/ Paul F. Costello
Paul F. Costello
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity and on the date
indicated:
Name Title Date
* January 12, 1996
- -----------------------
Daniel J. Ludeman Chairman and Trustee
(Chief Executive
Officer)
/s/ Peter J. Quinn, Jr. Trustee January 12, 1996
- -----------------------
Peter J. Quinn, Jr.
* January 12, 1996
- -----------------------
Arnold H. Dreyfuss Trustee
* January 12, 1996
- -----------------------
Thomas F. Keller Trustee
* January 12, 1996
- -----------------------
Louis W. Moelchert, Jr. Trustee
* January 12, 1996
- -----------------------
Troy A. Peery, Jr. Trustee
/s/ Paul F. Costello January 12, 1996
- ------------------------
Paul F. Costello President
/s/ Terry L. Perkins January 12, 1996
- ------------------------
Terry L. Perkins Treasurer (Principal Financial
and Accounting Officer)
*/s/ Peter J. Quinn, Jr. Attorney-in-fact January 12, 1996
- ------------------------
Peter J. Quinn, Jr.
EXHIBIT INDEX
Exhibit Page
(8)(iv) Form of Custodian Contract
(11)(i) Independent Auditors' Consent
(18) Rule 18f-3(d) Plan
(27)(i) Financial Data Schedules - Class A
(ii) Financial Data Schedules - Class B
(iii) Financial Data Schedule - Balanced Portfolio
CUSTODIAN CONTRACT
STATE STREET BANK AND TRUST COMPANY
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Employment of Custodian and Property to be Held by It................................................ 4
2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian in
the United States.................................................................................... 5
2.1 Holding Securities.......................................................................... 5
2.2 Delivery of Securities...................................................................... 6
2.3 Registration of Securities.................................................................. 10
2.4 Bank Accounts............................................................................... 10
2.5 Availability of Federal Funds............................................................... 11
2.6 Collection of Income........................................................................ 12
2.7 Payment of Fund Monies...................................................................... 12
2.8 Liability for Payment in Advance of Receipt of Securities Purchased......................... 15
2.9 Appointment of Agents....................................................................... 15
2.10 Deposit of Fund Assets in Securities Systems................................................ 15
2.10A Fund Assets Held in the Custodian's Direct Paper System..................................... 18
2.11 Segregated Account.......................................................................... 19
2.12 Ownership Certificates for Tax Purposes..................................................... 20
2.13 Proxies..................................................................................... 20
2.14 Communications Relating to Portfolio Securities............................................. 21
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the
United States........................................................................................ 21
3.1 Appointment of Foreign Sub-Custodians....................................................... 22
3.2 Assets to be Held........................................................................... 22
3.3 Foreign Securities Depositories............................................................. 23
3.4 Agreements with Foreign Banking Institutions................................................ 23
3.5 Access of Independent Accountants of the Fund............................................... 23
3.6 Reports by Custodian........................................................................ 24
3.7 Transactions in Foreign Custody Account..................................................... 24
3.8 Liability of Foreign Sub-Custodians......................................................... 25
3.9 Liability of Custodian...................................................................... 25
3.10 Reimbursement for Advances.................................................................. 26
3.11 Monitoring Responsibilities................................................................. 27
3.12 Branches of U.S. Banks...................................................................... 27
3.13 Tax Law..................................................................................... 28
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund............................... 28
5. Proper Instructions.................................................................................. 29
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
6. Actions Permitted without Express Authority.......................................................... 30
7. Evidence of Authority................................................................................ 31
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset
Value and Net Income................................................................................. 31
9. Records.............................................................................................. 32
10. Opinion of Fund's Independent Accountant............................................................. 32
11. Reports to Fund by Independent Public Accountants.................................................... 33
12. Compensation of Custodian............................................................................ 33
13. Responsibility of Custodian.......................................................................... 33
14. Effective Period, Termination and Amendment.......................................................... 35
15. Successor Custodian.................................................................................. 36
16. Interpretive and Additional Provisions............................................................... 38
17. Additional Funds..................................................................................... 38
18. Massachusetts Law to Apply........................................................................... 39
19. Prior Contracts...................................................................................... 39
20. Declaration of Trust................................................................................. 39
21. Shareholder Communications Election.................................................................. 39
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between , a business trust organized and existing under
the laws of Massachusetts, having its principal place of business at 901 East
Byrd Street, Richmond, Virginia, 23219, hereinafter called the "Fund", and State
Street Bank and Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in series together
with all other series subsequently established by the Fund and made subject to
this Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or
-1-
<PAGE>
capital distributions received by it with respect to all securities owned by the
Portfolio(s) from time to time, and the cash consideration received by it for
such new or treasury shares of beneficial interest of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian. Upon
receipt of "Proper Instructions" (within the meaning of Article 5), the
Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial
-2-
<PAGE>
paper of an issuer for which State Street Bank and Trust Company acts
as issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to
Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Portfolio;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.10 hereof;
4) To the depository agent in connection with tender or
other similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise
become payable; provided that, in any such case, the
cash or other consideration is to be delivered to the
Custodian;
-3-
<PAGE>
6) To the issuer thereof, or its agent, for transfer
into the name of the Portfolio or into the name of
any nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed pursuant
to Section 2.9 or into the name or nominee name of
any sub-custodian appointed pursuant to Article 1 in
each case to the extent permitted by Section 2.3; or
for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of
the Portfolio, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such securities prior to receiving payment for such
securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
-4-
<PAGE>
9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise of
such warrants, rights or similar securities or the
surrender of interim receipts or temporary securities
for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of
securities made by the Portfolio, but only against
receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on behalf
of the Portfolio, which may be in the form of cash or
obligations issued by the United States government,
its agencies or instrumentalities, except that in
connection with any loans for which collateral is to
be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department
of the Treasury, the Custodian may deliver securities
prior to the receipt of such collateral provided that
the Custodian shall promptly notify the Fund if such
collateral is not credited;
11) For delivery as security in connection with any
borrowings by the Fund on behalf of the Portfolio
requiring a pledge of assets by the Fund on behalf of
the Portfolio, but only against receipt of amounts
borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of
Securities Dealers,
-5-
<PAGE>
Inc. ("NASD"), relating to compliance with the rules
of The Options Clearing Corporation and of any
registered national securities exchange, or of any
similar organization or organizations, regarding
escrow or other similar arrangements in connection
with transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating
to compliance with the rules of the Commodity Futures
Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding
account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the currently
effective prospectus and statement of additional
information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from
the Fund on behalf of the applicable Portfolio, a
certified copy of a resolution of the Board of
Trustees or of
-6-
<PAGE>
the Executive Committee signed by an officer of the
Fund and certified by the Clerk or an Assistant
Clerk, specifying the securities of the Portfolio to
be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose
to be a proper corporate purpose, and naming the
person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian (or of any agent appointed
pursuant to Section 2.9 or any sub-custodian appointed pursuant to
Article 1) which nominee shall be assigned exclusively to the
Portfolio, unless the Fund has authorized in writing the appointment of
a nominee to be used in common with other registered investment
companies having the same investment adviser as the Portfolio. All
securities accepted by the Custodian on behalf of any Portfolio under
the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund specifically directs the Custodian
to maintain securities in "street name", the Custodian shall utilize
its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to
-7-
<PAGE>
draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of
the Portfolio, other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the Custodian
only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, (a) invest in such instruments as may be set forth in
such instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the Fund;
and (b) make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of such Portfolio
which are deposited into the Portfolio's account.
