AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 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. 11 (X)
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 13 (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)
(X) IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
<PAGE>
( ) ON NOV. (date), 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, 1996 WAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1996.
<PAGE>
MENTOR FUNDS
CROSS REFERENCE SHEET
(as required by Rule 404(a))
Part A - 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;
Other Services; 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; Mentor
Funds; Valuing shares;
Distribution and taxes;
Custodian and transfer
and dividend agent; Other
Services; 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; Mentor
Funds; How to buy
shares; How to Exchange
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);
Members of Investment
Management Teams
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.
<PAGE>
PROSPECTUS NOVEMBER 29, 1996
MENTOR FUNDS
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 (a 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. See
"Other Investment Practices."
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 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
November 29, 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
Mentor Funds is P.O. Box 1357, Richmond, Virginia 23218-1357.
------------------------
Mentor Distributors, LLC
Distributor
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses Summary..................................................................................... 3
Financial Highlights................................................................................. 6
Investment Objectives and Policies................................................................... 13
Valuing the Portfolios' Shares....................................................................... 26
Sales Arrangements................................................................................... 27
Distribution Plans (Class B Shares).................................................................. 32
How To Sell Shares................................................................................... 32
How To Exchange Shares............................................................................... 33
Distributions and Taxes.............................................................................. 34
Management........................................................................................... 35
General.............................................................................................. 37
Performance Information.............................................................................. 38
APPENDIX............................................................................................. 39
</TABLE>
2
<PAGE>
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The tables on this page and the next 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. Expenses shown are based on
those incurred for the last 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(1)
--------- -----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)
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)
Class B Shares(3)(4):
</TABLE>
<TABLE>
<S> <C>
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 are 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."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00% if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase
Program."
3
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY DURATION MUNICIPAL
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................. 0.70% 0.80% 0.85% 0.75% 1.10% 0.34%* 0.20%* 0.60%
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.................. 0.33% 0.38% 0.32% 0.36% 0.60% 0.46% 0.41%* 0.39%
Total Portfolio Operating
Expenses.................... 1.28% 1.43% 1.42% 1.36% 1.95% 1.05%* 0.86%* 1.24%
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY DURATION MUNICIPAL
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................. 0.70% 0.80% 0.85% 0.75% 1.10% 0.34%* 0.20%* 0.60%
12b-1 Fees...................... 0.75% 0.75% 0.75% 0.75% 0.75% 0.50% 0.30% 0.50%
Shareholder Service Fees........ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses.................. 0.33% 0.38% 0.34% 0.38% 0.60% 0.46% 0.41%* 0.39%
Total Portfolio Operating
Expenses.................... 2.03% 2.18% 2.19% 2.13% 2.70% 1.55%* 1.16%* 1.74%
</TABLE>
- ---------------
*After expense limitation.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income and Short-Duration Income Portfolios and Mentor
Investment Group has agreed to limit its administrative services fees from the
Short-Duration Income Portfolio until September 30, 1997 to the extent necessary
to limit the Total Portfolio Operating Expenses of those Portfolios to the
levels shown. In the absence of these expense limitations, Management Fees for
the Quality Income Portfolio and the Short-Duration Income Portfolio would have
been 0.60% and 0.50%, respectively; Other Expenses for the Short-Duration Income
Portfolio would have been 0.51%; and Total Portfolio Operating Expenses would
have been as follows: Quality Income Portfolio, Class A -- 1.31%; Class
B -- 1.81%; Short-Duration Income Portfolio, Class A -- 1.26%; Class B -- 1.56%.
4
<PAGE>
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 $ 96 $64 $ 124 $ 109 $ 203 $ 236
Capital Growth Portfolio............. 71 22 100 68 131 117 219 251
Strategy Portfolio................... 71 22 100 69 131 117 218 252
Income and Growth Portfolio.......... 71 22 98 67 128 114 212 246
Global Portfolio..................... 76 27 115 84 157 143 272 303
Quality Income Portfolio............. 58 16 79 49 103 84 170 185
Municipal Income Portfolio........... 60 18 85 55 112 94 190 205
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 5%
annual return and 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 $61 $ 96 $94 $ 124 $1119 $ 203 $ 236
Capital Growth Portfolio............. 71 62 100 98 131 127 219 251
Strategy Portfolio................... 71 62 100 99 131 127 218 252
Income and Growth Portfolio.......... 71 62 98 97 128 124 212 245
Global Portfolio..................... 76 67 115 114 157 153 272 303
Quality Income Portfolio............. 58 56 79 79 103 94 170 185
Municipal Income Portfolio........... 60 58 85 85 112 104 190 205
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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following tables have been derived from the Financial Highlights
included in Mentor Funds' financial statements, which have been audited by
KPMG Peat Marwick LLP, Mentor Funds' independent auditors. Their report
dated November 8, 1996 on the Portfolios' financial statements for the
period ended September 30, 1996 is included in the Annual Report dated
September 30, 1996 and are incorporated into this Prospectus by reference.
This table should be read in conjunction with each Portfolio's financial
statements and notes thereto, which are incorporated by reference into the
Statement of Additional Information and which may be obtained free of
charge from 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
MENTOR GROWTH STRATEGY
PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO
-------------------- --------------------------------------------------- -----------------
YEAR PERIOD YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95* 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** 9/30/96 9/30/95*
------- -------- ------- ------- ------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 16.08 $ 13.37 $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 14.18 $ 15.24 $ 13.45
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.10) (0.01) 0.11 0.02 0.09 0.14 0.08 0.08 --(b)
Net realized and
unrealized gain (loss)
on investments 4.23 2.72 3.73 2.91 (0.30) 1.02 0.03 2.86 1.79
------- -------- ------- ------- ------- ------- --------- ------- --------
Total from investment
operations 4.13 2.71 3.84 2.93 (0.21) 1.16 0.11 2.94 1.79
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- -- -- (0.04) (0.11) (0.08) -- --
Distributions in excess
of net investment
income -- -- -- -- -- -- -- -- --
Distributions from
capital gains (1.74) -- (0.50) (1.79) (0.13) -- -- (0.22) --
Distributions in excess
of capital -- -- -- -- -- -- -- -- --
------- -------- ------- ------- ------- ------- --------- ------- --------
Total Distributions (1.74) -- (0.50) (1.79) (0.17) (0.11) (0.08) (0.22) --
------- -------- ------- ------- ------- ------- --------- ------- --------
NET ASSET VALUE, END OF
PERIOD $ 18.47 $ 16.08 $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 17.96 $ 15.24
------- -------- ------- ------- ------- ------- --------- ------- --------
------- -------- ------- ------- ------- ------- --------- ------- --------
Total Return 29.15% 20.27% 24.63% 20.18% (1.37%) 8.21% 0.78% 19.36% 13.31%
------- -------- ------- ------- ------- ------- --------- ------- --------
------- -------- ------- ------- ------- ------- --------- ------- --------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $40,272 $ 20,368 $31,889 $29,582 $21,181 $31,360 $20,864 $20,372 $ 10,503
Ratio of expenses to
average net assets 1.28% 1.36%(a) 1.43% 1.87% 1.70% 1.49% 1.14%(a) 1.42% 1.65%(a)
Ratio of expenses to
average net asset
excluding waiver 1.28% 1.36%(a) 1.43% 1.87% 1.70% 1.59% 1.43%(a) 1.42% 1.65%(a)
Ratio of net investment
income (loss) to average
net assets (0.39%) (0.65%)(a) 0.51% 0.27% 0.53% 0.96% 1.54%(a) 0.62% (0.06%)(a)
Portfolio turnover rate 105% 70% 98% 157% 149% 192% 61% 125% 122%
Average commission rate on
portfolio transactions $0.0602 -- $0.0688 -- -- -- -- $0.0669 --
------- -------- ------- ------- ------- ------- --------- ------- --------
------- -------- ------- ------- ------- ------- --------- ------- --------
</TABLE>
- ---------------
* For the period from June 5, 1995 (initial offering of Class A shares)
to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
(b) Reflects net investment income (loss) which was under $0.01 per share.
6
<PAGE>
CLASS A SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR
QUALITY
MENTOR INCOME AND GROWTH PORTFOLIO MENTOR PERPETUAL GLOBAL PORTFOLIO INCOME
PORTFOLIO
-------------------------------------------- --------------------------------- -------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 9/30/93* 9/30/96 9/30/95 9/30/94** 9/30/96
------- ------- ------- -------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 17.13 $ 15.27 $ 14.88 $ 14.14 $ 15.88 $ 14.23 $ 14.18 $ 13.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.37 0.40 0.31 0.09 (0.04) 0.05 (0.01) 0.89
Net realized and
unrealized gain (loss)
on investments 2.75 2.14 0.64 0.73 2.82 1.60 0.06 (0.37)
------- ------- ------- -------- ------- ------- --------- -------
Total from investment
operations 3.12 2.54 0.95 0.82 2.78 1.65 0.05 0.52
LESS DISTRIBUTIONS
Dividends from net
investment income (0.35) (0.40) (0.30) (0.08) -- -- -- (0.89)
Distributions in excess
of net investment
income -- (0.03) -- -- -- -- -- (0.01)
Distributions from
capital gains (0.74) (0.25) (0.26) -- (0.80) -- -- --
Distributions in excess
of capital -- -- -- -- -- -- -- --
------- ------- ------- -------- ------- ------- --------- -------
Total Distributions (1.09) (0.68) (0.56) (0.08) (0.80) -- -- (0.90)
------- ------- ------- -------- ------- ------- --------- -------
NET ASSET VALUE, END OF
PERIOD $ 19.16 $ 17.13 $ 15.27 $ 14.88 $ 17.86 $ 15.88 $ 14.23 $ 12.91
------- ------- ------- -------- ------- ------- --------- -------
------- ------- ------- -------- ------- ------- --------- -------
Total Return 19.13% 17.24% 6.54% 5.54% 18.40% 11.60% 0.35% 4.09%
------- ------- ------- -------- ------- ------- --------- -------
------- ------- ------- -------- ------- ------- --------- -------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $24,210 $19,888 $17,773 $ 9,849 $13,098 $ 6,854 $ 8,882 $21,092
Ratio of expenses to
average net assets 1.36% 1.69% 1.75% 1.56%(a) 1.95% 2.06% 2.09%(a) 1.05%
Ratio of expenses to
average net asset
excluding waiver 1.36% 1.69% 1.75% 1.94%(a) 1.95% 2.11% 3.18%(a) 1.31%
Ratio of net investment
income (loss) to average
net assets 2.08% 2.53% 2.20% 2.35%(a) (0.21%) 0.26% (0.10%)(a) 6.84%
Portfolio turnover rate 72% 62% 78% 13% 130% 155% 2% 254%
Average commission rate on
portfolio transactions $0.0492 -- -- -- $0.0320 -- -- --
------- ------- ------- -------- ------- ------- --------- -------
------- ------- ------- -------- ------- ------- --------- -------
<CAPTION>
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 $ 12.75 $ 14.04 $ 14.39 $ 14.30
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.84 0.84 1.06 0.44
Net realized and
unrealized gain (loss)
on investments 0.61 (1.30) (0.31) 0.09
------- ------- ------- ----------
Total from investment
operations 1.45 (0.46) 0.75 0.53
LESS DISTRIBUTIONS
Dividends from net
investment income (0.85) (0.83) (1.06) (0.44)
Distributions in excess
of net investment
income (0.06) -- (0.04) --
Distributions from
capital gains -- -- -- --
Distributions in excess
of capital -- -- -- --
------- ------- ------- ----------
Total Distributions (0.91) (0.83) (1.10) (0.44)
------- ------- ------- ----------
NET ASSET VALUE, END OF
PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39
------- ------- ------- ----------
------- ------- ------- ----------
Total Return 11.82% (3.39%) 5.41% 3.37%
------- ------- ------- ----------
------- ------- ------- ----------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $24,472 $30,142 $47,780 $ 36,740
Ratio of expenses to
average net assets 1.32% 1.38% 1.04% 0.36%(a)
Ratio of expenses to
average net asset
excluding waiver 1.36% 1.39% 1.22% 1.21%(a)
Ratio of net investment
income (loss) to average
net assets 6.73% 6.33% 7.31% 8.00%(a)
Portfolio turnover rate 368% 455% 102% 9%
Average commission rate on
portfolio transactions -- -- -- --
------- ------- ------- ----------
------- ------- ------- ----------
</TABLE>
- ---------------
* 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.
*** Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
(a) Annualized.
7
<PAGE>
CLASS A SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR SHORT-
DURATION INCOME
PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO
------------------- ---------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95* 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92**
------ -------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD $12.68 $ 12.74 $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) 0.82 0.22 0.82 0.81 0.82 0.92 0.32
Net realized and unrealized
gain (loss) on investments (0.23) (0.03) 0.12 0.51 (1.54) 1.32 0.47
------ -------- ------- ------- ------- ------- ---------
Total from investment
operations 0.59 0.19 0.94 1.32 (0.72) 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net investment
income (0.77) (0.22) (0.82) (0.82) (0.81) (0.92) (0.32)
Distributions in excess of
net investment income -- (0.03) -- -- -- (0.03) --
Distributions from capital
gains -- -- -- -- (0.10) -- --
Distributions in excess of
capital -- -- -- -- -- -- --
------ -------- ------- ------- ------- ------- ---------
Total Distributions (0.77) (0.25) (0.82) (0.82) (0.91) (0.95) (0.32)
------ -------- ------- ------- ------- ------- ---------
NET ASSET VALUE, END OF PERIOD $12.50 $ 12.68 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76
------ -------- ------- ------- ------- ------- ---------
------ -------- ------- ------- ------- ------- ---------
Total Return 4.80% 1.51% 6.46% 9.46% (4.83%) 16.00% 5.34%
------ -------- ------- ------- ------- ------- ---------
------ -------- ------- ------- ------- ------- ---------
Ratios/Supplemental Data
Net assets, end of period (in
thousands) $7,450 $ 1,002 $17,558 $20,460 $25,056 $29,245 $18,801
Ratio of expenses to average
net assets 0.86% 0.71%(a) 1.24% 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to average
net asset excluding waiver 1.26% 1.00%(a) 1.24% 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment income
(loss) to average net assets 5.90% 4.10%(a) 5.47% 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate 411% 126% 46% 43% 87% 88% 0%
------ -------- ------- ------- ------- ------- ---------
------ -------- ------- ------- ------- ------- ---------
</TABLE>
- ---------------
* For the period from June 16, 1995 (initial offering of Class A shares)
to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
8
<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
--------------------------------------------------------------------------------------------------
YEAR PERIOD YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.17) (0.13) (0.15) (0.08) (0.06) (0.09) 0.02 0.13
Net realized and
unrealized gain (loss)
on investments 4.15 4.03 (0.47) 2.07 1.94 4.30 (1.10) 1.35
-------- -------- -------- -------- -------- -------- ------- --------
Total from investment
operations 3.98 3.90 (0.62) 1.99 1.88 4.21 (1.08) 1.48
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- -- -- -- -- (0.05) (0.12)
Distributions in excess
of net investment
income -- -- -- -- -- -- -- --
Distributions from
capital gains (1.74) -- (1.00) (1.02) (1.23) (0.42) (0.13) (0.27)
Distributions in excess
of capital gains -- -- (0.01) -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- --------
Total Distributions (1.74) -- (1.01) (1.02) (1.23) (0.42) (0.18) (0.39)
-------- -------- -------- -------- -------- -------- ------- --------
NET ASSET VALUE, END OF
PERIOD $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63
-------- -------- -------- -------- -------- -------- ------- --------
-------- -------- -------- -------- -------- -------- ------- --------
Total Return 28.18% 32.10% (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33%
-------- -------- -------- -------- -------- -------- ------- --------
-------- -------- -------- -------- -------- -------- ------- --------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $371,578 $246,326 $190,126 $186,978 $136,053 $108,719 $83,540 $107,315
Ratio of expenses to
average net assets 2.03% 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% 2.24%
Ratio of expenses to
average net asset
excluding waiver 2.03% 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% --
Ratio of net investment
income (loss) to average
net assets (1.13%) (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36%
Portfolio turnover rate 105% 70% 77% 64% 50% 40% 50% 26%
Average commission rate on
portfolio transactions $ 0.0602 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- --------
-------- -------- -------- -------- -------- -------- ------- --------
<CAPTION>
NINE
YEAR MOS. YEAR
ENDED ENDED ENDED
12/31/88 12/31/87 3/31/87
------- ------- --------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 7.45 $ 9.91 $ 9.34
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.01 (0.01) (0.01)
Net realized and
unrealized gain (loss)
on investments 1.24 (2.32) 0.92
------- ------- --------
Total from investment
operations 1.25 (2.33) 0.91
LESS DISTRIBUTIONS
Dividends from net
investment income (0.01) -- --
Distributions in excess
of net investment
income -- -- --
Distributions from
capital gains (0.15) (0.13) (0.34)
Distributions in excess
of capital gains -- -- --
------- ------- --------
Total Distributions (0.16) (0.13) (0.34)
------- ------- --------
NET ASSET VALUE, END OF
PERIOD $ 8.54 $ 7.45 $ 9.91
------- ------- --------
------- ------- --------
Total Return 16.78% (23.47%) 9.74%
------- ------- --------
------- ------- --------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $96,425 $92,763 $113,317
Ratio of expenses to
average net assets 2.19% 2.18%(a) 2.16%
Ratio of expenses to
average net asset
excluding waiver -- -- --
Ratio of net investment
income (loss) to average
net assets 0.16% (0.19%)(a) (0.18%)
Portfolio turnover rate 31% 33% 34%
Average commission rate on
portfolio transactions -- -- --
------- ------- --------
------- ------- --------
</TABLE>
- ---------------
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
9
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO MENTOR STRATEGY PORTFOLIO
--------------------------------------------------- --------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92* 9/30/96 9/30/95** 12/31/94 12/31/93***
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18 $ 15.21 $ 12.24 $ 12.70 $ 12.50
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.04) 0.25 (0.04) 0.05 0.46 (0.03) -- (0.06) --
Net realized and
unrealized gain (loss)
on investments 3.67 2.53 (0.26) 1.02 0.04 2.83 2.97 (0.40) 0.20
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
Total from investment
operations 3.63 2.78 (0.30) 1.07 0.50 2.80 2.97 (0.46) 0.20
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- -- (0.05) (0.46) -- -- -- --
In excess of net
investment income -- -- -- (0.01) -- -- -- -- --
Distributions from
capital gains (0.50) (1.79) (0.13) -- -- (0.22) -- -- --
Distributions in excess
of capital gains -- -- -- -- -- -- -- -- --
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
Total Distributions (0.50) (1.79) (0.13) (0.06) (0.46) (0.22) -- -- --
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
NET ASSET VALUE, END OF
PERIOD $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 17.79 $ 15.21 $ 12.24 $ 12.70
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
Total Return 23.64% 19.26% (2.00%) 7.52% 0.61% 18.48% 24.26% (3.61%) 1.60%
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $68,213 $57,648 $ 41,106 $57,030 $ 25,468 $288,494 $ 224,643 $179,274 $ 122,177
Ratio of expenses to
average net assets 2.18% 2.56% 2.46% 2.24% 1.86%(a) 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of expenses to
average net asset
excluding waiver 2.18% 2.56% 2.46% 2.34% 2.16%(a) 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment
income to average net
assets (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a) (0.19%) 0.02%(a) (0.54%) 0.08%(a)
Portfolio turnover rate 98% 157% 149% 192% 61% 125% 122% 143% 0%
Average commission rate on
portfolio transactions 0.0688 -- -- -- -- $ 0.0669 -- -- --
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
------- ------- ----------- ------- --------- -------- ---------- -------- -----------
</TABLE>
- ---------------
* Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
** For the period from January 1, 1995 to September 30, 1995.
*** Reflects operations for the period from October 29, 1993 (commencement
of operations) to December 31, 1993.
(a) Annualized.
10
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR
QUALITY
MENTOR PERPETUAL GLOBAL PORTFOLIO INCOME
MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO
----------------------------------------------- ----------------------------------- -------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 9/30/93* 9/30/96 9/30/95 9/30/94** 9/30/96
------- ------- ------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 17.14 $ 15.28 $ 14.91 $ 14.14 $ 15.67 $ 14.15 $ 14.18 $ 13.31
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.23 0.28 0.21 0.05 (0.05) (0.05) (0.04) 0.84
Net realized and
unrealized gain (loss)
on investments 2.76 2.14 0.61 0.77 2.64 1.57 0.01 (0.38)
------- ------- ------- ----------- ------- ------- ----- -------
Total from investment
operations 2.99 2.42 0.82 0.82 2.59 1.52 (0.03) 0.46
LESS DISTRIBUTIONS
Dividends from net
investment income (0.21) (0.28) (0.19) (0.05) -- -- -- (0.84)
In excess of net
investment income -- (0.03) -- -- -- -- -- --
Distributions from
capital gains (0.74) (0.25) (0.26) -- (0.80) -- -- --
Distributions in excess
of capital gains -- -- -- -- -- -- -- --
------- ------- ------- ----------- ------- ------- ----- -------
Total Distributions (0.95) (0.56) (0.45) (0.05) (0.80) -- -- (0.84)
------- ------- ------- ----------- ------- ------- ----- -------
NET ASSET VALUE, END OF
PERIOD $ 19.18 $ 17.14 $ 15.28 $ 14.91 $ 17.46 $ 15.67 $ 14.15 $ 12.93
------- ------- ------- ----------- ------- ------- ----- -------
------- ------- ------- ----------- ------- ------- ----- -------
Total Return 18.26% 16.32% 5.66% 5.54% 17.39% 10.74% (0.21%) 3.57%
------- ------- ------- ----------- ------- ------- ----- -------
------- ------- ------- ----------- ------- ------- ----- -------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $66,548 $46,678 $43,219 $18,127 $42,131 $12,667 $ 7,987 $58,239
Ratio of expenses to
average net assets 2.13% 2.43% 2.44% 2.31%(a) 2.70% 2.72% 2.79%(a) 1.55%
Ratio of expenses to
average net asset
excluding waiver 2.13% 2.43% 2.44% 2.69%(a) 2.70% 2.79% 3.93%(a) 1.81%
Ratio of net investment
income (loss) to average
net assets 1.32% 1.78% 1.51% 1.60%(a) (0.91%) (0.40%) (0.82%) 6.36%
Portfolio turnover rate 72% 62% 78% 13% 130% 155% 2% 254%
Average commission rate on
portfolio transactions $0.0492 -- -- -- $0.0320 -- -- --
------- ------- ------- ----------- ------- ------- ----- -------
------- ------- ------- ----------- ------- ------- ----- -------
<CAPTION>
YEAR YEAR PERIOD 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 $ 12.76 $ 14.06 $ 14.40 $ 14.30
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.79 0.82 0.99 0.41
Net realized and
unrealized gain (loss)
on investments 0.61 (1.37) (0.31) 0.10
------- ------- -------- ----------
Total from investment
operations 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 $ 13.31 $ 12.76 $ 14.06 $ 14.40
------- ------- -------- ----------
------- ------- -------- ----------
Total Return 11.33% (3.97%) 4.86% 3.24%
------- ------- -------- ----------
------- ------- -------- ----------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $62,155 $77,888 $127,346 $ 65,661
Ratio of expenses to
average net assets 1.74% 1.88% 1.54% 0.83%(a)
Ratio of expenses to
average net asset
excluding waiver 1.79% 1.90% 1.72% 1.67%(a)
Ratio of net investment
income (loss) to average
net assets 6.24% 6.21% 6.81% 7.53%(a)
Portfolio turnover rate 368% 455% 102% 9%
Average commission rate on
portfolio transactions -- -- -- --
------- ------- -------- ----------
------- ------- -------- ----------
</TABLE>
- ---------------
* Reflects operations for the period from May 24, 1993 (commencement of
operations) to September 30, 1993.
** Reflects operatons for the period from March 29, 1994 (commencement of
operations) to September 30, 1994.
*** Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
(a) Annualized.
11
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR SHORT DURATION
INCOME PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO
------------------------------------- -----------------------------------------------------------
YEAR PERIOD YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 9/30/95* 12/31/94** 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92***
-------- -------- ----------- -------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.67 $ 12.18 $ 12.50 $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.72 0.59 0.41 0.75 0.74 0.74 0.82 0.29
Net realized and
unrealized gain (loss)
on investments (0.16) 0.52 (0.29) 0.11 0.52 (1.54) 1.32 0.49
-------- -------- ----------- -------- -------- -------- ------- ------------
Total from investment
operations 0.56 1.11 0.12 0.86 1.26 (0.80) 2.14 0.78
LESS DISTRIBUTIONS
Dividends from net
investment income (0.73) (0.59) (0.41) (0.76) (0.74) (0.73) (0.82) (0.29)
In excess of net
investment income -- (0.03) (0.03) -- -- -- (0.04) --
Distributions from
capital gains -- -- -- -- -- (0.10) -- --
Distributions in excess
of capital gains -- -- -- -- -- -- -- --
-------- -------- ----------- -------- -------- -------- ------- ------------
Total Distributions (0.73) (0.62) (0.44) (0.76) (0.74) (0.83) (0.86) (0.29)
-------- -------- ----------- -------- -------- -------- ------- ------------
-------- -------- ----------- -------- -------- -------- ------- ------------
NET ASSET VALUE, END OF
PERIOD $ 12.50 $ 12.67 $ 12.18 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78
-------- -------- ----------- -------- -------- -------- ------- ------------
-------- -------- ----------- -------- -------- -------- ------- ------------
Total Return 4.53% 9.22% 0.95% 5.87% 9.01% (5.34%) 15.27% 5.28%
-------- -------- ----------- -------- -------- -------- ------- ------------
-------- -------- ----------- -------- -------- -------- ------- ------------
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 24,517 $ 19,871 $ 17,144 $ 37,191 $ 39,493 $ 46,157 $50,976 $ 24,265
Ratio of expenses to
average net assets 1.16% 1.20%(a) 1.29%(a) 1.74% 1.92% 1.74% 1.21 0.50%(a)
Ratio of expenses to
average net asset
excluding waiver 1.56% 1.70%(a) 1.29%(a) 1.74% 1.92% 1.86% 1.89% 1.76%(a)
Ratio of net investment
income (loss) to average
net assets 5.60% 5.04%(a) 4.90%(a) 4.95% 5.07% 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 411% 126% 166% 46% 43% 87% 88% 0%
-------- -------- ----------- -------- -------- -------- ------- ------------
-------- -------- ----------- -------- -------- -------- ------- ------------
</TABLE>
- ---------------
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1994 (commencement
of operations) to December 31, 1994.
*** Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
(a) Annualized.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering shares of eight different diversified Portfolios
by this Prospectus with varying 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
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 Investment Advisors, LLC ("Mentor Advisors") is the investment
adviser to each of the Portfolios other than the Mentor Perpetual Global
Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the investment
adviser to the Global Portfolio.
MENTOR GROWTH PORTFOLIO
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 Mentor Advisors, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Mentor Advisors is earnings growth which is above
average compared to the S&P 500 Index. Other important factors in selecting
investments include a strong balance sheet and product leadership in niche
markets. Mentor Advisors believes that such investments may offer better than
average potential for long-term capital growth.
Small and mid-size companies may present greater opportunities for capital
growth than do larger companies because of high potential earnings growth, but
may also involve greater risk. They may have limited product lines, 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.
13
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety of
securities which Mentor Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed by
Mentor Advisors to have the potential for capital appreciation. The Portfolio
may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, convertible debentures and any other class or type
of security Mentor Advisors believes offers the potential for capital
appreciation. In selecting investments, Mentor Advisors will attempt to identify
securities it believes will provide capital appreciation over the intermediate
or long term due to changes in the financial condition of issuers, changes in
financial conditions generally, or other factors. The Portfolio also may invest
in fixed-income securities, and cash or money market investments, for temporary
defensive purposes.
MENTOR STRATEGY PORTFOLIO
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Mentor Advisors
actively allocates the Portfolio's assets among the major asset categories of
equity securities, fixed-income securities, and money market instruments. The
Portfolio will normally invest some portion of its assets in each asset
category, but may invest without limit in any asset category. Total return
consists of current income (including dividends, interest, and, in the case of
discounted instruments, discount accruals) and capital appreciation (including
realized and unrealized capital gains and losses).
Mentor Advisors believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of the
market as opposed to relying solely on just one market sector. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to short-term bonds and money market instruments in order to earn current return
and to reduce the potential adverse effect of declines in the bond and equity
markets. After determining the portions of the Portfolio's assets to be invested
in the various market sectors, Mentor Advisors attempts to select the securities
of companies within those sectors offering potential for above-average total
return. The achievement of the Portfolio's investment objective depends upon,
among other things, the ability of Mentor Advisors to assess correctly the
effects of economic and market trends on different sectors of the market. The
Portfolio's investments may include both securities of U.S. issuers and
securities traded principally in foreign markets. The Portfolio may invest
without limit in foreign securities. See "Other Investment Practices -- Foreign
Securities" for a description of risks associated with investments in such
securities.
Within the equity sector, Mentor Advisors actively allocates the
Portfolio's assets to those industries and issuers it expects to benefit from
major market trends or which it otherwise believes offer the potential for
above-average total return. The Portfolio may purchase equity securities
(including convertible debt obligations and convertible preferred stock) sold on
the New York, American, and other U.S. or foreign stock exchanges and in the
over-the-counter market.
Within the fixed-income sector, Mentor Advisors seeks to maximize the
return on its investments by adjusting maturities and coupon rates as well as by
exploiting yield differentials among different types of investment-
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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 Mentor Advisors to be of comparable quality. While bonds rated Baa or
BBB are considered to be of investment grade, they have speculative
characteristics as well. A description of securities ratings is contained in the
Appendix to this Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P.
MENTOR INCOME AND GROWTH PORTFOLIO
SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY, LLP
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 Management Company ("Wellington Management")
believes exhibit sound fundamental characteristics and in investment-grade
fixed-income securities and U.S. Government securities, as described below.
Wellington Management 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 Management will attempt
to identify securities it believes are conservatively valued. 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
Management's fundamental research and security valuations.
Within the fixed-income asset class, Wellington Management 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, corporate debt securities (including
zero-coupon securities) and debt securities issued by foreign governments and by
companies located outside the United States. 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 unrated, are deemed by Wellington
Management to be of comparable quality. While fixed-income securities rated
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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
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 limited volume. As a result
the prices of these securities may fluctuate more than prices of securities of
larger, more established companies.
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Except as described below, debt and fixed-income securities in which the
Portfolio may invest will be investment grade securities or those of equivalent
quality as determined by Mentor 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
The Quality Income Portfolio's investment objective is to seek high current
income consistent with what Mentor 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 Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities. 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 Mentor Advisors to be of comparable quality. A
description of securities ratings is contained in the Appendix to this
Prospectus.
Mentor 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.
MENTOR MUNICIPAL INCOME PORTFOLIO
SUB-ADVISER: VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC.
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 American
Capital Management, Inc. ("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
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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- by S&P or between Ba and B3 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 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
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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. 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 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
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.
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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, Mentor Advisors 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 Mentor Advisors to be of comparable quality. Securities
rated Baa or BBB lack outstanding investment characteristics and have
speculative characteristics and are subject to greater credit and market risks
than higher-rated securities. 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.
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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 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, Income and Growth, 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
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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 or sub-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 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,
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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. 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 not appropriate and when, in the opinion of its
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<PAGE>
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.
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 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% of their total assets. (Those percentage limitations do not
apply to American Depository Receipts, Global Depository Receipts, and other
U.S. dollar-denominated securities of issuers located outside the United
States.) Since foreign securities are normally denominated and traded in foreign
currencies, the 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
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<PAGE>
invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. A Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments as described
more fully below.
A Portfolio may invest in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs"), which represent interests in foreign securities
held by a bank, trust company, or other organization. Investments in ADRs and
GDRs are subject to many of the same risks of investing in foreign securities
generally.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing nations,
which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in
foreign securities may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. A
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale of portfolio securities ("transaction hedging") and
to protect against changes in the value of specific portfolio positions
("position hedging").
A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes, a
Portfolio may also purchase and sell call and put options on foreign currency
futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
a Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of its
portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, each of 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
25
<PAGE>
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.
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 above) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
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 Highlights."
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.
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<PAGE>
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.
Securities quoted in foreign currencies are translated into U.S. dollars at
the current exchange rates or at such other rates as may be used in accordance
with procedures approved by the Trustees. As a result, fluctuations in the
values of such currencies in relation to the U.S. dollar will affect the net
asset value of a Portfolio's shares even though there has not been any change in
the values of such securities as quoted in such foreign currencies.
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. If you purchase
shares through an asset-allocation program, you may also be eligible to purchase
Class B shares through the "BL Purchase Program." 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. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Distributors, LLC ("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 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
money order made payable to 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.
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<PAGE>
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% 6.10% 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.
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<PAGE>
Shares of the SHORT-DURATION INCOME PORTFOLIO are sold subject to a sales
charge of 1%.
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.
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. The sales charges shown above will not apply
to shares purchased by you if you purchase shares through EVEREN Securities,
Inc. with the redemption proceeds received by you within the preceding 90 days
from the sale of shares of any non-Mentor open-end mutual fund. No CDSC will
apply to these purchases. EVEREN Securities, Inc. may compensate your investment
dealer in connection with any such purchase. See "How to Buy Shares -- General"
below.
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 the Example
below. The amount of CDSC 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> <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>
For information on how sales charges are calculated if you exchange your
shares, see "How To Exchange Shares."
THE BL PURCHASE PROGRAM. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this Program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be 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. Your broker-dealer or other financial institution is responsible
for making the
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<PAGE>
election on your behalf to invest through the Program. Accordingly, if you wish
to purchase shares through this Program, you should instruct your broker-dealer
or financial institution to do so.
GENERAL
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by 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 or its
affiliates. 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 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 or an affiliate; and (iv) redemptions by pension or profit
sharing plans of which Mentor Investment Group 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 other
mutual funds who invest in 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. If you invest through a broker-dealer or
other financial institution, your broker-dealer or other financial institution
will be responsible for electing on your behalf to take advantage of any of
these reduced sales charges or waivers described above. Please instruct your
broker-dealer or other financial institution accordingly.
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.
In determining whether a CDSC is payable in respect of the shares redeemed,
a Portfolio will first redeem the shares held longest (together with any shares
received upon reinvestment of distributions with respect to those shares). 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. See the Example below.
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<PAGE>
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:
(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
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
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, certificates will not be issued for
your shares unless you request them.
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 investment in shares of that
Portfolio to a value of $500 or more during such 60-day period.
Mentor Distributors, Mentor Advisors, the 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 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.
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.
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DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, is the principal distributor for the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any
Portfolio. Mentor Distributors, LLC is the successor to Mentor Distributors,
Inc.
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.
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 that Portfolio any day the New
York Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. A Portfolio will only redeem shares for which it has received
payment.
SELLING SHARES DIRECTLY TO A PORTFOLIO. Send a signed letter of instruction
and stock power form, along with any certificates that represent shares you want
to sell, to 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
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reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For more 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.
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 offered by this Prospectus and certain other portfolios in the Mentor
family 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 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 or the other portfolios into which you
may exchange your shares. 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
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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, quarterly for
the Income and Growth Portfolio, and annually for the Growth, Capital Growth,
Global, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of net capital
gain will be invested in additional shares of the same class of a Portfolio
unless 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 Mentor Funds will notify you
of the amount and tax status of distributions paid to you by your Portfolio for
the preceding year.
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 any of these Portfolios 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.
GLOBAL PORTFOLIO ONLY. Shareholders of the Portfolio who are U.S. citizens
or residents may be able to claim a foreign tax credit or deduction on their
U.S. income tax returns with respect to foreign taxes paid by the Portfolio. If,
at the end of the fiscal year of the Portfolio, more than 50% of the Portfolio's
total assets are represented by securities of foreign corporations, the
Portfolio intends to make an election permitted by the Internal Revenue Code to
treat any foreign taxes it paid as paid by its shareholders. In that case,
shareholders who are U.S. citizens, U.S. corporations, and, in some cases, U.S.
residents, will be required to include in U.S. taxable income their pro rata
share of such taxes, but may then be entitled to claim a foreign tax credit or
deduction (but not both) for their share of such taxes.
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The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of a 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).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. MENTOR INVESTMENT ADVISORS, LLC is the investment
adviser to each of the Portfolios other than the Global Portfolio. MENTOR
PERPETUAL ADVISORS, LLC is the investment adviser to the Global Portfolio. Each
of the investment advisers is located at 901 East Byrd Street, Richmond,
Virginia.
All investment decisions made for the Portfolios by Mentor Advisors and
Mentor Perpetual are made by investment management teams at those firms.
Mentor Advisors, formerly Commonwealth Investment Counsel, Inc., has over
$9.2 billion in assets under management. Mentor Advisors is a wholly-owned
subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group"), which in
turn is a subsidiary of Wheat First Butcher Singer, Inc. Wheat First Butcher
Singer, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses. EVEREN Capital Corporation has a 20%
ownership in Mentor Investment Group and may acquire additional ownership based
principally on the amount of Mentor Investment Group's revenues derived from
assets attributable to clients of EVEREN Securities, Inc. and its affiliates.
Mentor Advisors is the successor to Commonwealth Investment Counsel, Inc.,
Commonwealth Advisors, Inc., Charter Asset Management, Inc. and Wellesley
Advisors, Inc., each of which previously provided investment advisory services
to certain of the Portfolios. Mentor Investment Group, LLC is the successor to
Mentor Investment Group, Inc.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $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.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to twenty-one separate investment portfolios in the Mentor Family of Funds,
including those offered by this Prospectus. For a prospectus relating to certain
of these other investment portfolios, and for information concerning your
eligibility to purchase shares of those portfolios, contact Mentor Distributors.
Each of the Portfolios (other than the Global Portfolio) pays management
fees to Mentor Advisors at the annual rates described above under "Summary of
Portfolio Expenses -- Annual Portfolio Operating Expenses", and the Global
Portfolio pays fees to Mentor Perpetual 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 at any time in its sole discretion.
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THE SUB-ADVISERS
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. 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
wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is an
indirect wholly owned subsidiary of Morgan Stanley Group Inc. Morgan Stanley
Group Inc. and various of its subsidiaries, including Morgan Stanley & Co.
Incorporated, a registered broker-dealer, are engaged in a wide range of
financial services. As of September 30, 1996, Van Kampen, together with its
affiliates, advised or supervised approximately $163 billion of assets. For its
services as sub-adviser, Van Kampen receives a fee from Mentor Advisors at the
following annual rate: .25% of the first $60 million of the Portfolio's average
net assets and .20% of the Portfolio's average net assets over $60 million.
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 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 $13 billion.