-8-
<PAGE>
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to bearer domestic securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent and shall credit such income, as collected, to
such Portfolio's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest and other payments when due on
securities held hereunder. Income due each Portfolio on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options,
futures contracts or options on futures contracts for
the account of the Portfolio but only (a)
-9-
<PAGE>
against the delivery of such securities or evidence
of title to such options, futures contracts or
options on futures contracts to the Custodian (or any
bank, banking firm or trust company doing business in
the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered
in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities
System, in accordance with the conditions set forth
in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.10A; (d) in the
case of repurchase agreements entered into between
the Fund on behalf of the Portfolio and the
Custodian, or another bank, or a broker-dealer which
is a member of NASD, (i) against delivery of the
securities either in certificate form or through an
entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase
by the Portfolio of securities owned by the Custodian
along with written evidence of the agreement by the
Custodian to repurchase such securities from the
Portfolio or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or
foreign; such transactions may be effected prior to
receipt of
-10-
<PAGE>
a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as
defined in Article 5;
2) In connection with conversion, exchange or surrender
of securities owned by the Portfolio as set forth in
Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by
the Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred
by the Portfolio, including but not limited to the
following payments for the account of the Portfolio:
interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the
Portfolio declared pursuant to the governing
documents of the Fund;
6) For payment of the amount of dividends received in
respect of securities sold short;
7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund
on behalf of the Portfolio, a certified copy of a
resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer
of the Fund and certified by its Clerk or an
Assistant Clerk, specifying the amount of such
payment, setting forth the purpose for which such
payment is to be made,
-11-
<PAGE>
declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is
to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by
the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
-12-
<PAGE>
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in
a Securities System provided that such securities are
represented in an account ("Account") of the
Custodian in the Securities System which shall not
include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to
securities of the Portfolio which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for
the account of the Portfolio upon (i) receipt of
advice from the Securities System that such
securities have been transferred to the Account, and
(ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for
the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the
Securities System that payment for such securities
has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of
the Portfolio. Copies of all advices from the
Securities System of transfers of securities for the
account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the
Custodian and be
-13-
<PAGE>
provided to the Fund at its request. The Custodian
shall furnish the Fund promptly on behalf of the
Portfolio confirmation of each transfer to or from
the account of the Portfolio in the form of a written
advice or notice and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the
Securities System for the account of the Portfolio;
4) The Custodian shall provide to the Fund for the
Portfolio with any report obtained by the Custodian
on the Securities System's accounting system,
internal accounting control and procedures for
safeguarding securities deposited in the Securities
System;
5) The Custodian shall have received from the Fund on
behalf of the Portfolio the initial or annual
certificate, as the case may be, required by Article
14 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for the benefit of the Portfolio for any loss or
damage to the Portfolio resulting from use of the
Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees, or
from failure of the Custodian or any such agent to
enforce effectively such rights as it may have
against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim
against the Securities System or any other person
-14-
<PAGE>
which the Custodian may have as a consequence of any
such loss or damage if and to the extent that the
Portfolio has not been made whole for any such loss
or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a
Portfolio in the Direct Paper System of the Custodian subject
to the following provisions:
1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions from the Fund on behalf of the
Portfolio;
2) The Custodian may keep securities of the Portfolio in
the Direct Paper System only if such securities are
represented in an account ("Account") of the
Custodian in the Direct Paper System which shall not
include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for
customers;
3) The records of the Custodian with respect to
securities of the Portfolio which are maintained in
the Direct Paper System shall identify by book- entry
those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for
the account of the Portfolio upon the making of an
entry on the records of the Custodian to reflect such
payment and transfer of securities to the account of
the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon
the making of an entry on the records of the
-15-
<PAGE>
Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from
the account of the Portfolio, in the form of a
written advice or notice, of Direct Paper on the next
business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio copies
of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Portfolio;
6) The Custodian shall provide to the Fund on behalf of
the Portfolio any report created by or received by
the Custodian from any other person on its system of
internal accounting control and procedures for
safeguarding securities deposited in the Direct Paper
System as the Fund may reasonably request from time
to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating
-16-
<PAGE>
to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow, account
deposits, or other similar arrangements in connection with transactions
by the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased or sold by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of
the Board of Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Clerk or an Assistant Clerk,
setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper purposes of the Fund.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Portfolio held by
it and in connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the
-17-
<PAGE>
securities are registered otherwise than in the name of the Portfolio
or a nominee of the Portfolio, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly
deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange offers
or any other similar transaction, the Custodian shall transmit promptly
to the Portfolio all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange or similar
offer. If the Portfolio desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian of the action the Fund desires the
Custodian to take at least three business days prior to the date on
which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
-18-
<PAGE>
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Trustees, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt by the Custodian of Proper Instructions as
defined in Section 5 of this Contract, the Fund may instruct the
Custodian by delivery of the Proper Instructions to the Custodian to
cease the employment of any one or more such sub-custodians for
maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Portfolio's foreign securities
transactions. The assets of each applicable Portfolio shall at all
times be held separate from the assets of any sub-custodian and the
books and records of the sub-custodian shall at all times show that
such assets are held for the Custodian as Custodian for its clients or
for the applicable Portfolio. The books and records of the Custodian
shall at all times indicate the beneficial ownership of the applicable
Portfolio.