WELLINGTON MANAGEMENT COMPANY, LLP serves as sub-adviser to the Income and
Growth Portfolio. Wellington Management, 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, 1996,
Wellington Management had discretionary investment management authority with
respect to approximately $123.8 billion in assets. Wellington Management 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, Wellington Management receives a fee from
Mentor Advisors at the following annual rate: 0.325% of the first $50 million of
the Portfolio's average net assets, 0.275% of the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million.
Paul D. Kaplan, Senior Vice President of Wellington Management, has served
as portfolio manager of the fixed-income and U.S. Government securities portion
of the Portfolio since its inception in May 1993. Mr. Kaplan has been a
portfolio manager with Wellington Management since 1982. As of November 30,
1996, Wellington Management's Equity Income Team, a group of equity portfolio
managers and senior investment professionals, will assume responsibility for
managing the equity securities portion of the Portfolio.
GENERAL. Subject to the general oversight of the Trustees, each Portfolio's
investment adviser or sub-adviser manages the relevant Portfolio's investments
in accordance with the stated policies of the Portfolio. Each makes investment
decisions for a Portfolio and places the purchase and sale orders for the
Portfolio's transactions. In addition, each pays the salaries of all officers
and employees who are employed by both it and Mentor Funds. Mentor Funds pays
all expenses not assumed by the investment advisers, sub-advisers, or Mentor
Investment Group, 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, an 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
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adviser or sub-adviser may consider sales of shares of Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
OTHER SERVICES
ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as bookkeeping and accounting services. Mentor Investment Group provides these
services to each of the Portfolios at an annual rate of 0.10% of the Portfolio's
average net assets.
SHAREHOLDER SERVICING PLAN. 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 Mentor Distributors 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 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, by a
Portfolio's sub-adviser, or by Mentor Investment Group, 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 an investment
adviser, sub-adviser, and/or Mentor Investment Group, and will not be made from
the assets of any of the Portfolios.
GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of its Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of the Commonwealth of
Massachusetts.
Mentor Funds is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of 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. 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. Mentor Funds
may suspend the sale of shares at any time and may refuse any order to purchase
shares. Although neither Mentor Funds nor any Portfolio is required to hold
annual meetings of shareholders, shareholders have the right to call a meeting
to elect or remove Trustees, or to take other actions as provided in the
Declaration of Trust.
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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. State Street Bank and Trust Company, through
its subsidiary Boston Financial Data Services, Inc., serves as transfer agent
and dividend disbursing agent for the Portfolios. Mentor Funds' independent
auditors are KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolios. A Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share during a
recent 30-day period by the maximum public offering price per share on the last
day of that period. "Total return" for the one-, five-, and ten-year periods (or
for the life of a Portfolio, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return on an investment
of $1,000 in 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 or maximum
front-end sales charge would be reduced if the CDSC or front-end 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 a Portfolio, a
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.
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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.
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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.
40
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY MENTOR FUNDS. 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 SECURITIES OFFERED HEREBY AND MENTOR
FUNDS 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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 382-0016
1996 MENTOR DISTRIBUTORS, LLC
MENTOR FUNDS
MENTOR GROWTH PORTFOLIO
MENTOR PERPETUAL GLOBAL PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO
MENTOR STRATEGY PORTFOLIO
MENTOR INCOME AND GROWTH PORTFOLIO
MENTOR MUNICIPAL INCOME PORTFOLIO
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
-------------------
PROSPECTUS
-------------------
NOVEMBER 29, 1996
[MENTOR FUNDS LOGO]
<PAGE>
P R O S P E C T U S November 29, 1996
Mentor Balanced Portfolio
Mentor Balanced Portfolio seeks capital growth and current income. The
Portfolio is a series of shares of beneficial interest of Mentor Funds, an
open-end management investment company. The Portfolio invests in a diversified
portfolio of debt and equity securities which Mentor Investment Advisors, LLC,
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 November 29, 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
23218-1357.
--------------------
Mentor Distributors, LLC
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 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* 0.20%
12b-1 Fees* 0.00%
Shareholders Service Fee* 0.00%
Other Expenses* 0.30%
-----
Total Portfolio Operating Expenses* 0.50%
---------------
* After waivers
During the Portfolio's last fiscal year, the Portfolio's investment
adviser waived all Management Fees, the Portfolio's distributor waived all
12b-1 Fees and Shareholder Service Fees, and Mentor Investment Group, LLC
waived certain adminstrative fees. In the absence of the waivers,
Management Fees would have been 0.75%, 12b-1 Fees would have been 0.75%,
Shareholder Service Fees would have been 0.25%, Other Expenses would have
been 0.31%, and Total Portfolio Operating Expenses would have been 2.06%.
Mentor Advisors, Mentor Distributors, and/or Mentor Investment Group may
waive all or a portion of such fees for the current fiscal year.
-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
------ ------- ------- --------
$5 $16 $28 $63
You would pay the following expenses on the same investment, assuming no
redemption:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$55 $46 $38 $63
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 Examples 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, along with the Portfolio's financial statements and notes
thereto, is incorporated by reference into the Statement of Additional
Information, which may be obtained in the manner described on the cover
page of this Prospectus. See "Financial Statements" in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Mentor Balanced Portfolio
----------------------------------
Year Ended Period Ended Period Ended
9/30/96 9/30/95* 12/31/94**
---------- ---------- ----------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of
period.............................................. $ 14.85 $12.44 $12.50
Net Investment income (loss)........................ 0.42 0.36 0.22
Net realized and unrealized gain (loss)
on investments.................................... 2.09 2.08 (0.09)
---- ---- ----
Total from investment operations...................... 2.51 2.44 0.13
Less distributions
Dividends from net investment income (0.48) (0.03) (0.19)
Distributions from capital gains.................... (0.60) ---- ----
Total Distributions................................... (1.08) (0.03) (0.38)
Net asset value, end of period........................ $16.28 $ 14.85 $ 12.44
Total return.......................................... 18.00% 19.28% 1.00%
Ratios/Supplemental Data
Net assets, end of period
(in 000's)......................................... $3,825 $3,210 $2,911
Ratio of expenses to average
net assets.......................................... 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net
assets excluding waiver............................. 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income (loss)
to average net assets............................... 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate............................... 103% 65% 71%
Average commission rate on
portfolio transactions.............................. $ 0.0694 ---- ----
------------
</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 Mentor Advisors 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 Mentor Funds (the "Trust"), an 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.
Mentor Advisors will adjust the proportions of the Portfolio's assets
invested in the different types of securities in order to adjust to
changing market conditions. For example, under certain market conditions,
Mentor Advisors may judge that most of the Portfolio's assets should be
invested in equity securities, and that only a relatively small portion of
the Portfolio's assets should be invested in fixed-income securities. At
other times, Mentor Advisors may invest most of the Portfolio's assets in
fixed-income securities, with a corresponding reduction in the portion of
the Portfolio's assets invested in equity securities. Under normal
circumstances, the Portfolio will invest at least 25% of its assets in
fixed-income securities and 25% of its assets in equity securities.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market
conditions to maintain a portfolio of securities with a dollar-weighted
average rating of A or better. A security will be considered to be of
"investment grade" if, at the time of investment by the Portfolio, it is
rated at least Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Corporation or the equivalent by another nationally recognized
rating organization or, if unrated, determined by Mentor Advisors to be of
comparable quality. Securities rated Baa or BBB lack outstanding investment
characteristics and have speculative characteristics and are subject to
greater credit and market risks than higher-rated securities. See the
Statement of Additional Information for descriptions of securities ratings
assigned by Moody's and Standard & Poor's.
At times Mentor Advisors may decide that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy
inconsistent with the best interests of its shareholders. At such times,
Mentor Advisors may temporarily use alternative investment strategies
primarily designed to reduce fluctuations in the value of the Portfolio's
assets. In implementing these "defensive" strategies, the Portfolio would
be permitted to hold all or any portion of its assets in high quality
fixed-income securities, cash, or money market instruments. It is
impossible to predict when, or for how long, the Portfolio will use these
alternative strategies.
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 asset- backed securities that will pay principal or interest only
under certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market
factors. Such securities may experience extreme price volatility in
response to changes in interest rates or other market factors; this may be
especially true in the case of securities where the amounts of principal or
interest paid, or the timing of such payments, varies widely depending on
prevailing interest rates.
Mentor Advisors may not be able to obtain current market quotations for
certain mortgage-backed or asset- backed securities at all times, or to
obtain market quotations believed by it to reflect the values of such
securities accurately. In such cases, Mentor Advisors 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
-6-
<PAGE>
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, Mentor Advisors will be required to estimate the
extent to which the values of the securities are likely to change in
response to changes in interest 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
Mentor Advisors 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.
Zero-coupon bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds
do not pay current interest in cash, the Portfolio is nonetheless required
for federal income tax purposes to accrue interest income on such
investments and to distribute such amounts at least annually to
shareholders. Thus, the Portfolio could be required at times to liquidate
other investments in order to satisfy this distribution requirement.
Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal
amount payable on maturity. Although the Portfolio generally amortizes the
amount of any such premium into income, the Portfolio may recognize a
capital loss if such premium securities are called or sold prior to
maturity and the call or sale price is less than the purchase price.
Additionally, the Portfolio may 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 Mentor Advisors'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 Mentor
Advisors'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 Mentor Advisors 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 Mentor Advisors, 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
agreements, dollar- roll transactions, and forward commitments may increase
the Portfolio's overall investment exposure and may result in losses.
-8-
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.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization.
Investments in ADRs or GDRs are subject to many of the same risks of
investing in foreign securities generally.
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 Mentor Advisors is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment
performance of the Portfolio would be less favorable than 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 its business. Mentor Investment Advisors, LLC, located at 901
East Byrd Street, Richmond, Virginia 23219, acts as investment adviser to
the Portfolio. All investment decisions for the Portfolio are made by a
team of investment professionals at Mentor Advisors.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment
Group, Inc. ("Mentor Investment Group"), which is in turn a subsidiary of
Wheat First Butcher Singer, Inc. ("WFBS"). WFBS, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in
Mentor Investment Group and may acquire additional ownership based
principally on the amount of Mentor Investment Group's revenues derived
from assets attributable to clients of
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<PAGE>
EVEREN Securities, Inc. and its affiliates. Mentor Advisors is the
successor to Commonwealth Investment Counsel, Inc. Mentor Advisors,
together with its affiliates, serves as investment adviser to twenty-one
separate investment portfolios in the Mentor Family of Funds.
Subject to the general oversight of the Trustees, Mentor Advisors, as
investment adviser, manages the Portfolio's securities in accordance with
the stated policies of the Portfolio. Mentor Advisors makes investment
decisions for the Portfolio and places the purchase and sale orders for the
Portfolio's portfolio transactions. In addition, Mentor Advisors 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 Mentor Advisors 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
Mentor Advisors made up of investment professionals at Mentor Advisors.
Mentor Advisors places all orders for purchases and sales of the
Portfolio's securities. In selecting broker-dealers, Mentor Advisors may
consider research and brokerage services furnished to it and its
affiliates. Subject to seeking the best overall terms available, Mentor
Advisors may consider sales of 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 Portfolio pays management fees to Mentor Advisors at the annual
rate described above under "Summary of Portfolio Expenses - Annual
Portfolio Operating Expenses." Mentor Advisors may from time to time
voluntarily waive some or all of its management fee and may terminate such
voluntary waiver at any time in its sole discretion.
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment
decisions. A change in the securities held by 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 rates since inception are 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 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
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<PAGE>
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.
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
in the Example below. The amount of the CDSC 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
The CDSC shown above is not imposed upon the redemption of shares
purchased pursuant to certain asset- allocation plans. 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.
In determining whether a CDSC is payable in respect of the shares
redeemed, the Portfolio will first redeem shares held longest (together
with any shares received upon reinvestment of distributions with respect to
those shares.) 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.
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>
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment
(10 x $12) -120
o Minus appreciation on remaining shares, also not subject
to CDSC (40 x $2) - 80
-----
o 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
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, Mentor Advisors,
each their
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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
Investment Group or an affiliate; and (iv) redemptions by pension or profit
sharing plans of which Mentor Investment Group or any affiliate serves as a
plan fiduciary. If you invest through a broker-dealer or other financial
institution your broker-dealer or other financial institution will be
responsible for electing on your behalf to take advantage of any of these
reduced sales charges or waivers described above. Please instruct your
broker-dealer or financial institution accordingly.
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, certificates will not be issued
for your shares unless you request them.
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.
Mentor Distributors, Mentor Advisors, 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. In addition, if an investor purchases shares of the Portfolio
through EVEREN Securities, Inc. with the redemption proceeds received by
the investor within the preceding 90 days from the sale of shares of any
non-Mentor open-end mutual fund, EVEREN Securities, Inc. may compensate the
investor's investment consultant in connection with that purchase. Dealers
may not use sales of 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.
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.
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<PAGE>
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 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 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
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<PAGE>
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.)
To exchange your shares, simply complete an Exchange Authorization Form
and send it to 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 daily and paid monthly to all
shareholders invested in the Portfolio on a record date. 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.
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<PAGE>
Other services
Administrative Services. Mentor Investment Group, LLC, located at 901
East Byrd Street, Richmond, Virginia 23219, provides the Portfolio with
certain administrative personnel and services necessary to operate the
Portfolio, such as bookkeeping and accounting services. Mentor Investment
Group provides these services to the Portfolio at an annual rate of 0.10%
of the Portfolio's average net assets. In order to limit the Portfolio's
expenses, Mentor Investment Group has agreed to waive its fee for the
current fiscal year. This waiver may be terminated at any time. Mentor
Investment Group, LLC is the successor to Mentor Investment Group, Inc.
Shareholder Servicing Plan. 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 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 Mentor Advisors 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
Mentor Advisors and/or Mentor Funds and will not be made from the
assets of the Portfolio.
Mentor Funds
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.
Mentor Funds is an open-end, diversified, series management
investment company with an unlimited number of authorized shares of
beneficial interest. Shares of 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. 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. Mentor Funds may suspend the sale of shares at any time and
may refuse any order to purchase shares. Although neither Mentor Funds
nor the Portfolio is required to hold annual meetings of shareholders,
shareholders have the right to call a meeting to elect or remove Trustees,
or to take other actions as provided in the 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.
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<PAGE>
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.
Mentor Funds' independent auditors are KPMG Peat Marwick LLP, 99 High
Street, Boston, Massachusetts 02110.
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 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 Mentor Advisors 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.
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<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, LLC
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<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 29, 1996
Mentor Funds (the "Trust") is an 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 November 29, 1996 and the
prospectus of Mentor Balanced Portfolio dated November 29, 1996. A copy of
either prospectus can be obtained upon request by writing to Mentor
Distributors, LLC, the Trust's distributor, at 901 East Byrd Street, Richmond,
Virginia 23219, 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 . Part III provides general information with respect to the
Trust and all of the Portfolios.
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<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.................................................. 32
INVESTMENT ADVISORY SERVICES............................................. 34
ADMINISTRATIVE SERVICES.................................................. 38
SHAREHOLDER SERVICING PLAN............................................... 39
BROKERAGE TRANSACTIONS................................................... 40
HOW TO BUY SHARES........................................................ 44
DISTRIBUTION............................................................. 44
DETERMINING NET ASSET VALUE.............................................. 45
REDEMPTIONS IN KIND...................................................... 47
TAXES.................................................................... 47
INDEPENDENT ACCOUNTANTS.................................................. 52
CUSTODIAN................................................................ 52
PERFORMANCE INFORMATION ................................................. 52
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.................................. 57
PERFORMANCE COMPARISONS.................................................. 60
SHAREHOLDER LIABILITY.................................................... 66
FINANCIAL STATEMENTS..................................................... 66
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INTRODUCTION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992 as Cambridge Series Trust. As of the date of this Statement, the Trust
consisted of the following nine portfolios (collectively, the "Portfolios" and
each individually, the "Portfolio"): Mentor Growth Portfolio (the "Growth
Portfolio"); Mentor Quality Income Portfolio (the "Quality Income 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 a vote of a majority of the outstanding voting 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
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except to the extent that a Portfolio may enter into futures contracts.
The Municipal Income Portfolio may borrow money from banks for
temporary purposes in amounts of up to 5% of its total assets. The
Portfolios will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
Portfolio by enabling it to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolios will not purchase any securities while
any borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are outstanding,
the Quality Income Portfolio will restrict the purchase of portfolio
securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase
agreements. Notwithstanding this restriction, the Portfolios may enter
into when-issued and delayed delivery transactions.
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The
deposit or payment by a Portfolio of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios
may pledge assets having a value of 10% of assets taken at cost. For
purposes of this restriction, (a) the deposit of assets in escrow in
connection with the writing of covered put or call options and the
purchase of securities on a when-issued basis; and (b) collateral
arrangements with respect to (i) the purchase and sale of stock options
(and options on stock indexes) and (ii) initial or variation margin for
futures contracts, will not be deemed to be pledges of a Portfolio's
assets. Margin deposits for the purchase and sale of futures contracts
and related options are not deemed to be a pledge.
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets. (The
Municipal Income Portfolio will not lend portfolio securities.) This
shall not prevent a Portfolio from purchasing or holding U.S.
government obligations, money market instruments, variable amount
demand master notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a
Portfolio's investment objective, policies and limitations or
Declaration of Trust. The Municipal Income Portfolio will not make
loans except to the extent the obligations the Portfolio may invest in
are considered to be loans.
5. The Portfolios (other than the Quality Income Portfolio) will not
invest more than 10% of the value of their net assets in restricted
securities; the Quality Income Portfolio will not invest more than 15%
of the value of its net assets in restricted securities.
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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.
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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.
A Portfolio (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 to 5%
of its net assets, (3) will limit the margin deposits on futures contracts
entered into to 5% of its net assets, and (4) will
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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.)
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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 a vote 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 included in Part II) Borrow more than 33 1/3% of the
value of its total assets less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities.
5. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.
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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 Mentor Investment Advisors,
LLC 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
than1/2of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of companies
that invest or deal in real estate (or, in the case of any Portfolio
other than the Growth Portfolio, real estate or limited partnership
interests). (For purposes of this restriction, investments by a
Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the
purchase or sale of real estate or interests in real estate or real
estate mortgage loans.)
11. Make investments for the purpose of exercising control or management.
12. (as to the Growth Portfolio only) Participate on a joint or a joint and
several basis in any trading account in securities.
13. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.
14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open market
involving only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value) would be
invested in such securities, or except as part of a merger,
consolidation or other acquisition.
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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.
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.)
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<PAGE>
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.
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.
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PART III
The following information relates to all of the Portfolios of the
Trust, except where 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 for fiscal 1995 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
each 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 security. If the option is exercised, the Portfolio realizes
a gain or loss equal to the difference between the Portfolio's cost for
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the underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered put options. A Portfolio may write covered put options in
order to enhance its current return. Such options transactions may also be used
as a limited form of hedging against an increase in the price of securities that
the Portfolio plans to purchase. A put option gives the holder the right to
sell, and obligates the writer to buy, a security at the exercise price at any
time before the expiration date. A put option is "covered" if the writer
segregates cash and high-grade short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing put and call options. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above
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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.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
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Futures Contracts
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures and related options will, as may be
required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
Futures on Debt Securities and Related Options. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself to
make the future delivery of the security against payment of the agreed price.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of persons acting
at the direction of the Trustees as to the valuation of a Portfolio's assets,
reflect the fair value of the contract, in which case the positions will be
valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular securities when it has the necessary
cash, but expects the rate of return 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),
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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 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
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or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one
contract would be worth $18,000 (100 units x $180). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if a Portfolio enters into a futures contract to buy 100 units of
the S&P 100 Index at a specified future date at a contract price of $180 and the
S&P 100 Index is at $184 on that future date, the Portfolio will gain $400 (100
units x gain of $4). If the Portfolio enters into a futures contract to sell 100
units of the stock index at a specified future date at a contract price of $180
and the S&P 100 Index is at $182 on that future date, the Portfolio will lose
$200 (100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on stock index futures. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
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".
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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.
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
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such circumstances, an increase in the price of the portfolio securities, if
any, may partially or completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the prices
of the futures contracts and options and movements in the underlying securities
or index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio against
a decline in the market, the securities or index on which the puts are purchased
may increase in value and the value of securities held in the portfolio may
decline. If this occurred, the Portfolio would lose money on the puts and also
experience a decline in value in its portfolio 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
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it had not entered into any futures contracts or options transactions. Moreover,
in the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Portfolio may be exposed to risk of loss.
Forward Commitments
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security subject to
the obligation of the seller to repurchase and the Portfolio to resell such
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
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A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral 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
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payments. Each payment of such excess cash flow to a holder of the related
residual represents income and/or a return of capital. The amount of residual
cash flow resulting from a series of mortgage securities will depend on, among
other things, the characteristics of the mortgage assets, the coupon rate of
each class of the mortgage securities, prevailing interest rates, the amount of
administrative expenses, and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on residual interests may be extremely
sensitive to prepayments on the related underlying mortgage assets in the same
manner as an interest-only class of stripped mortgage-backed securities. In
addition, if a series of mortgage securities includes a class that bears
interest at an adjustable rate, the yield to maturity on the related residual
interest may also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. In certain circumstances, there
may be little or no excess cash flow payable to residual holders. The Portfolio
may fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals may be subject to certain restrictions on transferability.
Foreign Securities
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates 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
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Portfolio's assets to be invested in various countries is not known, and tax
laws and their interpretations may change from time to time and may change
without advance notice. Any such taxes paid by a Portfolio will reduce its net
income available for distribution to shareholders.
Foreign Currency Transactions
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In
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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
decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
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Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
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
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firm or revised on a timely basis. Available quotation information is generally
representative of very large transactions in the interbank market and thus may
not reflect relatively smaller transactions (less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be
reflected in the U.S. options markets.
Settlement Procedures. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and 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
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<PAGE>
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of the
owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective and policies, not
for investment leverage, but a Portfolio may sell such securities prior to
settlement date if such a sale is considered to be advisable. No income accrues
to a Portfolio on securities in connection with such transactions prior to the
date the Portfolio actually takes delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause a
Portfolio to miss a price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. 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.
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<PAGE>
Bank Instruments
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the U.S.; and
Yankee Certificates of Deposit ("Yankee CDS"), which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held in the
U.S.
Dollar Rolls and Reverse Repurchase Agreements
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. A
Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the 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
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<PAGE>
cash or property or may be required to return it to the counterparty or its
trustee or receiver.
Convertible Securities
A Portfolio may invest in convertible securities. Convertible
securities are fixed income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Portfolio's Adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
Warrants
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the 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
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<PAGE>
the price of securities the Portfolio anticipates purchasing at a later date. A
Portfolio would use these transactions as hedges and not as speculative
investments and would not sell interest rate caps or floors where it does not
own securities or other instruments providing the income stream the Portfolio
may be obligated to pay. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
Lower-rated Securities
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
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<PAGE>
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the investment
to determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
Indexed Securities
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further
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<PAGE>
declines in the value of the security may then reduce the principal amount
payable on maturity. Finally, indexed securities may be more volatile than the
reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "Dmark"), the Portfolio holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars.
Eurodollar Instruments
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
Segregation of Assets
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such segregated
account will be maintained by the Trust's custodian and may contain cash, U.S.
government securities, liquid high grade debt obligations, or other appropriate
assets.
MANAGEMENT OF THE TRUST
Officers and 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, LLC.
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<PAGE>
<TABLE>
<CAPTION>
Positions with
Name and Address the Trust Principal Occupations During Past Five Years
<S> <C>
Daniel J. Ludeman(1) Chairman and Trustee Chairman and Chief Executive Officer , Mentor
901 East Byrd Street Investment Group, LLC; Director , Wheat, First
Richmond, Virginia 23219 Securities, Inc. ; Managing Director , Wheat First
Butcher Singer, Inc. ; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.; Chairman and
Trustee, Cash Resource Trust and Mentor Institutional
Trust.
Peter J. Quinn, Jr. (1) Trustee President, Mentor Distributors, LLC; Managing
901 E. Byrd Street Director, Mentor Investment Group, LLC; Managing
Richmond, Virginia 23219 Director, Wheat First Butcher Singer, Inc.; formerly,
Senior Vice President/Director of Mutual Funds,
Wheat First Butcher Singer, Inc.; Trustee, Cash
Resource Trust; formerly, President of the Trust.
Stanley F. Pauley Trustee Chairman and Chief Executive Officer, E.R. Carpenter
P. O. Box 27205 Company Incorporated; Trustee, Cash Resource Trust
Richmond, Virginia 23261 and Mentor Institutional Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business and Finance, University of
University of Richmond Richmond; Trustee, Cash Resource Trust and Mentor
Richmond, Virginia 23173 Institutional Trust; Director, America's Utility Fund,
Inc.
Thomas F. Keller Trustee Former Dean, Fuqua School of Business, Duke University;
Duke University Trustee, Cash Resource Trust and Mentor Institutional
Durham, North Carolina 27706 Trust.
Arnold H. Dreyfuss Trustee Retired. Formerly, Chairman and Chief Executive
5100 Cary Street Road Officer, Hamilton Beach/Proctor-Silex, Inc. Trustee,
Richmond, Virginia 23225 Cash Resource Trust and Mentor Institutional Trust.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company. Trustee, Cash
2235 Staples Mill Road Resource Trust and Mentor Institutional Trust.
Richmond, Virginia 23230
Paul F. Costello President Managing Director, Wheat First Butcher Singer,
901 East Byrd Street Inc. and Mentor Investment Group, LLC; President,
Richmond, Virginia 23219 Cash Resource Trust, Mentor Income Fund, Inc., and
Mentor Institutional Trust; Managing Director,
Mentor Investment Advisors, LLC; Executive Vice
President and Chief Administrative Officer, America's
Utility Fund, Inc.; Director, Mentor Perpetual
Advisors, LLC and Mentor Trust Company; 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.
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<PAGE>
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group,
901 East Byrd Street LLC; Treasurer, Cash Resource Trust, Mentor
Richmond, Virginia 23219 Income Fund, Inc., Mentor Institutional Trust
and America's Utility Fund; formerly, Treasurer
and Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Treasurer Vice President, Mentor Investment Group, LLC;
901 East Byrd Street Assistant Treasurer, Cash Resource Trust, Mentor
Richmond, Virginia 23219 Income Fund, Inc., Mentor Institutional Trust and
America's Utility Fund; formerly, Senior Accountant,
Wheat First Butcher Singer, Inc.; Audit Senior,
BDO Seidman.
John M. Ivan Secretary Managing Director, Director of Compliance,
901 East Byrd Street Senior Vice President, and Assistant General
Richmond, Virginia 23219 Counsel, Wheat, First Securities, Inc.;
Clerk, Cash Resource Trust, Mentor
Institutional Trust.
</TABLE>
(1) This Trustee is deemed to be an "interested person" of the Trust as defined
in the Investment Company Act of 1940.
Trustees' Compensation
The table below shows the fees paid to each Trustee by the Trust for
fiscal 1995 and the estimated fees to be paid to each Trustee by all funds in
the Mentor family (including the Trust) during the 1996 calendar year.
<TABLE>
<CAPTION>
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds
<S> <C>
Daniel J. Ludeman $0 $0
Arnold H. Dreyfuss 6,000 12,200
Thomas F. Keller 5,500 11,175
Louis W. Moelchert, Jr. 6,000 12,200
Stanley F. Pauley 6,000 12,200
Troy A. Peery, Jr. 5,500 11,175
Peter J. Quinn, Jr. 0 0
</TABLE>
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- --------------------
The Trustees do not receive pension or retirement benefits from the
Trust.
The Trust's Declaration of Trust provides that the Trustees will be
liable for their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
PRINCIPAL HOLDERS OF SECURITIES
As of November 1, 1996, the officers and Trustees of the Trust owned 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 class of a Portfolio as of that date,
except as set forth below:
Portfolio Holder Percentage Ownership
Growth -Class A Bank of New York TTEE 52.72
Wheat First Butcher Singer 401K
New York, NY 10286-1010
Growth-Class A Wheat First Butcher Singer FBO 8.37
Plumbers & Pipe Fitters Local
Pittsburgh, PA 15212-5844
Strategy-Class A Bank of New York TTEE 30.93
Wheat First Butcher Singer 401K
New York, NY 10286-1010
Strategy-Class A Wheat First Butcher Singer FBO 14.01
Plumbers & Pipe Fitters Local
Pittsburgh, PA 15212-5844
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Global-Class A Wheat First 5.68
Butcher Singer FBO
FBO Fundsource
Glen Allen, VA 23058-6540
Short Duration-Class A Wheat First 13.29
Butcher Singer FBO
Citizens General Hospital Corp
New Kensington, PA 15068-6591
Short Duration-Class A Wheat First Butcher Singer FBO 26.69
Northern Virginia Electric Co-Op
Manassas, VA 22110-0875
Short Duration-Class A Wheat First Butcher Singer FBO 13.69
Arnold Borinsky
Deal, NJ 07723-0424
Short Duration-Class B Wheat First Butcher Singer FBO 7.41
Charles W Langford JR PSC
Profit Sharing Plan & Trust
Owensboro, KY 42301-7481
Balanced-Class B Wheat First Butcher Singer FBO 95.73
WFBS Foundation
Glen Allen, VA 23058-6540
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to each Portfolio other than the Global Portfolio. Van
Kampen American Capital Management, Inc.
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("Van Kampen") serves as sub-adviser to the Municipal Income Portfolio;
Wellington Management Company, LLP ("Wellington Management") serves as
sub-adviser to the Income and Growth Portfolio. Each of these sub-advisers has
complete discretion to purchase and sell portfolio securities for its respective
Portfolio consistent with the particular Portfolio's investment objective,
restrictions, and policies. Mentor Perpetual Advisors, LLC ("Mentor Perpetual")
serves as investment adviser to the Global Portfolio.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment
Group, LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First
Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor
Advisors and Perpetual plc, a diversified financial services holding company.
EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and
may acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates.
On October 31, 1996, Commonwealth Investment Counsel, Inc., the
investment adviser to the Short-Duration Income and Balanced Portfolios, was
reorganized as Mentor Investment Advisors, LLC. Also on October 31, 1996, each
of Commonwealth Advisors, Inc., the investment adviser to the Capital Growth,
Income and Growth, Municipal Income, and Quality Income Portfolios, Charter
Asset Management, Inc., the investment adviser to the Growth Portfolio, and
Wellesley Advisors, Inc., the investment adviser to the Strategy Portfolio,
transferred its rights and obligations under its respective advisory contract
with the Trust to Mentor Investment Advisors, LLC. In addition, Mentor
Investment Group, Inc. and Mentor Distributors, Inc. were reorganized as Mentor
Investment Group, LLC and Mentor Distributors, LLC, respectively.
On October 29, 1996, shareholders of the Municipal Income Portfolio
approved a new sub-advisory agreement with Van Kampen American Capital
Management, Inc., which became a subsidiary of Morgan Stanley Group Inc.
Subject to the general oversight of the Trustees, each investment
adviser and/or subadviser 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.
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The investment advisers and sub-advisers bear all their expenses in connection
with the performance of their services (except as may be approved from time to
time by the Trustees) and pay the salaries of all officers and employees who are
employed by them and the Trust.
Each Portfolio's investment adviser 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
Investment Group 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 , First Securities, Inc. and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, charges for the printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution, and certain costs incurred by Mentor Investment Group in
responding to shareholder inquiries as approved by the Trustees from time to
time, to shareholders, certain shareholder report charges and charges relating
to corporate matters are borne by the Portfolio.
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.
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The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
Fiscal year Fiscal Fiscal year
1994 1995 1996
Balanced Portfolio.................... -- -- $6,790
Capital Growth Portfolio.............. $590,693 $465,031 728,536
Global Portfolio...................... 69,515 174,547 368,592
Growth Portfolio...................... 1,327,384 1,143,696 2,313,470
Income and Growth Portfolio........... 374,462 460,486 575,647
Municipal Income Portfolio............ 387,074 380,281 344,784
Quality Income Portfolio.............. 893,139 563,032 278,216
Short-Duration Income Portfolio -- -- 54,833
Strategy Portfolio.................... 1,368,325 1,262,809 2,287,369
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
Fiscal year Fiscal Fiscal year
1994 1995 1996
Balanced Portfolio........................ $ 48,884 $ 14,563 $ 18,976
Capital Growth Portfolio.................. -- -- --
Global Portfolio.......................... 69,515 10,545 --
Municipal Income Portfolio................ 81,713 -- --
Quality Income Portfolio.................. -- -- 217,329
Short-Duration Income Portfolio .......... 11,536 65,901 83,567
The investment advisers of the following Portfolios paid sub-advisory
fees to the Portfolios' sub-advisers in the following amounts for the periods
indicated below:
Fiscal year Fiscal year Fiscal year
1994 1995 1996
Capital Growth Portfolio (1) $295,347 $126,880 --
Global Portfolio (2) 34,757 49,880 --
Income and Growth Portfolio 187,231 193,845 $236,071
Municipal Income Portfolio 234,393 190,141 172,392
Quality Income Portfolio (3) 419,570 157,161 --
- --------------------
(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.
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<PAGE>
(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.
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC 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, Income and Growth, and
Global Portfolios.
Pursuant to the Administration Agreement, Mentor Investment Group
provides continuous business management services to the Portfolios and, subject
to the general oversight of the Trustees, manages all of the business and
affairs of the Portfolios subject to the provisions of the Trust's Declaration
of Trust, By-laws and the 1940 Act, and other policies and instructions the
Trustees may from time to time establish. Mentor Investment Group pays the
compensation of all officers and executive employees of the Trust (except those
employed by or serving at the request of an investment adviser or sub-adviser)
and makes available to the Trust the services of its directors, officers, and
employees as elected by the Trustees or officers of the Trust. In addition,
Mentor Investment Group provides all clerical services relating to the
Portfolios' business. As compensation for its services, Mentor Investment Group
receives a fee from each Portfolio calculated daily at the annual rate of .10 %
of a Portfolio's average daily net assets.
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may be
terminated at any time without penalty on 30 days notice by Mentor Investment
Group, or immediately in respect of any Portfolio upon notice by the Trustees or
by vote of a majority of the outstanding voting securities of that Portfolio.
The Agreement terminates automatically in the event of any assignment (as
defined in the 1940 Act).
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<PAGE>
The Portfolios paid administrative service fees in the following
amounts for the periods indicated below (amounts shown reflect fee waivers where
applicable):
Fiscal year Fiscal year Fiscal year
1994 1995 1996
Balanced Portfolio..................... -- -- --
Capital Growth Portfolio............... $ 92,278 $ 66,032 $ 91,067
Global Portfolio....................... 7,140 19,082 33,508
Growth Portfolio....................... -- 108,285 330,496
Income and Growth Portfolio............ 151,234 69,316 76,753
Municipal Income Portfolio............. 97,653 72,055 57,464
Quality Income Portfolio............... 47,282 65,234 82,591
Short-Duration Income Portfolio -- -- --
Strategy Portfolio..................... 29,422 146,572 269,102
The administrators waived administrative fees in the amounts and for
the periods indicated below:
Fiscal year Fiscal year Fiscal year
1994 1995 1996
Balanced Portfolio.................... $ 2,307 -- --
Capital Growth Portfolio.............. -- -- --
Global Portfolio...................... 530 -- --
Growth Portfolio...................... -- -- --
Income and Growth Portfolio........... 15,033 -- --
Municipal Income Portfolio............ -- -- --
Quality Income Portfolio.............. 23,563 41,651 --
Short-Duration Income Portfolio....... 9,776 -- $ 27,680
Strategy Portfolio.................... 131,557 -- --
During fiscal 1995, the Growth and Strategy Portfolios reimbursed
amounts of $6,579 and $6,117, respectively, to Mentor Investment Group for
certain accounting and operations related costs not covered by their respective
administration arrangements. During fiscal year 1996, the Growth Portfolio,
Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, Municipal Income Portfolio, Quality Income Portfolio and
Short-Duration Income Portfolio paid $23,289, $2,752, $5,901, $17,744, $5,210,
$3,465, $5,005, and $1,842 respectively to Mentor Investment Group for these
direct reimbursements.
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC with respect to each Portfolio. Pursuant to the
Service Plan, financial
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<PAGE>
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.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser, and/or
Mentor Investment Group, 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 Investment Group, as applicable, and will not be made from the
assets of any of the Portfolios.
Shareholder Services Fees
During fiscal year 1996, the Portfolios incurred shareholder service
fees under the Service Plan as follows (amounts shown reflect fee waivers where
applicable):
Balanced Portfolio..................................... --
Capital Growth Portfolio............................... $227,668
Global Portfolio....................................... 83,771
Growth Portfolio....................................... 826,239
Income and Growth Portfolio............................ 191,882
Municipal Income Portfolio............................. 143,660
Quality Income Portfolio............................... 206,477
Short-Duration Income Portfolio........................ 69,200
Strategy Portfolio..................................... 672,756
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<PAGE>
During fiscal year 1996, shareholder services fees of $8,589 were
waived in respect of the Balanced Porfolio.
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Trust usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Trust includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
It is anticipated that most purchases and sales of securities by funds investing
primarily in certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, those funds would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser or sub-adviser may receive brokerage and
research services and other similar services from many broker-dealers with which
such investment adviser or sub-adviser places a Portfolio's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and market
reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment adviser's or sub-adviser's managers and
analysts. Where the services referred to above are not used exclusively by the
investment adviser or sub-adviser for research purposes, the investment adviser
or sub-adviser, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to its non-research
use. Some of these services are of value to the investment adviser or
sub-adviser and its affiliates in advising various of its clients (including the
Portfolios), although not all of these services are necessarily useful and of
value in managing all or any of the Portfolios. The management fee paid by a
Portfolio is not reduced because its 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.
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<PAGE>
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. 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 advisory and
sub-advisory agreements, a Portfolio's investment adviser or sub-adviser may
cause the Portfolio to pay a broker-dealer which provides "brokerage and
research services" (as defined in the 1934 Act) to that adviser an amount of
disclosed commission for effecting securities transactions on stock exchanges
and other transactions for the Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The investment adviser's or sub-adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Trustees may adopt from time to time. It is the position of the staff of
the Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
each 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) 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"), and EVEREN
Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors and
Mentor Perpetual. The Trustees have adopted certain policies incorporating the
standards of Rule 17e-l issued by the SEC under the 1940 Act which requires,
among other things, that the commissions paid to Wheat and EVEREN must be
reasonable and fair compared to the commissions, fees, or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN will not
participate in brokerage commissions
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<PAGE>
given by a Portfolio to other brokers or dealers. Over-the-counter purchases and
sales are transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere. A Portfolio
will in no event effect principal transactions with Wheat and EVEREN in
over-the-counter securities in which Wheat or EVEREN makes a market.