-19-
<PAGE>
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Portfolios
shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of
each Portfolio will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for the
assets of each Portfolio will be freely transferable without the
payment of money or value other than for safe custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable Portfolio; (d) officers of, or
auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent
public accountants for the Fund, will be given access to the books and
records of the foreign banking institution relating to its actions
under its agreement with the Custodian; and (e) assets of the
Portfolios held by the foreign sub-custodian will be subject only to
the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the
-20-
<PAGE>
Fund to be afforded access to the books and records of any foreign
banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, periodic reports in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a sub-custodian for the
Custodian on behalf of each applicable Portfolio indicating, as to
securities acquired for a Portfolio, the identity of the entity having
physical possession of such securities.
3.7 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.7,
the provision of Sections 2.2 and 2.7 of this Contract shall apply,
mutatis mutandis to the foreign securities of the Fund held outside the
United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
account of each applicable Portfolio may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to the purchaser
-21-
<PAGE>
thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund
agrees to hold any such nominee harmless from any liability as a
holder of record of such securities absent such nominee's negligence,
bad faith or breach of obligation.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and each Portfolio from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with
the institution's performance of such obligations. At the election of
the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. Except as otherwise provided in this Section,
the Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking
-22-
<PAGE>
institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, provided, however, that the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any similar act
or event beyond the Custodian's control. Notwithstanding the foregoing
provisions of this paragraph 3.9, (i) with respect to the use by the
Custodian of any foreign sub-custodian, the Custodian shall be liable
to the Fund for any loss, damage, cost, expense, liability or claim
resulting from such use if and to the extent caused by any negligence,
misfeasance or misconduct of the Custodian or any of its agents or any
its or their employees, or from any failure of the Custodian or any
such agent to enforce effectively such rights as it may have against
the foreign sub-custodian, (ii) in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the
-23-
<PAGE>
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Fund
fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of such Portfolios assets to
the extent necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S. dollars
or the equivalent thereof) or that its shareholders, equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions
hereof shall not apply where the custody of the Portfolios assets is
maintained in a foreign branch of a
-24-
<PAGE>
banking institution which is a "bank" as defined by Section 2(a)(5) of
the Investment Company Act of 1940 meeting the qualification set forth
in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or
both.
3.13 Tax Law. The Custodian shall be responsible to use reasonable
professional efforts to assist each Portfolio with respect to any claim
for exemption or refund under the tax law of jurisdictions in which the
Portfolio has invested. The Custodian and each Portfolio shall consult
and cooperate to facilitate the appropriate administration of tax
matters connected with the income and securities of each Portfolio to
which this Contract relates. The Custodian will be entitled to rely
without separate duty of inquiry on any representation or information
relating to tax status that it is supplied by a Portfolio.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
-25-
<PAGE>
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and the By-laws of the Fund and any
applicable votes of the Board of Trustees of the Fund pursuant thereto, the
Custodian shall, upon receipt of instructions from the Transfer Agent, make
funds available for payment to holders of Shares who have delivered to the
Transfer Agent a request for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of a Portfolio, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of a
Portfolio, the Custodian shall honor checks drawn on the Custodian by a holder
of Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give Proper Instructions with
respect to the transaction involved. The Fund shall cause all oral instructions
to be confirmed in writing. Upon receipt of a certificate of the Clerk or an
Assistant Clerk as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of
-26-
<PAGE>
procedures approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electromechanical or electronic devices
provided that the Board of Trustees and the Custodian are satisfied that such
procedures afford adequate safeguards for the Portfolios' assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three party agreement which requires a segregated
asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each Applicable Portfolio:
1) make payments to itself or others for minor expenses
of handling securities or other similar items
relating to its duties under this Contract, Provided
that all such payments shall be accounted for to the
Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities
in definitive form;
3) endorse for collection, in the name of the Portfolio,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details
in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the
Fund.
-27-
<PAGE>
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust and By-laws as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
-28-
<PAGE>
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
3la-l and 3la-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
registration statement and amendments thereto, the Fund's Form N-lA, and Form
N-SAR or other annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
-29-
<PAGE>
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios, at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the
-30-
<PAGE>
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence in carrying out the provisions of this Contract. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim to the extent such loss,
damage, cost, expense, liability or claim results from, or is caused by,
nationalization, expropriation, currency restrictions, or acts of war or
terrorism, or any other similar act or event beyond the Custodian's control.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money
other than cash held by the Custodian on behalf of the Fund pursuant to this
Contract or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable for
the payment of money other than cash held by the Custodian on behalf of the Fund
pursuant to this Contract or incurring liability of some other form, the Fund on
behalf of the Portfolio, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
-31-
<PAGE>
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities other than cash or securities held by the
Custodian on behalf of the Fund pursuant to this Contract for any purpose for
the benefit of a Portfolio including the purchase or sale of foreign exchange or
of contracts for foreign exchange or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Clerk or an Assistant Clerk that the Board of Trustees of the Fund has approved
the initial use of a particular Securities System by such Portfolio and the
receipt of an annual certificate of the Clerk or an Assistant Clerk that the
Board of Trustees has reviewed the use by such Portfolio of such Securities
System, as
-32-
<PAGE>
required in each case by Rule 17f-4 under the Investment Company Act of 1940, as
amended and that the Custodian shall not with respect to a Portfolio act under
Section 2.10A hereof in the absence of receipt of an initial certificate of the
Clerk or an Assistant Clerk that the Board of Trustees has approved the initial
use of the Direct Paper System by such Portfolio and the receipt of an annual
certificate of the Clerk or an Assistant Clerk that the Board of Trustees has
reviewed the use by such Portfolio of the Direct Paper System; provided further
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state law or regulations, or any
provision of the Declaration of Trust or By-laws of the Fund, and further
provided, that the Fund on behalf of one or more of the Portfolios may at any
time by action of its Board of Trustees (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements pursuant to this Contract.