Under rules adopted by the SEC, Wheat and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for execution
and arranging for the performance of this function by members of the exchange
not associated with them. Wheat and EVEREN will be required to pay fees charged
to those persons performing the floor brokerage elements out of the brokerage
compensation they receive from a Portfolio. The Trust has been advised by Wheat
that on most transactions, the floor brokerage generally constitutes from 5% and
10% of the total commissions paid.
Brokerage Commissions
The Portfolios paid brokerage commissions on brokerage transactions in
the following aggregate amounts for the periods indicated:
Fiscal year Fiscal Fiscal year
1994 1995 1996
Balanced Portfolio................... $ 1,641 $ 3,436 $ 7,385
Capital Growth Portfolio............. 195,086 416,744 299,554
Global Portfolio..................... 45,449 148,625 359,217
Growth Portfolio..................... 374,267 1,354,359 1,864,300
Income and Growth Portfolio.......... 116,782 125,986 146,323
Municipal Income Portfolio........... -- 4,037 2,422
Quality Income Portfolio............. -- 20,250 24,990
Short-Duration Income Portfolio 1,307 2,717 1,560
Strategy Portfolio................... 651,172 1,297,178 1,144,804
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
Fiscal year Fiscal Fiscal year
1994 1995 1996
Balanced Portfolio...................... -- -- --
Capital Growth Portfolio................ $78,085 $ 22,411 $54,642
Global Portfolio........................ -- -- --
Growth Portfolio........................ 34,881 53,120 72,923
Income and Growth Portfolio............. 22,606 47,723 52,534
Municipal Income Portfolio.............. -- -- --
Quality Income Portfolio................ -- -- --
Short-Duration Income Portfolio -- -- --
Strategy Portfolio...................... 1,757 1,138 87,458
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<PAGE>
The brokerage commissions paid to Wheat for fiscal year 1996 amounted
to the following percentages of the aggregate brokerage commissions and
brokerage transactions paid by each Portfolio:
<TABLE>
<CAPTION>
Percent of aggregate
Percent of aggregate dollar amount of
commissions brokerage transactions
<S> <C>
Balanced Portfolio.................. -- --
Capital Growth Portfolio............ 18.24% 19.57%
Global Portfolio.................... -- --
Growth Portfolio.................... 3.91% 3.51%
Income and Growth Portfolio......... 35.90% 19.48%
Municipal Income Portfolio.......... -- --
Quality Income Portfolio............ -- --
Short-Duration Income Portfolio..... -- --
Strategy Portfolio.................. 7.64% 7.71%
</TABLE>
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."
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, LLC in
accordance with its respective Distribution Plan adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940.
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<PAGE>
During fiscal year 1996, the Portfolios paid the following 12b-1 fees
to Mentor Distributors as shown below:
Balanced Portfolio.......................... --
Capital Growth Portfolio.................... 458,606
Global Portfolio............................ 183,636
Growth Portfolio............................ 2,260,899
Income and Growth Portfolio................. 411,096
Municipal Income Portfolio.................. 190,043
Quality Income Portfolio.................... 298,041
Short-Duration Income Portfolio............. 70,827
Strategy Portfolio.......................... 1,910,928
During fiscal year 1996, 12b-1 Fees of $25,766 were waived in respect
of the Balanced Portfolio.
Contingent Deferred Sales Charges
During fiscal year 1996, Mentor Distributors received the following
contingent deferred sales charges:
Balanced Portfolio.......................... --
Capital Growth Portfolio.................... 13,725
Global Portfolio............................ 12,547
Growth Portfolio............................ 182,754
Income and Growth Portfolio................. 10,261
Municipal Income Portfolio.................. 7,099
Quality Income Portfolio.................... 15,091
Short-Duration Income Portfolio............. 44,511
Strategy Portfolio.......................... 511,034
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<PAGE>
Underwriting Commissions
The following table shows the approximate amount of underwriting
commissions retained by Mentor Distributors (and any predecessor) for each
Portfolio for the periods indicated:
Fiscal year Fiscal Fiscal year
1994 1995 1996
Balanced Portfolio................... -- -- --
Capital Growth Portfolio............. $ 17,055 $ 1,314 $10,477
Global Portfolio..................... 6,354 1,829 23,038
Growth Portfolio..................... -- -- 38,398
Income and Growth Portfolio.......... 32,761 2,708 15,762
Municipal Income Portfolio........... 12,958 247 4,110
Quality Income Portfolio............. 7,951 559 9,062
Short-Duration Income Portfolio...... -- -- 186
Strategy Portfolio................... -- -- 31,801
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 investment adviser or
sub-adviser, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sale price or, if
no sales are reported (as in the case of some securities traded
over-the-counter), the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable
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<PAGE>
securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values. The
fair value of such securities is generally determined as the amount which a
Portfolio could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Portfolio in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser or sub-adviser is
typically able to obtain dealer quotations for each of the securities on at
least a weekly basis. On any day when it is not practicable for the investment
adviser or sub-adviser to obtain an actual dealer quotation for a security, the
investment adviser or sub-adviser may reprice the securities based on changes in
the value of a U.S. Treasury security of comparable duration. When the next
dealer quotation is obtained, the investment adviser or sub-adviser compares the
dealer quote against the price obtained by it using its U.S. Treasury-spread
calculation, and makes any necessary adjustments to its calculation methodology.
The investment adviser or sub-adviser attempts to obtain dealer quotes for each
security at least weekly, and on any day when there has been an unusual
occurrence affecting the securities which, in the investment adviser or
sub-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
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<PAGE>
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
procedures approved as required by the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio 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 its investment
portfolio. Redemptions in kind will be made in conformity with applicable SEC
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner that the Trustees determine
to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 of
the Investment Company Act of 1940, under which a Portfolio is obligated to
redeem 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.
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<PAGE>
A Portfolio will not under present law be subject to any excise or income taxes
in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies; (b) derive less than 30% of its gross income
from the sale or other disposition of certain assets (including stock or
securities and certain options, futures contracts, forward contracts, and
foreign currencies) held less than three months; (c) distribute with respect to
each taxable year at least 90% of the sum of its taxable net investment income,
its net tax-exempt income, and the excess, if any, of net short-term capital
gains over net long-term capital losses for such year; and (d) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of its total assets consists of cash and cash items,
U.S. Government Securities, securities of other regulated investment companies,
and other securities limited generally with respect to any one issuer to not
more than 5% of the value of its total assets and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any issuer or of two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or businesses. In order to receive the favorable tax
treatment accorded regulated investment companies and their shareholders,
moreover, a Portfolio must in general distribute at least 90% of its interest,
dividends, net short-term capital gain, and certain other income each year.
If a Portfolio 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
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<PAGE>
that preceding year. A Portfolio intends generally to make distributions
sufficient to avoid imposition of the 4% excise tax.
Exempt-interest dividends. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt form
federal income tax. Distributions that the Portfolio properly designates as
exempt-interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If
the Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such 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 from 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.
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Under the 30% of gross income test described above, a Portfolio will be
restricted in selling assets held or considered under Code rules to have been
held for less than three months, and in engaging in certain hedging transactions
(including hedging transactions in options and futures) that in some
circumstances could cause certain Portfolio assets to be treated as held for
less than three months.
Certain of a Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and its
taxable income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Portfolio's remaining earnings and profits (including earnings and
profits arising from tax-exempt income), and thereafter as a return of capital
or as gain from the sale or exchange of a capital asset, as the case may be. If
a Portfolio's book income is less than its taxable income, the Portfolio could
be required to make distributions exceeding book income to qualify as a
regulated investment company that is accorded special tax treatment.
Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of capital to
the extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you or your shares.
Securities issued or purchased at a discount. A Portfolio's investment
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
Foreign currency-denominated securities and related hedging
transactions. A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts, and forward contacts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a Portfolio's assets at year end consists of the
debt and equity securities of foreign corporations, the Portfolio may elect to
permit shareholders to claim a credit or deduction on their income tax returns
for their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries. In such a case, shareholders will include in gross income from
foreign sources their pro rata shares of such taxes. A shareholder's ability to
claim a foreign tax credit or deduction in respect of foreign taxes paid by the
Portfolio may be subject to certain limitations imposed by the Code, as a result
of which a shareholder may not get a full credit or deduction for the amount of
such taxes. Shareholders who do not itemize on their federal income tax returns
may claim a credit (but no deduction) for such foreign taxes.
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Investment by a Portfolio in certain "passive foreign investment
companies" could subject the Portfolio to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a company;
however, this tax can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund."
Sale or redemption of shares. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain or loss
realized upon a taxable disposition of shares will be treated as long-term
capital gain or loss if the shares have been held for more than 12 months, and
otherwise as short-term capital gain or loss. However, if a shareholder sells
shares at a loss within six months of purchase, any loss will be disallowed for
federal income tax purposes to the extent of any exempt-interest dividends
received on such shares. In addition, any loss (not already disallowed as
provided in the preceding sentence) realized upon a taxable disposition of
shares held for six months or less will be treated as long-term, rather than
short-term, to the extent of any long-term capital gain distributions received
by the shareholder with respect to the shares. All or a portion of any loss
realized upon a taxable disposition of Portfolio shares will be disallowed if
other Portfolio shares are purchased within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
Shares purchased through tax-qualified plans. Special tax rules apply
to investments through 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
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<PAGE>
company's stock. Any amount of distribution or gain allocated to the taxable
year of the distribution or disposition would be included in a Portfolio's
investment company taxable income and, accordingly, would not be taxable to the
Portfolio to the extent distributed by the Portfolio as a dividend to its
shareholders.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
state and federal taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state or local taxes. The foregoing
discussion relates solely to U.S. federal income tax law. Non-U.S. investors
should consult their tax advisers concerning the tax consequences of ownership
of shares of the Portfolio, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced rate of withholding
provided by treaty).
For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in respect
of taxes.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Trust's independent accountants, providing audit services, tax
return review and other tax consulting services and assistance and consultation
in connection with the review of various Securities and Exchange Commission
filings.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of foreign assets. A custodian's responsibilities
include generally safeguarding and controlling a Portfolio's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION (shown through September 30, 1996)
The table below shows the average annual total return for the one-,
five- and ten-year periods (or for the life of the Portfolios if shorter):
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<PAGE>
Class A Shares 1 Year 5 Years Since Inception
-------------- ------ ------- ---------------
Capital Growth Portfolio............. 17.45% -- 9.89%
Global Portfolio..................... 11.58% -- 9.30%
Growth Portfolio*.................... 21.73% -- 33.35%
Income and Growth Portfolio.......... 12.00% -- 12.35%
Municipal Income Portfolio........... 1.42% -- 5.99%
Quality Income Portfolio............. (0.83)% -- 3.58%
Short-Duration Income Portfolio*..... 3.73% -- 4.08%
Strategy Portfolio*.................. 12.50% -- 20.14%
<TABLE>
<CAPTION>
Class B Shares 1 Year 5 Years 10 Years Since Inception
-------------- ------ ------- -------- ---------------
<S> <C>
Balanced Portfolio*............... 13.00% -- -- 15.76%
Capital Growth Portfolio.......... 19.64% -- -- 10.46%
Global Portfolio.................. 13.39% -- -- 9.91%
Growth Portfolio*................. 24.18% 18.17% 13.68% 13.68%
Income and Growth Portfolio....... 14.26% -- -- 13.11%
Municipal Income Portfolio........ 1.87% -- -- 6.45%
Quality Income Portfolio.......... (0.31)% -- -- 4.03%
Short-Duration Income Portfolio*.. 0.59% -- -- 4.87%
Strategy Portfolio*............... 14.48% -- -- 12.51%
</TABLE>
- ------------------
* 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. As a
result, the annual total return information beyond the one-year period 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
these Funds bore a front-end sales charge, but each of them was subject to a
maximum contingent deferred sales charge of 5%. The Balanced Portfolio currently
offers only one class of shares. Total return information for this Portfolio is
shown under the Class B share table.
- - - - - -
Total return for the one-, five-, and ten-year periods for each class of shares
(or for the life of a class, if shorter) is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in 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 front-end or contingent
deferred sales charge, if applicable, and reinvestment of all Portfolio
distributions at net asset value on their respective reinvestment dates.
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All data are based on past performance and do not predict future
results.
Yield and Tax-Equivalent Yield
The thirty-day yield for both classes of shares of certain of the
Portfolios for the period ending September 30, 1996, was as follows:
Class A Class B
Quality Income Portfolio 6.64% 6.48%
Municipal Income Portfolio 4.91% 4.66%
Income and Growth Portfolio 2.33% 1.57%
A Portfolio's yield is presented for a specified thirty-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate amount of dividends and interest earned by the Portfolio during the
base period less expenses accrued for that period, and (ii) dividing that amount
by the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
net asset value per share on the last day of the base period. The result is
annualized on a compounding basis to determine the yield. For this calculation,
interest earned on debt obligations held by a Portfolio is generally calculated
using the yield to maturity (or first expected call date) of such obligations
based on their market values (or, in the case of receivables-backed securities
such as GNMA's, based on costs). Dividends on equity securities are accrued
daily at their stated dividend rates.
To the extent that financial institutions and broker/dealers charge
fees in connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying those
fees.
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The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1996, was 8.13%. The
tax-equivalent yield for that Portfolio's Class B shares was 7.72% 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.
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. 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 front-end or contingent deferred sales charge would be
reduced if such sales charges were reflected.
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EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES FOR THE MUNICIPAL
INCOME PORTFOLIO
The table below shows the effect of the tax status of tax-exempt securities on
the effective yield received by their individual holders under the federal
income tax laws currently in effect for 1996. It gives the approximate yield a
taxable security must earn at various income levels to produce after-tax yields
equivalent to those of tax-exempt securities yielding from 2.0% to 10.0%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Taxable Income* Marginal Tax-exempt yield
federal
income
Joint Single Rate tax** 2% 3% 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------------------------------------------------------------------------------------
Equivalent taxable yield
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
$0 - 40,100 $0 - 24,000 15.00% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
40,101 - 96,900 24,001 - 58,150 28.00% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
96,901 - 147,700 58,151 - 121,300 31.00% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
147,701 - 263,750 121,301 - 263,750 36.00% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
over 263,750 over 263,750 39.60% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
- -------------------
* This amount represents taxable income as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), after any deduction for
personal exemptions and the greater of the standard deduction or
itemized deductions. Income in the higher brackets may be affected by
the phase-out of personal exemptions and the limitation of itemized
deductions, based on Adjusted Gross Income, under the Code.
** These rates are the marginal federal income tax rates on taxable income
currently in effect for 1996 under the Code.
Of course, there is no assurance that the Municipal Income Portfolio
will achieve any specific tax-exempt yield. While it is expected that the
Portfolio will invest principally in obligations which pay interest exempt from
federal income tax, other income received by the Portfolio may be taxable. The
table does not take into account any state or local taxes payable on Portfolio
distributions.
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MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolios'
investment advisers, as indicated.
Mentor Investment Advisors, LLC
Large Capitalization Quality Equity Growth
John G. Davenport, CFA -- Managing Director, Chief Investment Officer
Mr. Davenport has twelve years of investment management experience. He joined
the Mentor organization 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.
P. Barton Peters, CFA
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<PAGE>
Mr. Peters has sixteen years of investment management experience and joined the
Mentor organization 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 six years of investment management experience. He has
earned both his undergraduate degree and masters of business administration from
the University of Virginia.
Richard L. Rice -- Vice President, Research Analyst
Mr. Rice has twenty-three years' experience in the securities industry. Prior
to joining the Mentor organization in 1993, he was a partner in the equity
management software firm, Parata Analytics Research, which was acquired by the
Mentor organization. His previous responsibilities include director of Research
for Signet Asset Management, Senior Research Analyst for Capitoline Investment
Services, and research positions at Atlanta Corp. and Southwest Banking.
Active Fixed-Income
P. Michael Jones, CFA -- Managing Director, Chief Investment Officer
Mr. Jones has eleven 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.
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Steven C. Henderson -- Associate Vice President, Portfolio Manager
Mr. Henderson has seven 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.
Stephen R. McClelland -- Vice President, Portfolio Manager
Mr. McClelland has six 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
Mr. Wantling has five 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.
Small-to-Medium Capitalization Equity Growth
Theodore W. Price, CFA -- Managing Director, Chief Investment Officer
Mr. Price has over thirty years of investment management experience, with over
twenty-three years' tenure at Charter Asset Management, the predecessor to
Mentor Advisors. 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 -- Portfolio Manager
Ms. Ziglar has seventeen 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 eight 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
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<PAGE>
Mr. Rick has two years of investment management experience. He received his
undergraduate degree in finance from the University of Richmond, where he
graduated cum laude.
Tactical Asset Allocation
Don R. Hays -- Chief Investment Officer
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 the 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 Manager
Mr. Graves has five 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.
William P. Ryder -- Research Analyst
Mr. Ryder joined Wheat First Butcher Singer in 1991 as a member of its
Investment Strategy Group, working as a research analyst on its growth and
growth and income model portfolios. In 1995 he became part of the team
responsible for managing the Mentor Strategy Portfolio. In that capacity he
focuses primarily on conducting economic analysis, industry group studies, and
asset allocation modeling. Mr. Ryder attended Virginia Commonwealth University
and has five years' investment experience.
Mentor Perpetual Advisors, LLC
Scott McGlashan -- Far East Specialist, Portfolio Manager
Mr. McGlashan has nineteen 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- four 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
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Mr. Whittaker has sixteen 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 eleven 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.
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 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.
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Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on
their own criteria rather than on the standardized performance measures
described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified period of
time. From time to time, a Portfolio will quote its Lipper ranking in
advertising and sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3- year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public utilities,
and transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
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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 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).
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Shearson Lehman Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
21,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of both classes of their shares
compared to similar funds or portfolios using certain indices, reporting
services, and financial publications. These may include the following: Morgan
Stanley Capital International World Index, The Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) index, J.P. Morgan Global
Traded Bond Index, Salomon Brothers World Government Bond Index, and the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). A Portfolio also
may compare its performance to the performance of unmanaged stock and bond
indices, including the total returns of foreign government bond markets in
various countries. All index returns are translated into U.S. dollars. The total
return calculation for these unmanaged indices may assume the reinvestment of
dividends and any distributions, if applicable, may include withholding taxes,
and generally do not reflect deductions for administrative and management costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when comparing
a Portfolio's performance to any index, conditions such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing portfolios using reporting
services, or total return and yield, investors should take into consideration
any relevant differences in portfolios, such as permitted portfolio compositions
and methods used to value portfolio securities and compute net asset value.
Advertisements and other sales literature for a Portfolio may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market funds
using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of
-65-
<PAGE>
the Portfolios may distribute evaluations by or excerpts from these publications
to its shareholders or to potential investors. The following illustrates the
types of information provided by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all distributions.
They do not reflect deduction of any sales charges. Funds are not categorized;
they compete in a large universe of over 2,000 funds. The source for rankings is
data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year to
3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper
mutual fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally,
Barron's modifies the Lipper information by ranking the funds in asset classes.
"Large funds" may be those with assets in excess of $25 million; "small funds"
may be those with less than $25 million in assets.
The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock
or bond fund categories (for example, aggressive growth stock funds, growth
stock funds, small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds
-66-
<PAGE>
appearing in the rankings. The rankings are based on 3-year annualized total
return reflecting changes in net asset value and reinvestment of distributions
and not reflecting sales charges. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for five-year
risk adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its category,
as well as taking into account its risk, reward to risk, and fees. An A+ rated
fund is one of the best, while a D- rated fund is one of the worst. The source
for Financial World rating is Schabacker investment management in Rockville,
Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive
an A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in
"up" markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also
provides a risk-adjusted grade in both rising and falling markets. Funds are
graded against others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
-67-
<PAGE>
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5 and
10 years and the last six bear markets. Total return reflects changes in net
asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three years
the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's judgment,
"excellent" risk-adjusted return or "superior" return with low levels of risk.
Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
FINANCIAL STATEMENTS
The Report of Independent Auditors, financial highlights, and financial
statements in respect of each Porfolio other than the Balanced Portfolio,
included in the Mentor Funds' Annual Report for the fiscal year ended September
30, 1996, and the Report of
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<PAGE>
Independent Auditors, financial highlights, and financial statements included in
the Balanced Portfolio's Annual Report for the fiscal year ended September 30,
1996, each filed electronically on November 27, 1996 (File No. 811-6550), are
incorporated by reference into this Statement of Additional Information.
-69-
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements and Supporting Schedules
(1) Financial Statements:
Statements of Assets and Liabilities -- September 30, 1996*
Statements of Operations -- year ended September 30, 1996*
Statements of Changes in Net Assets -- years/periods ended
September 30, 1996 and September 30, 1995*
Financial Highlights *(+)
Notes to Financial Statements*
(2) Supporting Schedules:
Schedule I -- Portfolio of investments owned -- September 30,
1996*
Schedule II through IX omitted because the required matter is
not present.
_____________
* Incorporated by reference to Part B to this Registration Statement.
(+) Incorporated by reference to 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) (a)Conformed copy of Management Agreement of the Registrant
(Capital Growth, Income and Growth, Quality Income, and
Municipal Income Portfolios) (2);
(b)Conformed copy of New Exhibit A to Management
Agreement(4);
(c)Form of Instrument of Transfer of Management Agreement
(8);
(ii) Form of Investment Advisory Agreement for the
Municipal Income Portfolio (8);
(iii) (a)Conformed copy of Investment Advisory Agreement
for the Income and Growth Portfolio (3);
(b)Form of Instrument of Transfer of Investment Advisory
Agreement (Income and Growth Portfolio) (8);
(iv) Form of Investment Advisory and Management Agreement
for the Global Portfolio (8);
(v) (a)Form of Investment Advisory and Management
Agreement for the Growth Portfolio (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Growth Portfolio) (8);
(vi) (a)Form of Investment Advisory and Management
Agreement for the Strategy Portfolio (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Strategy Portfolio) (8);
(vii) (a)Form of Investment Advisory and Management Agreement for
the Short-Duration Income Portfolio (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Short-Duration Income
Portfolio) (8);
(viii) (a)Form of Investment Advisory and Management
Agreement for the Balanced Portfolio (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Balanced Portfolio) (8);
(6)(i) (a)Conformed copy of Distributor's Contract of the
Registrant, through and including
Exhibit I (3);
(b) Form of Instrument of Transfer of Distributor's
Contract (8);
(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) (a)Form of Administration Agreement of the
Registrant in respect of each Portfolio (6);
(b) Form of Instrument of Transfer of Administration
Agreement (8);
(iv) Form of Custodian Contract with State Street Bank
and Trust Company in respect of foreign securities(7);
(9)(i) Conformed copy of Transfer Agency and Registrar
Agreement of the Registrant (2);
(ii) (a)Conformed copy of Shareholder Services Plan of the
Registrant through and including Exhibit B in respect of
the Capital Growth, Quality Income, Municipal Income,
Income and Growth, and Global Portfolios (3);
(b)Form of Instrument of Transfer of Shareholder Services
Plan (8);
(c) 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 (8);
(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 (Capital Growth, Income
and Growth, Municipal Income, Quality Income, and Global
Portfolios);
(ii) (a)Copy of 12b-1 Agreement (Sales Agreement) with
Mentor Distributors, Inc. (3);
(b)Form of Instrument of Transfer of 12b-1 Agreement
(Sales Agreement) (8);
(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 Income
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)(8)
(18) Rule 18f-3(d) Plan (7)
(27)(i) Financial Data Schedules of Class A Shares (8)
(ii) Financial Data Schedules of Class B Shares (8)
(iii) Financial Data Schedule in respect of the Balanced
Portfolio. (8)
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.
7. Incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed January 15, 1996.
8. Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant:
Reference is made to "Principal Holders of Securities" in Part
B of this Registration Statement
Item 26. Number of Holders of Securities as of September 30, 1996:
Multiclass Portfolios Class A Class B
Capital Growth Portfolio 2,002 5,317
Global Portfolio 1,087 4,229
Growth Portfolio 1,308 22,568
Income and Growth Portfolio 1,151 4,175
Municipal Income Portfolio 494 1,184
Quality Income Portfolio 1,040 3,297
Short-Duration Income Portfolio 139 1,232
Strategy Portfolio 840 17,166
Single Class Portfolio
Balanced Portfolio 5 (Class B shares)
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 Mentor Investment Advisors, LLC:
Business, Profession,
Vocation or Employment
Position with during the past
Name Investment Adviser two fiscal years
John G. Davenport Managing Director None
R. Preston Nuttall Managing Director Formerly, Senior Vice
President, Capitoline
Investment Services,
919 East Main Street,
Richmond, VA 23219
Paul F. Costello Managing Director Managing Director,
Wheat First
Butcher Singer, Inc.
and Mentor Investment
Group, LLC; President,
Mentor Funds,
Mentor Income Fund,
Inc., and Cash Resource
Trust; Executive Vice
President and Chief
Administrative Officer,
America's Utility Fund,
Inc.; Director, Mentor
Perpetual Advisors, LLC
and Mentor Trust
Company;
Theodore W. Price Managing Director Formerly, President,
Charter Asset
Management, Inc.
P. Michael Jones Managing Director Formerly, Managing
Director, Commonwealth
Investment Counsel,
Inc.
-3-
<PAGE>
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
Robert P. Wilson Assistant Treasurer Assistant Treasurer,
Mentor Distributors,
Inc. and Commonwealth
Advisors
John M. Ivan Secretary Managing Director,
Senior Vice President
and Assistant General
Counsel, Wheat, First
Securities, Inc.;
Managing Director and
Assistant Secretary,
Wheat First Butcher
Singer, Inc.; Clerk,
Cash Resource Trust;
Secretary, Mentor
Funds
Howard T. Macrae, Jr. Assistant Secretary Assistant Secretary,
Mentor Investment
Advisors, LLC and
Mentor Distributors,
LLC
(b) The following is additional information with respect to the directors and
officers of Mentor Perpetual Advisors, LLC ("Mentor Perpetual"):
<TABLE>
OTHER SUBSTANTIAL
POSITION WITH THE BUSINESS, PROFESSION,
NAME INVESTMENT ADVISOR VOCATION OR EMPLOYMENT
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited
Martyn Arbib 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>
(c) 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 --
(d) The following is additional information with respect to the directors
and officers of Van Kampen American Capital Management Inc., located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486:
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, LLC, Wheat, First Securities,
Inc., Wheat First Butcher Singer, Inc., Mentor Funds, Mentor Income
Fund, Inc., Mentor Investment Advisors, LLC, and Mentor Perpetual
Advisors, LLC is 901 East Byrd Street, Richmond, VA 23219. The address
of Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000
Broken Land Parkway, Columbia, MD 21044. The address of Perpetual
Portfolio Management Limited is 48 Hart Street, Henley-on-Thames, Oxon,
England, RG92AZ.
Item 29. Principal Underwriters:
(a) Mentor Distributors, LLC is the principal distributor for the
Registrant's shares and acts as the principal underwriter for the
Registrant.
-10-
Mentor Distributors, LLC is a Virginia corporation and is an
affiliate of Mentor Investment Advisors, LLC.
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
27th day of November, 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
* November 27, 1996
- -----------------------
Daniel J. Ludeman Chairman and Trustee
(Chief Executive
Officer)
/s/ Peter J. Quinn, Jr. Trustee November 27, 1996
- -----------------------
Peter J. Quinn, Jr.
* November 27, 1996
- -----------------------
Arnold H. Dreyfuss Trustee
* November 27, 1996
- -----------------------
Thomas F. Keller Trustee
* November 27, 1996
- -----------------------
Louis W. Moelchert, Jr. Trustee
* November 27, 1996
- -----------------------
Troy A. Peery, Jr. Trustee
/s/ Paul F. Costello November 27, 1996
- ------------------------
Paul F. Costello President
/s/ Terry L. Perkins November 27, 1996
- ------------------------
Terry L. Perkins Treasurer (Principal Financial
and Accounting Officer)
*/s/ Peter J. Quinn, Jr. Attorney-in-fact November 27, 1996
- ------------------------
Peter J. Quinn, Jr.
EXHIBIT INDEX
Exhibit Page
(5)(i)(c) Form of Instrument of Transfer of Management Agreement (for each
of the Portfolios other than the New Portfolios and the Global
Portfolio);
(5)(ii) Form of Investment Advisory Agreement for the Municipal
Income Portfolio;
(5)(iii)(b) Form of Instrument of Transfer of Investment Advisory Agreement
(Income and Growth Portfolio);
(5)(iv) Form of Investment Advisory and Management Agreement for the
Global Portfolio;
(5)(v)(b) Form of Instrument of Transfer of Investment Advisory and
Management Agreement (Growth Portfolio);
(5)(vi)(b) Form of Instrument of Transfer of Investment Advisory and
Management Agreement (Strategy Portfolio);
(5)(vii)(b) Form of Instrument of Transfer of Investment Advisory and
Management Agreement (Short-Duration Income Portfolio);
(5)(viii)(b) Form of Instrument of Transfer of Investment Advisory and
Management Agreement (Balanced Portfolio);
(6)(i)(b) Form of Instrument of Transfer of Distributor's Contract;
(8)(iii)(b) Form of Instrument of Transfer of Administration Agreement;
(9)(ii)(b) Form of Instrument of Transfer of Shareholder Services Plan;
(11)(i) Independent Auditors' Consent;
(15)(ii)(b) Form of Instrument of Transfer of 12b-1 Agreement (Sales
Agreement);
(16)(i) Schedules for Computation of Performance (all Portfolios);
(27)(i) Financial Data Schedules - Class A;
(ii) Financial Data Schedules - Class B;
(iii) Financial Data Schedule - Balanced Portfolio.
EXHIBIT 5(i)(c)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Management Agreement dated April 17, 1992, in respect of
the Mentor Capital Growth Portfolio, Mentor Income and Growth Portfolio, Mentor
Municipal Income Portfolio, and Mentor Quality Income Portfolio, each a series
of the Mentor Funds, and you hereby accept and assume any and all of such
rights and obligations. If this letter is consistent with your understanding of
the agreement between us, please acknowledge your acceptance by signing in the
space indicated below.
Very truly yours,
Commonwealth Advisors, Inc.
(formerly Cambridge Investment Advisors, Inc.)
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 5(ii)
THE MENTOR FUNDS
INVESTMENT ADVISORY AGREEMENT
October 31, 1996
Van Kampen American Capital Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Dear Sirs:
Under an agreement (the "Management Agreement") between The Mentor
Funds, a Massachusetts business trust (the "Trust"), and Mentor Investment
Advisors, LLC, a Virginia corporation, (the "Adviser"), the Adviser serves as
the Trust's investment adviser and has the responsibility of evaluating,
recommending, supervising and compensating investment advisors to each series of
the Trust.
The Adviser hereby confirms its agreement with Van Kampen American
Capital Management, Inc. (the "Sub-Adviser") and the Trust with respect to the
Sub-Adviser's serving as the sub-adviser of the Mentor Municipal Income
Portfolio (the "Portfolio"), a series of the Trust, as follows:
Section 1. Investment Description; Appointment
(a) The Trust desires to employ the Portfolio's capital by investing
and reinvesting in investments of the kind and in accordance with the investment
objectives, policies and limitations specified in the prospectus (the
"Prospectus") and in the statement of additional information (the "Statement of
Additional Information") filed with the Securities and Exchange Commission (the
"SEC") as part of the Trust's Registration Statement on Form N-1A, as amended
from time to time (the "Registration Statement"). The Adviser has herewith
furnished the Sub-Adviser copies of the Trust's Prospectus, Statement of
Additional Information, Declaration of Trust and By-Laws as currently in effect
and agrees during the continuance of the Agreement to furnish the Sub-Adviser
copies of any amendments or supplements thereto before or at the time the
amendments or supplements become effective. The Sub-Adviser will be entitled to
rely on all such documents furnished to it by the Adviser or the Trust.
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<PAGE>
(b) The Adviser, with the approval of the Trust, hereby appoints
the Sub-Adviser to act as investment adviser to the Portfolio for the periods
and on the terms set forth in this Agreement. The Sub-Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
Section 2. Portfolio Management Duties
(a) Subject to the supervision of the Adviser and the Trust's Board of
Trustees, the Sub-Adviser will (i) manage the Portfolio's assets in accordance
with the Portfolio's investment objectives, policies and limitations as stated
in the Trust's Prospectus and Statement of Additional Information; (ii) make
investment decisions for the Portfolio; and (iii) place orders to purchase and
sell securities (and where appropriate) commodity futures contracts for the
Portfolio.
(b) The Sub-Adviser will keep the Trust and the Adviser informed of
developments materially affecting the Portfolio and shall, on the Sub-Adviser's
own initiative and as reasonably requested by the Adviser or the Trust, furnish
to the Trust and the Adviser from time to time whatever information the Adviser
reasonably believes appropriate for this purpose.
(c) The Sub-Adviser agrees that, in the performance of the duties
required of it by this Agreement, it will comply with the Investment Company Act
of 1940, as amended (the "Act"), and all rules and regulations thereunder, all
applicable federal and state laws and regulations and with any applicable
procedures adopted by the Trust's Board of Trustees and identified in writing to
the Sub-Adviser. The Adviser will provide to the Sub-Adviser any specific
procedures that must be followed in the performance of Sub-Adviser's duties
hereunder by reason of the affiliation of other sub-advisers or service
providers with the Trust.
Section 3. Brokerage
(a) The Sub-Adviser agrees that it will place orders pursuant to its
investment determinations for the Portfolio either directly with the issuer or
with brokers or dealers selected by the Sub-Adviser in accordance with the
standards specified in paragraphs (b) and (c) of this Section 3. Until notified
to the contrary by the Adviser, the Sub-Adviser may place orders for the
Portfolio with affiliates of the Adviser in accordance with Section 11(a) of the
Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, Section 17(e) of
the Act and Rule 17e-1 thereunder and other applicable laws and regulations. The
Sub-Adviser will identify to the Adviser in writing any brokers or dealers which
are affiliates of the Sub- Adviser. The Adviser will identify to the Sub-Adviser
in writing any brokers and dealers which are affiliates of the Adviser and will
forward to each Sub-Adviser information provided by the other Sub-Advisers with
respect to affiliated broker-dealers of such Sub-Advisers.
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<PAGE>
(b) In placing orders with brokers and dealers, the Sub-Adviser will
seek the best overall terms available. In assessing the best overall terms
available for any portfolio transaction, the Sub-Adviser will consider all
factors it deems relevant including, but not limited to, the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of any
commission for the specific transaction and on a continuing basis.
(c) Subject to the requirements of subsections (a) and (b) above, in
selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, the Adviser shall have the right to
request in writing that transactions giving rise to brokerage commissions shall
be executed by brokers and dealers that provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to the Trust or will be of value to the Trust in the management of its
assets or the Adviser's performance of its management services provided to the
Trust. In addition, subject to the requirements of subsections (a) and (b) above
and the applicable Rules of Fair Practice of the National Association of
Securities Dealers, Inc., the Trust shall have the right to request that such
transactions be executed by brokers and dealers by or through whom sales of
shares of the Trust are made.
Section 4. Information Provided to the Adviser and the Trust
(a) The Sub-Adviser agrees that it will make available to the Adviser
and the Trust promptly upon their request copies of all of its records with
respect to the Portfolio to assist the Adviser and the Trust in monitoring
compliance with the Act and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), as well as other applicable laws. The Sub- Adviser will furnish
the Trust's Board of Trustees with respect to the Portfolio such periodic and
special reports as the Adviser and the Board of Trustees may reasonably request.
(b) The Sub-Adviser agrees that it will immediately notify the Adviser
and the Trust in the event that the Sub-Adviser or any of its affiliates: (i)
becomes subject to a statutory disqualification that prevents the Sub-Adviser
from serving as investment advisor pursuant to this Agreement; or (ii) if it is
or expects to become the subject of an administrative proceeding or enforcement
action by the SEC or other regulatory authority. The Sub-Adviser has provided
the information about itself set forth in the Registration Statement and
acknowledges that, as of the date hereof, it is true and correct and contains no
material misstatement or omission, and the Sub-Adviser further agrees to notify
the Adviser immediately of, (i) any material fact known to the Sub-Adviser
respecting or relating to the Sub-Adviser that is not contained in the
Prospectus or Statement of Additional Information of the Trust, or any amendment
or supplement thereto, if the omission of such would make such document
misleading, (ii) any statement contained therein relating to the Sub-Adviser
that becomes untrue in any material respect, or (iii) any material change in the
investment objective and policies of the mutual fund advised by the Sub-Adviser
and identified in the Prospectus as being a model for the Portfolio.
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<PAGE>
(c) The Sub-Adviser represents that it is an investment adviser
registered under the Advisers Act and other applicable laws and that the
statements contained in the Sub-Adviser's registration under the Advisers Act on
Form ADV, as of the date hereof, are true and correct and do not omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. The Sub-Adviser agrees to maintain the
completeness and accuracy of its registration on Form ADV in accordance with all
legal requirements relating to that Form. The Sub-Adviser acknowledges that it
is an "investment advisor" to the Portfolio within the meaning of the Act and
the Advisers Act.
Section 5. Books and Records
In compliance with the requirements of Rule 31a-3 under the Act, the
Sub-Adviser hereby agrees that all records that it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
copies of any such records upon the Trust's request. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the Act the
records with respect to the Sub-Adviser's duties hereunder required to be
maintained by Rule 31a-1 under the Act and to preserve the records required by
Rule 204-2 under the Advisers Act for the period specified in that Rule.
Section 6. Compensation
(a) In consideration of services rendered pursuant to this Agreement,
the Adviser will pay the Sub-Adviser a fee that is computed daily and paid
monthly at the annual rate set forth in Appendix I to this Agreement (the
"Portfolio Advisory Fee"). From time to time the Sub-Adviser may agree to
reimburse the Trust additional expenses or waive a portion or all of its fee, in
the sole discretion of the Sub-Adviser.
(b) The Portfolio Advisory Fee for the period from the date that the
Portfolio commences investment operations to the end of the month during which
the Portfolio commences investment operations shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such part
of that month shall be prorated according to the proportion that such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
(c) For the purposes of determining fees payable to the Sub-Adviser,
the value of the Trust's net assets shall be computed at the times and in the
manner specified in the Trust's Prospectus and/or the Statement of Additional
Information.
Section 7. Costs and Expenses
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<PAGE>
During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it and its staff in connection with the performance of its
services under this Agreement, including the payment of salaries of all officers
and employees who are employed by it, but not including expenses to be paid by
the Trust or the Adviser such as brokerage fees and commissions and custodian
charges. The Trust shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Trust's securities or other property, for
keeping its books of account, for any other charges of the custodian, and for
calculating the net asset value of the Trust as provided in the prospectus of
the Trust. The Sub-Adviser shall not be required to pay and the Trust (or the
Adviser) shall assume and pay the charges and expenses of the Trust's
operations, including compensation of the trustees, charges and expenses of
independent auditors, of legal counsel, of any transfer or dividend disbursing
agent, and of any registrar of the Trust, costs of acquiring and disposing of
portfolio securities, interest, if any, on obligations incurred by the Trust,
costs of share certificates and of reports, membership dues in the Investment
Company Institute or any similar organization, costs of reports and notices to
shareholders, other like miscellaneous expenses and all taxes and fees payable
to federal, state or other governmental agencies on account of the registration
of securities issued by the Trust, filing of trust documents or otherwise.