15. Successor Custodian
If a successor custodian for the Fund, or one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for
-33-
<PAGE>
transfer, all securities of each applicable Portfolio then held by it hereunder
and shall transfer to an account of the successor custodian all of the
securities of each such Portfolio held in a Securities System and shall deliver
to such successor Custodian all Funds and other property held by it with respect
to each applicable Portfolio.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the
-34-
<PAGE>
certified copy of the vote referred to or of the Board of Trustees to appoint a
successor custodian, the Custodian shall be entitled to fair compensation for
its services during such period as the Custodian retains possession of such
securities, funds and other properties and the provisions of this Contract
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state laws or regulations or any provision of the Declaration of Trust or
By-laws of the Fund. No interpretive or additional provisions made as provided
in the preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to Mentor Growth Fund and Mentor Strategy Fund with respect to which it
desires to have the Custodian render services as custodian under the terms
hereof, it shall so notify the Custodian in writing, and if the Custodian agrees
in writing to provide such services, each such series of Shares shall become a
Portfolio hereunder.
-35-
<PAGE>
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Declaration of Trust
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of the Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of the Fund as
Trustees and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees or beneficiaries
individually, but binding only upon the assets and property of the Fund.
21. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not
-36-
<PAGE>
provide this information to requesting companies. If the Fund tells the
Custodian "yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Fund as consenting to disclosure of this
information for all securities owned by the Fund or any funds or accounts
established by the Fund. For the Fund's protection, the Rule prohibits the
requesting company from using the Fund's name and address for any purpose other
than corporate communications. Please indicate below whether the Fund consents
or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [X] The Custodian is not authorized to release the
Fund's name, address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the ____ day of
ATTEST
________________ By ______________________________
ATTEST STATE STREET BANK AND TRUST
COMPANY
-37-
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of
for use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
- --------------------------
Fund's Authorized Officer
Date:_____________________
-38-
EXHIBIT 11(i)
CONSENT OF INDEPENDENT AUDITORS
The Trustees
The Mentor Funds
We consent to the use of our report dated November 10, 1995, included
herein, and to the reference to our firm under the captions "FINANCIAL
HIGHLIGHTS" in the prospectuses and "INDEPENDENT ACCOUNTANTS" in the statement
of additional information.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 9, 1996
THE MENTOR FUNDS
PLAN PURSUANT TO RULE 18F-3(D) UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective December 1, 1995*
Each series of shares of beneficial interest in The Mentor Funds (the
"Trust") (each a "Portfolio" and, together, the "Portfolios") may from time to
time issue one or more of the following classes of shares: Class A shares and
Class B shares. Each class is subject to such investment minimums and other
conditions of eligibility as are set forth in the prospectus in respect of any
such Portfolio as from time to time in effect (each, the "Prospectus"). The
differences in expenses among these classes of shares, and the conversion and
exchange features of each class of shares, are set forth below in this Plan.
Except as noted below, expenses are allocated among the classes of shares of
each Portfolio based upon the net assets of each Portfolio attributable to
shares of each class. This Plan is subject to change, to the extent permitted by
law and by the Declaration of Trust and By-laws of the Trust, by action of the
Trustees of the Trust.
CLASS A SHARES
DISTRIBUTION AND SERVICE FEES
Class A shares pay no Rule 12b-1 distribution fees, but pay shareholder
service fees of .25% of the relevant Portfolio's average net assets attributable
to Class A shares.
EXCHANGE FEATURES
Class A shares of any Portfolio may be exchanged, at the holder's
option, for Class A shares of any other Portfolio that offers Class A shares
without the payment of a sales charge beginning 15 days after purchase, provided
that Class A shares of such other Portfolio are available to residents of the
relevant state. The holding period for determining any CDSC will include the
holding period of the shares exchanged, and will be calculated using the
schedule of any Portfolio into or from which shares have been exchanged that
would result in the highest CDSC applicable to such shares. (If a shareholder
exchanges his shares for shares of the Cash Resource U.S. Government Money
Market Fund, the period during which he holds shares of that Fund will not be
included in calculating the length of time he has owned
-1-
<PAGE>
the shares subject to the CDSC, and any CDSC payable on redemption of his shares
will be reduced by the amount of any payment collected by that Fund under its
distribution plan in respect of those shares.)
- --------
* The Trust has been offering multiple classes of shares, prior to the
effectiveness of under this Investment Company Act of 1940, without any change
in the arrangements and expense allocations that have previously been approved
by the Trustees of the Trust under such order of exemption.
CONVERSION FEATURES
Class A shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class A shares are offered at a public offering price that is equal to
their net asset value ("NAV") plus a sales charge of up to 5.75% of the public
offering price (which maximum may be less for certain Portfolios, as described
in the Prospectus). The sales charges on Class A shares are subject to reduction
or waiver as permitted by Rule 22d-1 under the 1940 Act and as described in the
Prospectus.
CONTINGENT DEFERRED SALES CHARGE
Purchases of Class A shares of $1 million or more that are redeemed
within one year of purchase are subject to a CDSC of 1.00% of either the
purchase price or the NAV of the shares redeemed, whichever is less. Class A
shares are not otherwise subject to a CDSC.
The CDSC on Class A shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
CLASS B SHARES
DISTRIBUTION AND SERVICE FEES
Class B shares pay distribution fees pursuant to plans adopted pursuant
to Rule 12b-1 under the 1940 Act (the "Class B Plans"). Class B shares also bear
any costs associated with obtaining shareholder approval of the Class B Plans
(or an amendment to a Class B Plan). Pursuant to the Class B Plans, Class B
shares may pay up to .75% of the relevant Portfolio's average net assets
attributable to Class B shares (which percentage may be less for certain
Portfolios, as described in the Prospectus). Amounts payable under the Class B
Plans are subject to such further limitations as the Trustees may from time to
time determine and as set forth in the Prospectus.
EXCHANGE FEATURES
Class B shares of any Portfolio may be exchanged, at the holder's
option, for Class B shares of any other Portfolio that offers Class B shares
without the payment of a sales charge
-2-
<PAGE>
beginning 15 days after purchase, provided that Class B shares of such other
Portfolio are available to residents of the relevant state. The holding period
for determining any CDSC will include the holding period of the shares
exchanged, and will be calculated using the schedule of any Portfolio into or
from which shares have been exchanged that would result in the highest CDSC
applicable to such Class B shares. (If a shareholder exchanges his shares for
shares of the Cash Resource U.S. Government Money Market Fund, the period which
he holds shares of that Fund will not be included in calculating the length of
time he has owned the shares subject to the CDSC, and any CDSC payable on
redemption of his shares will be reduced by the amount of any payment collected
by that Fund under its distribution plan in respect of those shares.)
CONVERSION FEATURES
Class B shares do not convert into any other class of shares.
INITIAL SALES CHARGE
Class B shares are offered at their NAV, without an initial sales
charge.
CONTINGENT DEFERRED SALES CHARGE
Class B shares that are redeemed within 6 years of purchase are subject
to a CDSC of up to 4.00% of either the purchase price or the NAV of the shares
redeemed, whichever is less (which period may be shorter and which percentage
may be less for certain Portfolios, as described in the Prospectus); such
percentage declines the longer the shares are held, as described in the
Prospectus. Class B shares purchased with reinvested dividends or capital gains
are not subject to a CDSC.
The CDSC on Class B shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
-3-
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> GROWTH PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 185,817,377
<INVESTMENTS-AT-VALUE> 262,537,845
<RECEIVABLES> 22,999,898
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 27,607
<TOTAL-ASSETS> 285,565,350
<PAYABLE-FOR-SECURITIES> 3,885,112
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,985,814
<TOTAL-LIABILITIES> 18,870,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,184,322
<SHARES-COMMON-STOCK> 1,266,659
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 24,789,634
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 76,720,468
<NET-ASSETS> 266,694,424
<DIVIDEND-INCOME> 486,045
<INTEREST-INCOME> 966,811
<OTHER-INCOME> 0
<EXPENSES-NET> (3,418,915)
<NET-INVESTMENT-INCOME> (1,966,059)
<REALIZED-GAINS-CURRENT> 24,885,052
<APPREC-INCREASE-CURRENT> 38,888,234
<NET-CHANGE-FROM-OPS> 61,807,227
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 127,059
<NUMBER-OF-SHARES-REDEEMED> (3,410)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 76,568,466
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,418,915
<AVERAGE-NET-ASSETS> 200,175,844
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> 2.72
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.08
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> GROWTH PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 185,817,377
<INVESTMENTS-AT-VALUE> 262,537,845
<RECEIVABLES> 22,999,898
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 27,607
<TOTAL-ASSETS> 285,565,350
<PAYABLE-FOR-SECURITIES> 3,885,112
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,985,814
<TOTAL-LIABILITIES> 18,870,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,184,322
<SHARES-COMMON-STOCK> 15,350,398
<SHARES-COMMON-PRIOR> 15,653,316
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 24,789,634
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 76,720,468
<NET-ASSETS> 266,694,424
<DIVIDEND-INCOME> 486,045
<INTEREST-INCOME> 966,811
<OTHER-INCOME> 0
<EXPENSES-NET> (3,418,915)
<NET-INVESTMENT-INCOME> (1,966,059)
<REALIZED-GAINS-CURRENT> 24,885,052
<APPREC-INCREASE-CURRENT> 38,888,234
<NET-CHANGE-FROM-OPS> 61,807,227
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,282,441
<NUMBER-OF-SHARES-REDEEMED> (2,585,359)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 76,568,466
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,418,915
<AVERAGE-NET-ASSETS> 200,175,844
<PER-SHARE-NAV-BEGIN> 12.15
<PER-SHARE-NII> (0.13)
<PER-SHARE-GAIN-APPREC> 4.03
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.05
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> CAPITAL GROWTH PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 76,760,291
<INVESTMENTS-AT-VALUE> 87,312,465
<RECEIVABLES> 2,747,927
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,125
<TOTAL-ASSETS> 90,061,517
<PAYABLE-FOR-SECURITIES> 2,485,380
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 346,176
<TOTAL-LIABILITIES> 2,831,556
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,969,320
<SHARES-COMMON-STOCK> 1,846,405
<SHARES-COMMON-PRIOR> 1,423,010
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 708,467
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,552,174
<NET-ASSETS> 87,229,961
<DIVIDEND-INCOME> 947,404
<INTEREST-INCOME> 349,284
<OTHER-INCOME> 0
<EXPENSES-NET> (1,404,574)
<NET-INVESTMENT-INCOME> (107,886)
<REALIZED-GAINS-CURRENT> 5,567,739
<APPREC-INCREASE-CURRENT> 8,926,628
<NET-CHANGE-FROM-OPS> 14,386,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,027,725)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 772,017
<NUMBER-OF-SHARES-REDEEMED> (473,840)
<SHARES-REINVESTED> 125,218
<NET-CHANGE-IN-ASSETS> 24,943,048
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,264,435
<OVERDISTRIB-NII-PRIOR> 103,086
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 465,031
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,404,574
<AVERAGE-NET-ASSETS> 60,402,321
<PER-SHARE-NAV-BEGIN> 14.88
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 2.91
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.79
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.02
<EXPENSE-RATIO> 1.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> CAPITAL GROWTH PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 76,760,291
<INVESTMENTS-AT-VALUE> 87,312,465
<RECEIVABLES> 2,747,927
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,125
<TOTAL-ASSETS> 90,061,517
<PAYABLE-FOR-SECURITIES> 2,485,380
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 346,176
<TOTAL-LIABILITIES> 2,831,556
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,969,320
<SHARES-COMMON-STOCK> 3,651,052
<SHARES-COMMON-PRIOR> 2,778,026
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 708,467
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,552,174
<NET-ASSETS> 87,229,961
<DIVIDEND-INCOME> 947,404
<INTEREST-INCOME> 349,284
<OTHER-INCOME> 0
<EXPENSES-NET> (1,404,574)
<NET-INVESTMENT-INCOME> (107,886)
<REALIZED-GAINS-CURRENT> 5,567,739
<APPREC-INCREASE-CURRENT> 8,926,628
<NET-CHANGE-FROM-OPS> 14,386,481
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (4,095,792)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,584,227
<NUMBER-OF-SHARES-REDEEMED> (968,058)
<SHARES-REINVESTED> 256,857
<NET-CHANGE-IN-ASSETS> 24,943,048
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,264,435
<OVERDISTRIB-NII-PRIOR> 103,086
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 465,031
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,404,574
<AVERAGE-NET-ASSETS> 60,402,321
<PER-SHARE-NAV-BEGIN> 14.80
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 2.53
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.79
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.79