Section 8. Standard of Care
The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Adviser or the Trust in
connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Sub-Adviser against any liability to the Adviser or the Trust to which the
Sub-Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or by
reason of the Sub-Adviser's reckless disregard of its obligations and duties
under this Agreement.
Section 9. Services to Other Companies or Accounts
(a) Except as otherwise agreed between the Adviser and the Sub-Adviser,
it is understood that the services of the Sub-Adviser are not exclusive, and
nothing in this Agreement shall prevent the Sub-Adviser from providing similar
services to other investment companies (whether or not their investment
objectives and policies are similar to those of the Trust) or from engaging in
other activities.
(b) When the Sub-Adviser recommends the purchase or sale of a security
for other investment companies and other clients, and at the same time the
Sub-Adviser recommends the purchase or sale of the same security for the Trust,
it is understood that in light of its fiduciary duty to the Trust, such
transactions will be executed on a basis that it is fair and equitable to the
Trust.
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<PAGE>
(c) The Trust and the Adviser understand and acknowledge that the
persons employed by the Sub-Adviser to assist in the performance of its duties
under this Agreement will not devote their full time to that service; nothing
contained in this Agreement will be deemed to limit or restrict the right of the
Sub-Adviser or any affiliate of the Sub-Adviser to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature,
except as otherwise agreed between the Adviser and the Sub-Adviser.
Section 10. Duration and Termination
(a) The Trust represents that this Agreement has been approved by the
Trust's Board of Trustees and shareholders pursuant to Section 15 of the Act.
This Agreement shall become effective on the date hereof and shall continue for
two years from that date, and thereafter shall continue automatically for
successive annual periods, and thereafter shall continue automatically for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Trust's Board of Trustees or (ii) a vote of a majority
of the Portfolio's outstanding voting securities (as defined in the Act),
provided that the continuance is also approved by a majority of the Trustees who
are not "interested persons" (as defined in the Act) of the Trust, by vote cast
in person at a meeting called for the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated (i)
by the Adviser at any time without penalty, upon 60 days' written notice to the
Sub-Adviser and the Trust, (ii) at any time without penalty by the Trust, upon
the vote of a majority of the Trust's Trustees or by vote of the majority of the
Trust's outstanding voting securities, upon 60 days' written notice to the
Sub-Adviser and the Adviser, or (iii) by the Sub-Adviser at any time without
penalty, upon 60 days' written notice to the Adviser and the Trust.
(c) This Agreement will terminate automatically in the event of its
assignment (as defined in the Act and in rules adopted under the Act).
Section 11. Amendments
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved in
accordance with applicable law.
Section 12. Limitations of Liability of Trustees, Officers, Employees, Agents
and Shareholders of the Trust
The Sub-Adviser is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust and agrees that the
obligations assumed by the Trust pursuant to this Agreement shall be limited in
any case to the Trust and its assets and that the Sub-Adviser shall not seek
satisfaction of any such obligations from the shareholders of the Trust, the
Trustees, officers, employees or agents of the Trust, or any of them.
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<PAGE>
Section 13. Miscellaneous
(a) This Agreement shall be governed by the laws of the Commonwealth of
Virginia, provided that nothing herein shall be construed in a manner
inconsistent with the Act, the Advisers Act, or rules or orders of the SEC
thereunder.
(b) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Sub-Adviser
as an agent of the Trust or the Adviser.
If the terms and conditions described above are in accordance with your
understanding, kindly indicate your acceptance of this Agreement by signing and
returning to us the enclosed copy of this Agreement.
MENTOR INVESTMENT ADVISORS, LLC
By:_________________________
Name:
Title:
THE MENTOR FUNDS
By:__________________________
Name:
Title:
Accepted:
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC.
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<PAGE>
By:_________________________
Name:
Title:
-8-
<PAGE>
APPENDIX I
The Adviser pays the Sub-Adviser an annual fee not to exceed the following
percentage of Portfolio assets as follows:
SUB-ADVISER'S RATE
OF FEE IN
ACCORDANCE WITH
SECTION 6 OF THE
THE MENTOR FUNDS AGREEMENT
Mentor Municipal Income Portfolio .25% of average net assets
of the Portfolio from $0
to $60 million; .20% of
average net assets of the
Portfolio over $60 million
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EXHIBIT 5(iii)(b)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Investment Advisory Agreement dated May 20, 1993, in
respect of the Mentor Income & Growth Portfolio of the Mentor Funds and you
hereby accept and assume any and all of such rights and obligations. If this
letter is consistent with your understanding of the agreement between us, please
acknowledge your acceptance by signing in the space indicated below.
Very truly yours,
Commonwealth Advisors, Inc.
(formerly Cambridge Investment Advisors, Inc.)
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 5(iv)
MENTOR PERPETUAL GLOBAL PORTFOLIO
of
THE MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of June 5,
1995 between THE MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR PERPETUAL ADVISORS, L.L.C., a Virginia corporation (the "Manager")
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for Mentor Perpetual Global Portfolio (the "Portfolio"), will
determine what investments shall be purchased, held, sold, or exchanged by the
Portfolio and what portion, if any, of the assets of the Portfolio shall be held
uninvested and shall make changes in the Portfolio's investments. In the
performance of its duties, the Manager will comply with the provisions of the
Agreement and Declaration of Trust and Bylaws of the Portfolio and the
Portfolio's stated investment objectives, policies, and restrictions, and will
use its best efforts to safeguard and promote the welfare of the Portfolio and
to comply with other policies which the Trustees may from time to time determine
and shall exercise the same care and diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction
<PAGE>
taking into account market prices and trends, the reputation, experience, and
financial stability of the broker or dealer involved, and the quality of service
rendered by the broker or dealer in other transactions. Subject to such policies
as the Trustees of the Trust may determine, the Manager shall not be deemed to
have acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Portfolio to pay a broker or
dealer that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, of 1.10%
annually of the Portfolio's average daily net assets up to $75 million, and
1.00% annually of the Portfolio's average daily net assets over $75 million. The
first payment of the fee shall be made as promptly as possible at the end of the
month next succeeding the effective date of this Agreement, and shall constitute
a full payment of the fee
<PAGE>
due the Manager for all services prior to that date. If this Agreement is
terminated as of any date that is not the last day of a month, such fee shall be
paid as promptly as possible after such date of termination, shall be based on
the average daily net assets of the Portfolio in that period from the beginning
of such month to such date of termination, and shall be that proportion of such
average daily net assets as the number of business days in such period bears to
the number of business days in such month. The average daily net assets of the
Portfolio shall in all cases be based only on business days and be computed as
of the time of the regular close of business of the New York Stock Exchange, or
such other time as may be determined by the Trustees. Each such payment shall be
accompanied by a report of the Trust prepared either by the Trust or by a
reputable firm of independent accountants which shall show the amount properly
payable to the Manager under this Agreement and the detailed computation
thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Agreement by not
more than sixty days nor less than thirty days written notice delivered or
mailed by registered mail, postage prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Portfolio, and
(ii) a majority of the Trustees of the Trust who are not interested persons of
the Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Agreement, then this Agreement shall
automatically terminate at the close of business on June 5, 1997 or the
expiration of one year from the effective date of the last such continuance,
whichever is later.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment
<PAGE>
of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
7. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers, or
shareholders of the Trust but are binding only upon the assets and property of
the Trust.
<PAGE>
IN WITNESS WHEREOF, THE MENTOR FUNDS and MENTOR PERPETUAL ADVISORS,
L.L.C., have each caused this instrument to be signed in duplicate in its behalf
by its President or Vice President thereunto duly authorized, all as of the day
and year first above written.
THE MENTOR FUNDS
on behalf of MENTOR PERPETUAL GLOBAL PORTFOLIO
By:_____________________________________
MENTOR PERPETUAL ADVISORS, L.L.C.
By:______________________________________
EXHIBIT 5(v)(b)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Investment Advisory and Management Agreement dated May 30,
1995, in respect of the Mentor Growth Portfolio of the Mentor Funds and you
hereby accept and assume any and all of such rights and obligations. If this
letter is consistent with your understanding of the agreement between us, please
acknowledge your acceptance by signing in the space indicated below.
Very truly yours,
Charter Asset Management, Inc.
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 5(vi)(b)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Investment Advisory and Management Agreement dated May 30,
1995, in respect of the Mentor Strategy Portfolio of the Mentor Funds and you
hereby accept and assume any and all of such rights and obligations. If this
letter is consistent with your understanding of the agreement between us, please
acknowledge your acceptance by signing in the space indicated below.
Very truly yours,
Wellesley Advisors, Inc.
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 5(vii)(b)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Investment Advisory and Management Agreement dated May 30,
1995, in respect of the Mentor Short-Duration Income Portfolio of the Mentor
Funds and you hereby accept and assume any and all of such rights and
obligations. If this letter is consistent with your understanding of the
agreement between us, please acknowledge your acceptance by signing in the space
indicated below.
Very truly yours,
Commonwealth Investment Counsel, Inc.
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 5(viii)(b)
November 1, 1996
Mentor Investment Advisors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Investment Advisory and Management Agreement dated May 30,
1995, in respect of the Mentor Balanced Portfolio of the Mentor Funds and you
hereby accept and assume any and all of such rights and obligations. If this
letter is consistent with your understanding of the agreement between us, please
acknowledge your acceptance by signing in the space indicated below.
Very truly yours,
Commonwealth Investment Counsel, Inc.
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Advisors, LLC
By:_________________________
Name:
Title:
EXHIBIT 6(i)(b)
November 1, 1996
Mentor Distributors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Distributor's Contract dated May 19, 1992, in respect of
the Mentor Funds and you hereby accept and assume any and all of such rights and
obligations. If this letter is consistent with your understanding of the
agreement between us, please acknowledge your acceptance by signing in the space
indicated below.
Very truly yours,
Mentor Distributors, Inc.
(formerly Cambridge Distributors, Inc.)
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Distributors, LLC
By:_________________________
Name:
Title:
EXHIBIT 8(iii)(b)
November 1, 1996
Mentor Investment Group, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Administration Agreement dated May 30, 1995, in respect of
the Mentor Funds and you hereby accept and assume any and all of such rights and
obligations. If this letter is consistent with your understanding of the
agreement between us, please acknowledge your acceptance by signing in the space
indicated below.
Very truly yours,
Mentor Investment Group, Inc.
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Investment Group, LLC
By:_________________________
Name:
Title:
EXHIBIT 9(ii)(b)
November 1, 1996
Mentor Distributors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Shareholder Services Plan dated April 17, 1992, in respect
of the Mentor Funds and you hereby accept and assume any and all of such rights
and obligations. If this letter is consistent with your understanding of the
agreement between us, please acknowledge your acceptance by signing in the space
indicated below.
Very truly yours,
Mentor Distributors, Inc.
(formerly Cambridge Distributors, Inc.)
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Distributors, LLC
By:_________________________
Name:
Title:
Exhibit 11(i)
The Trustees and Shareholders
Mentor Funds
We consent to:
1. the use of our report dated November 8, 1996, for Mentor Funds,
including the Mentor Growth Portfolio, Mentor Perpetual Global
Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy
Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal
Income Portfolio, Mentor Quality Income Portfolio, and Mentor
Short-Duration Income Portfolio, incorporated by reference herein,
2. the use of our report dated November 8, 1996, for Mentor Balanced
Portfolio, incorporated by reference herein,
3. to the reference to our firm under the caption "Financial
Highlights" in the prospectus of Mentor Funds, including the Mentor
Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Capital
Growth Portfolio, Mentor Strategy Portfolio, Mentor Income and
Growth Portfolio, Mentor Municipal Income Portfolio, Mentor Quality
Income Portfolio, and Mentor Short-Duration Income Portfolio,
4. to the reference to our firm under the caption "Financial
Highlights" in the prospectus of the Mentor Balanced Portfolio, and
5. to the reference to our firm under the caption "INDEPENDENT
ACCOUNTANTS" in the statement of additional information for Mentor
Funds, including the Mentor Growth Portfolio, Mentor Perpetual
Global Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy
Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal
Income Portfolio, Mentor Quality Income Portfolio, Mentor
Short-Duration Income Portfolio, and Mentor Balanced Portfolio.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 27, 1996
EXHIBIT 15(ii)(b)
November 1, 1996
Mentor Distributors, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Effective today, we hereby transfer to you all of our rights and
obligations under the Sales Agreement dated April 17, 1992, in respect of the
Mentor Funds and you hereby accept and assume any and all of such rights and
obligations. If this letter is consistent with your understanding of the
agreement between us, please acknowledge your acceptance by signing in the space
indicated below.
Very truly yours,
Mentor Distributors Inc.
(formerly Cambridge Distributors, Inc.)
By:______________________________
Name:
Title:
Acknowledged and accepted:
Mentor Distributors, LLC
By:_________________________
Name:
Title:
EXHIBIT 16(i)
The Mentor Funds, N-1A
SA17
FYE 9/30/96
<TABLE>
<CAPTION>
CLASS A SHARES Capital Income and Quality
30 Day Base Period Ended September 30, 1996 Growth Growth Strategy Growth Global Income
- ------------------------------------------- ------ -------- -------- ----------- ------ -------
<S> <C>
a = dividends and interest earned during the
month 74,503.82 140,873.31
b = expenses accrued during month 24,924.84 18,334.61
c = average dividend shares outstanding during
the month 1,261,801.80 1,655,676.41
d = net asset value price per share on the last
day of the month 20.33 13.55
Fund Yield = 2*[((a-b)/cd+1)^6-1] 2.33% 6.64%
Performance Calculation
- -----------------------
Initial Investment 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
Initial NAV 16.08 16.02 15.24 17.13 15.88 13.29
Initial Shares 62.19 62.42 65.62 58.38 62.97 75.24
Shares from Distribution 7.74 1.95 0.84 3.80 3.32 5.38
End of Period NAV 18.47 19.36 17.96 19.16 17.86 12.91
Total Return 29.15% 24.63% 19.36% 19.13% 18.40% 4.09%
CLASS B SHARES Capital Income and Quality
30 Day Base Period Ended September 30, 1996 Growth Growth Strategy Growth Global Income
- ------------------------------------------- ------ -------- -------- ----------- ------ -------
a = dividends and interest earned during the
month 200,349.11 385,708.54
b = expenses accrued during month 115,233.45 74,089.86
c = average dividend shares outstanding during
the month 3,393,178.18 4,526,209.55
d = net asset value price per share on the last
day of the month 19.18 12.93
Fund Yield = 2*[((a-b)/cd+1)^6-1] 1.57% 6.48%
Performance Calculation
- -----------------------
Initial Investment 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
Initial NAV 16.05 15.38 15.21 17.14 15.67 13.31
Initial Shares 62.31 65.02 65.75 58.34 63.82 75.13
Shares from Distribution 7.78 0.33 0.85 3.31 3.42 4.97
End of Period NAV 18.29 18.92 17.79 19.18 17.46 12.93
Total Return 28.18% 23.64% 18.48% 18.26% 17.39% 3.57%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES Municipal Short-
30 Day Base Period Ended September 30, 1996 Income Duration
- ------------------------------------------- --------- --------
<S> <C>
a = dividends and interest earned during the
month 98,911.51 40,898.62
b = expenses accrued during month 24,135.62 2,280.40
c = average dividend shares outstanding during
the month 1,169,182.76 576,479.14
d = net asset value price per share on the last
day of the month 15.79 12.63
Fund Yield = 2*[((a-b)/cd+1)^6-1] 4.91% 6.45%
Performance Calculation
- -----------------------
Initial Investment 1,000.00 1,000.00
Initial NAV 14.92 12.68
Initial Shares 67.02 78.86
Shares from Distribution 3.76 4.98
End of Period NAV 15.04 12.50
Total Return 6.46% 4.80%
CLASS B SHARES Municipal Short-
30 Day Base Period Ended September 30, 1996 Income Duration Balanced
- ------------------------------------------- --------- --------- --------
a = dividends and interest earned during the
month 210,792.67 141,259.23 10,711.89
b = expenses accrued during month 66,643.30 -14,367.71 1,594.06
c = average dividend shares outstanding during
the month 2,488,463.60 1,994,047.00 235,896.24
d = net asset value price per share on the last
day of the month 15.05 12.50 16.28
Fund Yield = 2*[((a-b)/cd+1)^6-1] 4.66% 7.61% 2.87%
Performance Calculation
- -----------------------
Initial Investment 1,000.00 1,000.00 1,000.00
Initial NAV 14.95 12.67 14.85
Initial Shares 66.89 78.93 67.34
Shares from Distribution 3.46 4.70 5.14
End of Period NAV 15.05 12.50 16.28
Total Return 5.87% 4.53% 18.00%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> GROWTH PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 316,031,502
<INVESTMENTS-AT-VALUE> 415,694,420
<RECEIVABLES> 6,131,229
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19,058
<TOTAL-ASSETS> 421,844,707
<PAYABLE-FOR-SECURITIES> 9,602,057
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 392,490
<TOTAL-LIABILITIES> 9,994,547
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 258,480,220
<SHARES-COMMON-STOCK> 2,180,561
<SHARES-COMMON-PRIOR> 1,266,659
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 53,707,022
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 99,662,918
<NET-ASSETS> 411,850,160
<DIVIDEND-INCOME> 642,265
<INTEREST-INCOME> 2,364,361
<OTHER-INCOME> 0
<EXPENSES-NET> (6,570,800)
<NET-INVESTMENT-INCOME> (3,564,174)
<REALIZED-GAINS-CURRENT> 63,686,744
<APPREC-INCREASE-CURRENT> 22,942,450
<NET-CHANGE-FROM-OPS> 83,065,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (2,238,213)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,900,420
<NUMBER-OF-SHARES-REDEEMED> (1,145,852)
<SHARES-REINVESTED> 159,334
<NET-CHANGE-IN-ASSETS> 145,155,736
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,789,634
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,313,470
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,570,800
<AVERAGE-NET-ASSETS> 333,955,858
<PER-SHARE-NAV-BEGIN> 16.08
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> 4.23
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.74
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.47
<EXPENSE-RATIO> 1.28
<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> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 316,031,502
<INVESTMENTS-AT-VALUE> 415,694,420
<RECEIVABLES> 6,131,229
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19,058
<TOTAL-ASSETS> 421,844,707
<PAYABLE-FOR-SECURITIES> 9,602,057
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 392,490
<TOTAL-LIABILITIES> 9,994,547