<EXPENSE-RATIO> 2.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> STRATEGY PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 203,994,840
<INVESTMENTS-AT-VALUE> 241,739,224
<RECEIVABLES> 7,422,611
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 65,544
<TOTAL-ASSETS> 249,227,379
<PAYABLE-FOR-SECURITIES> 9,187,919
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,898,294
<TOTAL-LIABILITIES> 14,086,213
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 194,466,839
<SHARES-COMMON-STOCK> 688,803
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 47,636
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,882,307
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,744,384
<NET-ASSETS> 235,141,166
<DIVIDEND-INCOME> 1,008,606
<INTEREST-INCOME> 2,468,076
<OTHER-INCOME> 0
<EXPENSES-NET> (3,444,118)
<NET-INVESTMENT-INCOME> 32,564
<REALIZED-GAINS-CURRENT> 13,062,170
<APPREC-INCREASE-CURRENT> 30,325,565
<NET-CHANGE-FROM-OPS> 43,420,299
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 690,271
<NUMBER-OF-SHARES-REDEEMED> (1,062)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 55,867,360
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,262,809
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,444,118
<AVERAGE-NET-ASSETS> 201,646,543
<PER-SHARE-NAV-BEGIN> 13.45
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 1.79
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.24
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 06
<NAME> STRATEGY PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 203,994,840
<INVESTMENTS-AT-VALUE> 241,739,224
<RECEIVABLES> 7,422,611
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 65,544
<TOTAL-ASSETS> 249,227,379
<PAYABLE-FOR-SECURITIES> 9,187,919
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,898,294
<TOTAL-LIABILITIES> 14,086,213
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 194,466,839
<SHARES-COMMON-STOCK> 14,773,679
<SHARES-COMMON-PRIOR> 14,645,199
<ACCUMULATED-NII-CURRENT> 47,636
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,882,307
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,744,384
<NET-ASSETS> 235,141,166
<DIVIDEND-INCOME> 1,008,606
<INTEREST-INCOME> 2,468,076
<OTHER-INCOME> 0
<EXPENSES-NET> (3,444,118)
<NET-INVESTMENT-INCOME> 32,564
<REALIZED-GAINS-CURRENT> 13,062,170
<APPREC-INCREASE-CURRENT> 30,325,565
<NET-CHANGE-FROM-OPS> 43,420,299
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,247,821
<NUMBER-OF-SHARES-REDEEMED> (2,121,049)
<SHARES-REINVESTED> 1,708
<NET-CHANGE-IN-ASSETS> 55,867,360
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,262,809
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,444,118
<AVERAGE-NET-ASSETS> 201,646,543
<PER-SHARE-NAV-BEGIN> 12.24
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 2.97
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.21
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> INCOME AND GROWTH PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 60,536,390
<INVESTMENTS-AT-VALUE> 66,626,716
<RECEIVABLES> 1,045,065
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67,671,781
<PAYABLE-FOR-SECURITIES> 903,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202,158
<TOTAL-LIABILITIES> 1,105,970
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,165,300
<SHARES-COMMON-STOCK> 1,161,248
<SHARES-COMMON-PRIOR> 1,164,060
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4)
<ACCUMULATED-NET-GAINS> 2,310,185
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,090,330
<NET-ASSETS> 66,656,811
<DIVIDEND-INCOME> 954,545
<INTEREST-INCOME> 1,641,651
<OTHER-INCOME> 0
<EXPENSES-NET> (1,359,623)
<NET-INVESTMENT-INCOME> 1,236,573
<REALIZED-GAINS-CURRENT> 2,495,422
<APPREC-INCREASE-CURRENT> 5,833,996
<NET-CHANGE-FROM-OPS> 9,565,991
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (464,855)
<DISTRIBUTIONS-OF-GAINS> (298,324)
<DISTRIBUTIONS-OTHER> (38,935)
<NUMBER-OF-SHARES-SOLD> 255,128
<NUMBER-OF-SHARES-REDEEMED> (307,376)
<SHARES-REINVESTED> 49,436
<NET-CHANGE-IN-ASSETS> 5,574,295
<ACCUMULATED-NII-PRIOR> 75,944
<ACCUMULATED-GAINS-PRIOR> 1,115,161
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 460,486
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,359,623
<AVERAGE-NET-ASSETS> 61,623,339
<PER-SHARE-NAV-BEGIN> 15.27
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 2.14
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0.25
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 17.13
<EXPENSE-RATIO> 1.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> INCOME AND GROWTH PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 60,536,390
<INVESTMENTS-AT-VALUE> 66,626,716
<RECEIVABLES> 1,045,065
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67,671,781
<PAYABLE-FOR-SECURITIES> 903,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202,158
<TOTAL-LIABILITIES> 1,105,970
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,165,300
<SHARES-COMMON-STOCK> 2,723,279
<SHARES-COMMON-PRIOR> 2,828,735
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4)
<ACCUMULATED-NET-GAINS> 2,310,185
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,090,330
<NET-ASSETS> 66,565,811
<DIVIDEND-INCOME> 954,545
<INTEREST-INCOME> 1,641,651
<OTHER-INCOME> 0
<EXPENSES-NET> (1,359,623)
<NET-INVESTMENT-INCOME> 1,236,573
<REALIZED-GAINS-CURRENT> 2,495,422
<APPREC-INCREASE-CURRENT> 5,833,996
<NET-CHANGE-FROM-OPS> 9,565,991
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (771,682)
<DISTRIBUTIONS-OF-GAINS> (712,920)
<DISTRIBUTIONS-OTHER> (64,635)
<NUMBER-OF-SHARES-SOLD> 602,055
<NUMBER-OF-SHARES-REDEEMED> (806,196)
<SHARES-REINVESTED> 98,685
<NET-CHANGE-IN-ASSETS> 557,429
<ACCUMULATED-NII-PRIOR> 75,944
<ACCUMULATED-GAINS-PRIOR> 1,115,161
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 460,486
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,359,623
<AVERAGE-NET-ASSETS> 61,623,339
<PER-SHARE-NAV-BEGIN> 15.28
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 2.14
<PER-SHARE-DIVIDEND> 0.28
<PER-SHARE-DISTRIBUTIONS> 0.25
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 17.14
<EXPENSE-RATIO> 2.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> GLOBAL PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 18,085,442
<INVESTMENTS-AT-VALUE> 19,047,770
<RECEIVABLES> 1,938,424
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 35,318
<TOTAL-ASSETS> 21,021,512
<PAYABLE-FOR-SECURITIES> 1,423,528
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76,851
<TOTAL-LIABILITIES> 1,500,379
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,642,535
<SHARES-COMMON-STOCK> 431,462