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 258,480,220
<SHARES-COMMON-STOCK> 20,320,150
<SHARES-COMMON-PRIOR> 15,350,398
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 53,707,022
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 99,662,918
<NET-ASSETS> 411,850,160
<DIVIDEND-INCOME> 642,265
<INTEREST-INCOME> 2,364,361
<OTHER-INCOME> 0
<EXPENSES-NET> (6,570,800)
<NET-INVESTMENT-INCOME> (3,564,174)
<REALIZED-GAINS-CURRENT> 63,686,744
<APPREC-INCREASE-CURRENT> 22,942,450
<NET-CHANGE-FROM-OPS> 83,065,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (27,048,016)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,577,893
<NUMBER-OF-SHARES-REDEEMED> (1,493,872)
<SHARES-REINVESTED> 1,885,731
<NET-CHANGE-IN-ASSETS> 145,155,736
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 24,789,634
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,313,470
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,570,800
<AVERAGE-NET-ASSETS> 333,955,858
<PER-SHARE-NAV-BEGIN> 16.05
<PER-SHARE-NII> (0.17)
<PER-SHARE-GAIN-APPREC> 4.15
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.74
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.29
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> GLOBAL PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 51,438,719
<INVESTMENTS-AT-VALUE> 54,955,735
<RECEIVABLES> 2,371,996
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 27,558
<TOTAL-ASSETS> 57,355,289
<PAYABLE-FOR-SECURITIES> 2,085,235
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41,090
<TOTAL-LIABILITIES> 2,126,325
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49,783,985
<SHARES-COMMON-STOCK> 733,629
<SHARES-COMMON-PRIOR> 431,462
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,024,947
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,516,772
<NET-ASSETS> 55,228,964
<DIVIDEND-INCOME> 474,933
<INTEREST-INCOME> 132,950
<OTHER-INCOME> 0
<EXPENSES-NET> (854,851)
<NET-INVESTMENT-INCOME> (246,968)
<REALIZED-GAINS-CURRENT> 2,247,124
<APPREC-INCREASE-CURRENT> 2,553,849
<NET-CHANGE-FROM-OPS> 4,554,005
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (338,447)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 412,686
<NUMBER-OF-SHARES-REDEEMED> (132,328)
<SHARES-REINVESTED> 21,809
<NET-CHANGE-IN-ASSETS> 35,707,831
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 956,483
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 368,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 854,851
<AVERAGE-NET-ASSETS> 34,189,738
<PER-SHARE-NAV-BEGIN> 15.88
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 2.82
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.80
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.86
<EXPENSE-RATIO> 1.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GLOBAL PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 51,438,719
<INVESTMENTS-AT-VALUE> 54,955,735
<RECEIVABLES> 2,371,996
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 27,558
<TOTAL-ASSETS> 57,355,289
<PAYABLE-FOR-SECURITIES> 2,085,235
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41,090
<TOTAL-LIABILITIES> 2,126,325
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49,783,985
<SHARES-COMMON-STOCK> 2,412,641
<SHARES-COMMON-PRIOR> 808,434
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,024,947
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,516,772
<NET-ASSETS> 55,228,964
<DIVIDEND-INCOME> 474,933
<INTEREST-INCOME> 132,950
<OTHER-INCOME> 0
<EXPENSES-NET> (854,851)
<NET-INVESTMENT-INCOME> (246,968)
<REALIZED-GAINS-CURRENT> 2,247,124
<APPREC-INCREASE-CURRENT> 2,553,849
<NET-CHANGE-FROM-OPS> 4,554,005
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (688,165)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,723,938
<NUMBER-OF-SHARES-REDEEMED> (164,743)
<SHARES-REINVESTED> 45,012
<NET-CHANGE-IN-ASSETS> 35,707,831
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 956,483
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 368,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 854,851
<AVERAGE-NET-ASSETS> 34,189,738
<PER-SHARE-NAV-BEGIN> 15.67
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 2.64
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.80
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.46
<EXPENSE-RATIO> 2.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> CAPITAL GROWTH PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 86,367,458
<INVESTMENTS-AT-VALUE> 100,227,137
<RECEIVABLES> 273,929
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 18,000
<TOTAL-ASSETS> 100,519,066
<PAYABLE-FOR-SECURITIES> 256,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 161,373
<TOTAL-LIABILITIES> 417,373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,087,322
<SHARES-COMMON-STOCK> 1,647,133
<SHARES-COMMON-PRIOR> 1,846,405
<ACCUMULATED-NII-CURRENT> 11,836
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,142,856
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,859,679
<NET-ASSETS> 100,101,693
<DIVIDEND-INCOME> 1,552,160
<INTEREST-INCOME> 221,224
<OTHER-INCOME> 0
<EXPENSES-NET> (1,765,410)
<NET-INVESTMENT-INCOME> 7,974
<REALIZED-GAINS-CURRENT> 16,294,346
<APPREC-INCREASE-CURRENT> 3,307,505
<NET-CHANGE-FROM-OPS> 19,609,825
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (871,361)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 148,975
<NUMBER-OF-SHARES-REDEEMED> (401,455)
<SHARES-REINVESTED> 53,208
<NET-CHANGE-IN-ASSETS> 12,871,732
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 708,467
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 728,536
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,765,410
<AVERAGE-NET-ASSETS> 91,382,467
<PER-SHARE-NAV-BEGIN> 16.02
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 3.73
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.50
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.36
<EXPENSE-RATIO> 1.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 066
<NAME> CAPITAL GROWTH PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 86,367,458
<INVESTMENTS-AT-VALUE> 100,227,137
<RECEIVABLES> 273,929
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 18,000
<TOTAL-ASSETS> 100,519,066
<PAYABLE-FOR-SECURITIES> 256,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 161,373
<TOTAL-LIABILITIES> 417,373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,087,322
<SHARES-COMMON-STOCK> 3,604,659
<SHARES-COMMON-PRIOR> 3,651,052
<ACCUMULATED-NII-CURRENT> 11,836
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,142,856
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,859,679
<NET-ASSETS> 100,101,693
<DIVIDEND-INCOME> 1,552,160
<INTEREST-INCOME> 221,224
<OTHER-INCOME> 0
<EXPENSES-NET> (1,765,410)
<NET-INVESTMENT-INCOME> 7,974
<REALIZED-GAINS-CURRENT> 16,294,346
<APPREC-INCREASE-CURRENT> 3,307,505
<NET-CHANGE-FROM-OPS> 19,609,825
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,783,019)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 635,818
<NUMBER-OF-SHARES-REDEEMED> (793,484)
<SHARES-REINVESTED> 111,273
<NET-CHANGE-IN-ASSETS> 12,871,732
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 708,467
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 728,536
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,765,410
<AVERAGE-NET-ASSETS> 91,382,467
<PER-SHARE-NAV-BEGIN> 15.79
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 3.67
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.50
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.92
<EXPENSE-RATIO> 2.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> STRATEGY PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 247,450,844
<INVESTMENTS-AT-VALUE> 307,754,299
<RECEIVABLES> 1,647,946
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 46,101
<TOTAL-ASSETS> 309,448,346
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,140
<TOTAL-LIABILITIES> 582,140
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,524,569
<SHARES-COMMON-STOCK> 1,134,383
<SHARES-COMMON-PRIOR> 688,803
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,038,182
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 60,303,455
<NET-ASSETS> 308,866,206
<DIVIDEND-INCOME> 1,528,175
<INTEREST-INCOME> 3,888,338
<OTHER-INCOME> 0
<EXPENSES-NET> (5,812,964)
<NET-INVESTMENT-INCOME> (396,451)
<REALIZED-GAINS-CURRENT> 24,144,971
<APPREC-INCREASE-CURRENT> 22,559,071
<NET-CHANGE-FROM-OPS> 46,307,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (224,749)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 625,652
<NUMBER-OF-SHARES-REDEEMED> (192,977)
<SHARES-REINVESTED> 12,905
<NET-CHANGE-IN-ASSETS> 73,725,040
<ACCUMULATED-NII-PRIOR> 47,636
<ACCUMULATED-GAINS-PRIOR> 2,882,307
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,287,369
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,812,964
<AVERAGE-NET-ASSETS> 270,471,192
<PER-SHARE-NAV-BEGIN> 15.24
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 2.86
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.22
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.96
<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> STRATEGY PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 247,450,844
<INVESTMENTS-AT-VALUE> 307,754,299
<RECEIVABLES> 1,647,946
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 46,101
<TOTAL-ASSETS> 309,448,346
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 582,140
<TOTAL-LIABILITIES> 582,140
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,524,569
<SHARES-COMMON-STOCK> 16,214,886
<SHARES-COMMON-PRIOR> 14,773,679
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,038,182
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 60,303,455
<NET-ASSETS> 308,866,206
<DIVIDEND-INCOME> 1,528,175
<INTEREST-INCOME> 3,888,338
<OTHER-INCOME> 0
<EXPENSES-NET> (5,812,964)
<NET-INVESTMENT-INCOME> (396,451)
<REALIZED-GAINS-CURRENT> 24,144,971
<APPREC-INCREASE-CURRENT> 22,559,071
<NET-CHANGE-FROM-OPS> 46,307,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,506,588)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,946,568
<NUMBER-OF-SHARES-REDEEMED> (1,706,367)
<SHARES-REINVESTED> 201,006
<NET-CHANGE-IN-ASSETS> 73,725,040
<ACCUMULATED-NII-PRIOR> 47,636
<ACCUMULATED-GAINS-PRIOR> 2,882,307
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,287,369
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,812,964
<AVERAGE-NET-ASSETS> 270,471,192
<PER-SHARE-NAV-BEGIN> 15.21
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 2.83
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.22
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.79
<EXPENSE-RATIO> 2.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> INCOME AND GROWTH PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 80,302,197
<INVESTMENTS-AT-VALUE> 89,720,373
<RECEIVABLES> 1,497,732
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 447
<TOTAL-ASSETS> 91,218,552
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 460,971
<TOTAL-LIABILITIES> 460,971
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,417,788
<SHARES-COMMON-STOCK> 1,263,439
<SHARES-COMMON-PRIOR> 1,161,248
<ACCUMULATED-NII-CURRENT> 98,562
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,823,065
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,418,166
<NET-ASSETS> 90,757,581
<DIVIDEND-INCOME> 857,844
<INTEREST-INCOME> 1,797,747
<OTHER-INCOME> 0
<EXPENSES-NET> (1,471,886)
<NET-INVESTMENT-INCOME> 1,183,705
<REALIZED-GAINS-CURRENT> 8,390,313
<APPREC-INCREASE-CURRENT> 3,327,836
<NET-CHANGE-FROM-OPS> 12,901,854
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (431,692)
<DISTRIBUTIONS-OF-GAINS> (857,221)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,095
<NUMBER-OF-SHARES-REDEEMED> (160,516)
<SHARES-REINVESTED> 69,612
<NET-CHANGE-IN-ASSETS> 24,191,770
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,310,185
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 575,647
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,471,886
<AVERAGE-NET-ASSETS> 77,171,983
<PER-SHARE-NAV-BEGIN> 17.13
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 2.75
<PER-SHARE-DIVIDEND> 0.35
<PER-SHARE-DISTRIBUTIONS> 0.74
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.16
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> INCOME AND GROWTH PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 80,302,197
<INVESTMENTS-AT-VALUE> 89,720,373
<RECEIVABLES> 1,497,732
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 447
<TOTAL-ASSETS> 91,218,552
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 460,971
<TOTAL-LIABILITIES> 460,971
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,417,788
<SHARES-COMMON-STOCK> 3,469,932
<SHARES-COMMON-PRIOR> 2,723,279
<ACCUMULATED-NII-CURRENT> 98,562
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,823,065
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,418,166
<NET-ASSETS> 90,757,581
<DIVIDEND-INCOME> 857,844
<INTEREST-INCOME> 1,797,747
<OTHER-INCOME> 0
<EXPENSES-NET> (1,471,886)
<NET-INVESTMENT-INCOME> 1,183,705
<REALIZED-GAINS-CURRENT> 8,390,313
<APPREC-INCREASE-CURRENT> 3,327,836
<NET-CHANGE-FROM-OPS> 12,901,854
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (655,745)
<DISTRIBUTIONS-OF-GAINS> (2,018,269)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,025,114
<NUMBER-OF-SHARES-REDEEMED> (428,846)
<SHARES-REINVESTED> 150,385
<NET-CHANGE-IN-ASSETS> 24,191,770
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,310,185
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 575,647
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,471,886
<AVERAGE-NET-ASSETS> 77,171,983
<PER-SHARE-NAV-BEGIN> 17.14
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 2.76
<PER-SHARE-DIVIDEND> 0.21
<PER-SHARE-DISTRIBUTIONS> 0.74
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.18
<EXPENSE-RATIO> 2.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> MUNICIPAL INCOME PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 51,266,294
<INVESTMENTS-AT-VALUE> 54,207,394
<RECEIVABLES> 960,397
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,167,791
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418,753
<TOTAL-LIABILITIES> 418,753
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54,408,948
<SHARES-COMMON-STOCK> 1,169,466
<SHARES-COMMON-PRIOR> 1,371,150
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (89,604)
<ACCUMULATED-NET-GAINS> (2,511,406)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,941,100
<NET-ASSETS> 54,749,038
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,850,534
<OTHER-INCOME> 0
<EXPENSES-NET> (904,716)
<NET-INVESTMENT-INCOME> 2,945,818
<REALIZED-GAINS-CURRENT> 149,379
<APPREC-INCREASE-CURRENT> 320,865
<NET-CHANGE-FROM-OPS> 3,416,062
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,063,836)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53,174
<NUMBER-OF-SHARES-REDEEMED> (291,238)
<SHARES-REINVESTED> 36,380
<NET-CHANGE-IN-ASSETS> (5,204,141)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,687,785)
<OVERDISTRIB-NII-PRIOR> (52,543)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 344,784
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 904,716
<AVERAGE-NET-ASSETS> 57,441,118
<PER-SHARE-NAV-BEGIN> 14.92
<PER-SHARE-NII> 0.82
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> 0.82
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.04
<EXPENSE-RATIO> 1.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MUNICIPAL INCOME PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 51,266,294
<INVESTMENTS-AT-VALUE> 54,207,394
<RECEIVABLES> 960,397
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,167,791
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418,753
<TOTAL-LIABILITIES> 418,753
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54,408,948
<SHARES-COMMON-STOCK> 2,468,725
<SHARES-COMMON-PRIOR> 2,641,371
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (89,604)
<ACCUMULATED-NET-GAINS> (2,511,406)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,941,100
<NET-ASSETS> 54,749,038
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,850,534
<OTHER-INCOME> 0
<EXPENSES-NET> (904,716)
<NET-INVESTMENT-INCOME> 2,945,818
<REALIZED-GAINS-CURRENT> 149,379
<APPREC-INCREASE-CURRENT> 320,865
<NET-CHANGE-FROM-OPS> 3,416,062
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,919,043)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 240,061
<NUMBER-OF-SHARES-REDEEMED> (488,067)
<SHARES-REINVESTED> 75,360
<NET-CHANGE-IN-ASSETS> (5,204,141)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,687,785)
<OVERDISTRIB-NII-PRIOR> (52,543)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 344,784
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 904,716
<AVERAGE-NET-ASSETS> 57,441,118
<PER-SHARE-NAV-BEGIN> 14.95
<PER-SHARE-NII> 0.75
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.76
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.05
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> QUALITY INCOME PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 95,114,052
<INVESTMENTS-AT-VALUE> 94,805,826
<RECEIVABLES> 876,222
<ASSETS-OTHER> 8,120
<OTHER-ITEMS-ASSETS> 67,381
<TOTAL-ASSETS> 95,757,549
<PAYABLE-FOR-SECURITIES> 6,506,094
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,920,226
<TOTAL-LIABILITIES> 16,426,320
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94,833,231
<SHARES-COMMON-STOCK> 1,633,938
<SHARES-COMMON-PRIOR> 1,840,920
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (111,276)
<ACCUMULATED-NET-GAINS> (15,082,500)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (308,226)
<NET-ASSETS> 79,331,229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,546,848
<OTHER-INCOME> 0
<EXPENSES-NET> (1,165,596)
<NET-INVESTMENT-INCOME> 5,381,252
<REALIZED-GAINS-CURRENT> (1,415,843)
<APPREC-INCREASE-CURRENT> (937,621)
<NET-CHANGE-FROM-OPS> 3,027,788
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,580,519)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (6,680)
<NUMBER-OF-SHARES-SOLD> 261,361
<NUMBER-OF-SHARES-REDEEMED> (533,765)
<SHARES-REINVESTED> 65,422
<NET-CHANGE-IN-ASSETS> (7,295,662)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (13,667,436)
<OVERDISTRIB-NII-PRIOR> (242,890)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 495,545
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,382,925
<AVERAGE-NET-ASSETS> 82,874,399
<PER-SHARE-NAV-BEGIN> 13.29
<PER-SHARE-NII> 0.89
<PER-SHARE-GAIN-APPREC> (0.37)
<PER-SHARE-DIVIDEND> 0.89
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.01
<PER-SHARE-NAV-END> 12.91
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> QUALITY INCOME PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 95,114,052
<INVESTMENTS-AT-VALUE> 94,805,826
<RECEIVABLES> 876,222
<ASSETS-OTHER> 8,120
<OTHER-ITEMS-ASSETS> 67,381
<TOTAL-ASSETS> 95,757,549
<PAYABLE-FOR-SECURITIES> 6,506,094
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,920,226
<TOTAL-LIABILITIES> 16,426,320
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94,833,231
<SHARES-COMMON-STOCK> 4,504,962
<SHARES-COMMON-PRIOR> 4,669,766
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (111,276)
<ACCUMULATED-NET-GAINS> (15,082,500)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (308,226)
<NET-ASSETS> 79,331,229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,546,848
<OTHER-INCOME> 0
<EXPENSES-NET> (1,165,596)
<NET-INVESTMENT-INCOME> 5,381,252
<REALIZED-GAINS-CURRENT> (1,415,843)
<APPREC-INCREASE-CURRENT> (937,621)
<NET-CHANGE-FROM-OPS> 3,027,788
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,800,733)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (16,065)
<NUMBER-OF-SHARES-SOLD> 765,460
<NUMBER-OF-SHARES-REDEEMED> (1,108,119)
<SHARES-REINVESTED> 177,855
<NET-CHANGE-IN-ASSETS> (7,295,662)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (13,667,436)
<OVERDISTRIB-NII-PRIOR> (242,890)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 495,545
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,382,925
<AVERAGE-NET-ASSETS> 82,874,399
<PER-SHARE-NAV-BEGIN> 13.31
<PER-SHARE-NII> 0.84
<PER-SHARE-GAIN-APPREC> (0.38)
<PER-SHARE-DIVIDEND> 0.84
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.93
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> SHORT-DURATION INCOME PORTFOLIO-CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 35,018,886
<INVESTMENTS-AT-VALUE> 34,934,396
<RECEIVABLES> 315,191
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,280
<TOTAL-ASSETS> 35,299,867
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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<EXPENSES-NET> (308,712)
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<REALIZED-GAINS-CURRENT> (113,895)
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<ACCUMULATED-NII-PRIOR> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> SHORT-DURATION INCOME PORTFOLIO-CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 35,018,886
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<EXPENSES-NET> (308,712)
<NET-INVESTMENT-INCOME> 1,563,529
<REALIZED-GAINS-CURRENT> (113,895)
<APPREC-INCREASE-CURRENT> (364,509)
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<NUMBER-OF-SHARES-SOLD> 1,146,855
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<NET-CHANGE-IN-ASSETS> 11,094,045
<ACCUMULATED-NII-PRIOR> 0
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<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 17
<NAME> BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 3,403,938
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<ACCUMULATED-NII-CURRENT> 69,245
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 3,825,401
<DIVIDEND-INCOME> 36,842
<INTEREST-INCOME> 77,923
<OTHER-INCOME> 0
<EXPENSES-NET> (17,364)
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<DISTRIBUTIONS-OF-GAINS> (129,654)
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<SHARES-REINVESTED> 16,321
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 70,695
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</TABLE>