<SHARES-COMMON-PRIOR> 624,181
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 956,483
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 962,923
<NET-ASSETS> 19,521,133
<DIVIDEND-INCOME> 313,054
<INTEREST-INCOME> 78,660
<OTHER-INCOME> 0
<EXPENSES-NET> (408,481)
<NET-INVESTMENT-INCOME> (16,767)
<REALIZED-GAINS-CURRENT> 862,461
<APPREC-INCREASE-CURRENT> 942,613
<NET-CHANGE-FROM-OPS> 1,788,307
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 142,470
<NUMBER-OF-SHARES-REDEEMED> (335,189)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 261,594
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17,822
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 185,092
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 419,026
<AVERAGE-NET-ASSETS> 16,915,203
<PER-SHARE-NAV-BEGIN> 14.23
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.88
<EXPENSE-RATIO> 2.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> GLOBAL PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 18,085,442
<INVESTMENTS-AT-VALUE> 19,047,770
<RECEIVABLES> 1,938,424
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 35,318
<TOTAL-ASSETS> 21,021,512
<PAYABLE-FOR-SECURITIES> 1,423,528
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76,851
<TOTAL-LIABILITIES> 1,500,379
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,642,535
<SHARES-COMMON-STOCK> 808,434
<SHARES-COMMON-PRIOR> 564,671
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 956,483
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 962,923
<NET-ASSETS> 19,521,133
<DIVIDEND-INCOME> 313,054
<INTEREST-INCOME> 78,660
<OTHER-INCOME> 0
<EXPENSES-NET> (408,481)
<NET-INVESTMENT-INCOME> (16,767)
<REALIZED-GAINS-CURRENT> 862,461
<APPREC-INCREASE-CURRENT> 942,613
<NET-CHANGE-FROM-OPS> 1,788,307
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 417,981
<NUMBER-OF-SHARES-REDEEMED> (174,218)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,651,594
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17,822
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 185,092
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 419,026
<AVERAGE-NET-ASSETS> 16,915,203
<PER-SHARE-NAV-BEGIN> 14.15
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 1.57
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.67
<EXPENSE-RATIO> 2.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> QUALITY INCOME PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 95,192,126
<INVESTMENTS-AT-VALUE> 95,821,521
<RECEIVABLES> 2,957,583
<ASSETS-OTHER> 6,585
<OTHER-ITEMS-ASSETS> 49,968
<TOTAL-ASSETS> 98,835,657
<PAYABLE-FOR-SECURITIES> 11,757,662
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 451,104
<TOTAL-LIABILITIES> 12,208,766
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99,907,822
<SHARES-COMMON-STOCK> 1,840,920
<SHARES-COMMON-PRIOR> 2,363,773
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (242,890)
<ACCUMULATED-NET-GAINS> (13,667,436)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 629,395
<NET-ASSETS> 86,626,891
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,539,556
<OTHER-INCOME> 0
<EXPENSES-NET> (1,655,115)
<NET-INVESTMENT-INCOME> 5,884,441
<REALIZED-GAINS-CURRENT> (1,948,938)
<APPREC-INCREASE-CURRENT> 5,945,462
<NET-CHANGE-FROM-OPS> 9,880,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,780,925)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (130,142)
<NUMBER-OF-SHARES-SOLD> 132,285
<NUMBER-OF-SHARES-REDEEMED> (745,107)
<SHARES-REINVESTED> 89,969
<NET-CHANGE-IN-ASSETS> (21,402,758)
<ACCUMULATED-NII-PRIOR> 165,284
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 563,032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,696,766
<AVERAGE-NET-ASSETS> 94,213,533
<PER-SHARE-NAV-BEGIN> 12.75
<PER-SHARE-NII> 0.84
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.85
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.06
<PER-SHARE-NAV-END> 13.29
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> QUALITY INCOME PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 95,192,126
<INVESTMENTS-AT-VALUE> 95,821,521
<RECEIVABLES> 2,957,583
<ASSETS-OTHER> 6,585
<OTHER-ITEMS-ASSETS> 49,968
<TOTAL-ASSETS> 98,835,657
<PAYABLE-FOR-SECURITIES> 11,757,662
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 451,104
<TOTAL-LIABILITIES> 12,208,766
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99,907,822
<SHARES-COMMON-STOCK> 4,669,766
<SHARES-COMMON-PRIOR> 6,103,595
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (242,890)
<ACCUMULATED-NET-GAINS> (13,667,436)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 629,395
<NET-ASSETS> 86,626,891
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,539,556
<OTHER-INCOME> 0
<EXPENSES-NET> (1,655,115)
<NET-INVESTMENT-INCOME> 5,884,441
<REALIZED-GAINS-CURRENT> (1,948,938)
<APPREC-INCREASE-CURRENT> 5,945,462
<NET-CHANGE-FROM-OPS> 9,880,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,084,639)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (298,487)
<NUMBER-OF-SHARES-SOLD> 421,513
<NUMBER-OF-SHARES-REDEEMED> (2,078,944)
<SHARES-REINVESTED> 223,602
<NET-CHANGE-IN-ASSETS> (21,402,758)
<ACCUMULATED-NII-PRIOR> 165,284
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 563,032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,696,766
<AVERAGE-NET-ASSETS> 94,213,533
<PER-SHARE-NAV-BEGIN> 12.76
<PER-SHARE-NII> 0.79
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.79
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.06
<PER-SHARE-NAV-END> 13.31
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> SHORT-DURATION INCOME PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 20,084,529
<INVESTMENTS-AT-VALUE> 20,364,548
<RECEIVABLES> 835,093
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,169,830
<TOTAL-ASSETS> 24,369,471
<PAYABLE-FOR-SECURITIES> 3,169,405
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 327,521
<TOTAL-LIABILITIES> 3,496,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,712,902
<SHARES-COMMON-STOCK> 79,010
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 85,490
<ACCUMULATED-NET-GAINS> 34,886
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 280,019
<NET-ASSETS> 20,872,545
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 980,167
<OTHER-INCOME> 0
<EXPENSES-NET> (159,977)
<NET-INVESTMENT-INCOME> 820,190
<REALIZED-GAINS-CURRENT> 258,876
<APPREC-INCREASE-CURRENT> 423,995
<NET-CHANGE-FROM-OPS> 1,503,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,777)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (2,635)
<NUMBER-OF-SHARES-SOLD> 80,087
<NUMBER-OF-SHARES-REDEEMED> (1,399)
<SHARES-REINVESTED> 322
<NET-CHANGE-IN-ASSETS> 328,703
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 37,127
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 65,901
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 225,878
<AVERAGE-NET-ASSETS> 18,224,077
<PER-SHARE-NAV-BEGIN> 12.74
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> (0.03)
<PER-SHARE-DIVIDEND> 0.22
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> SHORT-DURATION INCOME PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 20,084,529
<INVESTMENTS-AT-VALUE> 20,364,548
<RECEIVABLES> 835,093
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,169,830
<TOTAL-ASSETS> 24,369,471
<PAYABLE-FOR-SECURITIES> 3,169,405
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 327,521
<TOTAL-LIABILITIES> 3,496,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,712,902
<SHARES-COMMON-STOCK> 1,568,467
<SHARES-COMMON-PRIOR> 1,407,124
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 85,490
<ACCUMULATED-NET-GAINS> 34,886
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 280,019
<NET-ASSETS> 20,872,545
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 980,167
<OTHER-INCOME> 0
<EXPENSES-NET> (159,977)
<NET-INVESTMENT-INCOME> 820,190
<REALIZED-GAINS-CURRENT> 258,876
<APPREC-INCREASE-CURRENT> 423,995
<NET-CHANGE-FROM-OPS> 1,503,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (812,803)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (39,850)
<NUMBER-OF-SHARES-SOLD> 1,116,509
<NUMBER-OF-SHARES-REDEEMED> (1,011,667)
<SHARES-REINVESTED> 56,501
<NET-CHANGE-IN-ASSETS> 3,728,703
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 37,127
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 65,901
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 225,878
<AVERAGE-NET-ASSETS> 18,224,077
<PER-SHARE-NAV-BEGIN> 12.18
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.52
<PER-SHARE-DIVIDEND> 0.59
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.03
<PER-SHARE-NAV-END> 12.67
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> MUNICIPAL INCOME PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 56,429,527
<INVESTMENTS-AT-VALUE> 59,049,762
<RECEIVABLES> 1,088,850
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,138,612
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 185,433
<TOTAL-LIABILITIES> 185,433
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 60,073,272
<SHARES-COMMON-STOCK> 1,371,150
<SHARES-COMMON-PRIOR> 1,738,078
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 52,543
<ACCUMULATED-NET-GAINS> (2,687,785)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,620,235
<NET-ASSETS> 59,953,179
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,455,047
<OTHER-INCOME> 0
<EXPENSES-NET> (1,117,143)
<NET-INVESTMENT-INCOME> 3,337,904
<REALIZED-GAINS-CURRENT> (2,056,061)
<APPREC-INCREASE-CURRENT> 4,099,300
<NET-CHANGE-FROM-OPS> 5,381,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,233,641)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 71,110
<NUMBER-OF-SHARES-REDEEMED> (483,463)
<SHARES-REINVESTED> 45,425
<NET-CHANGE-IN-ASSETS> (11,260,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 58,877
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,281
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,117,143
<AVERAGE-NET-ASSETS> 65,132,238
<PER-SHARE-NAV-BEGIN> 14.42
<PER-SHARE-NII> 0.81
<PER-SHARE-GAIN-APPREC> 0.51
<PER-SHARE-DIVIDEND> 0.82
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.92
<EXPENSE-RATIO> 1.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> MUNICIPAL INCOME PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 56,429,527
<INVESTMENTS-AT-VALUE> 59,049,762
<RECEIVABLES> 1,088,850
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,138,612
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 185,433
<TOTAL-LIABILITIES> 185,433
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 60,073,272
<SHARES-COMMON-STOCK> 2,641,371
<SHARES-COMMON-PRIOR> 3,198,229
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 52,543
<ACCUMULATED-NET-GAINS> (2,687,785)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,620,235
<NET-ASSETS> 59,953,179
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,455,047
<OTHER-INCOME> 0
<EXPENSES-NET> (1,117,143)
<NET-INVESTMENT-INCOME> 3,337,904
<REALIZED-GAINS-CURRENT> (2,056,061)
<APPREC-INCREASE-CURRENT> 4,099,300
<NET-CHANGE-FROM-OPS> 5,381,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,106,334)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 247,851
<NUMBER-OF-SHARES-REDEEMED> (903,907)
<SHARES-REINVESTED> 99,198
<NET-CHANGE-IN-ASSETS> (11,260,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 58,877
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,281
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,117,143
<AVERAGE-NET-ASSETS> 65,132,238
<PER-SHARE-NAV-BEGIN> 14.43
<PER-SHARE-NII> 0.74
<PER-SHARE-GAIN-APPREC> 0.52
<PER-SHARE-DIVIDEND> 0.74
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.95
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 17
<NAME> BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 2,849,013
<INVESTMENTS-AT-VALUE> 3,212,567
<RECEIVABLES> 76,230
<ASSETS-OTHER> 3,332
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,292,129
<PAYABLE-FOR-SECURITIES> 82,175
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 381
<TOTAL-LIABILITIES> 82,556
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,663,556
<SHARES-COMMON-STOCK> 216,091
<SHARES-COMMON-PRIOR> 233,931
<ACCUMULATED-NII-CURRENT> 77,407
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 105,056
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 363,554
<NET-ASSETS> 3,209,573
<DIVIDEND-INCOME> 28,094
<INTEREST-INCOME> 61,868
<OTHER-INCOME> 0
<EXPENSES-NET> (12,188)
<NET-INVESTMENT-INCOME> 77,774
<REALIZED-GAINS-CURRENT> 112,161
<APPREC-INCREASE-CURRENT> 379,762
<NET-CHANGE-FROM-OPS> 569,697
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,781)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,784
<NUMBER-OF-SHARES-REDEEMED> (28,622)
<SHARES-REINVESTED> 3,998
<NET-CHANGE-IN-ASSETS> 298,474
<ACCUMULATED-NII-PRIOR> 7,414
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14,563
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 50,610
<AVERAGE-NET-ASSETS> 3,177,108
<PER-SHARE-NAV-BEGIN> 12.44
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 2.08
<PER-SHARE-DIVIDEND> 0.03
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.85
<EXPENSE-RATIO> 0.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
