THE MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 15, 1996
The Mentor Funds (the "Trust") is a diversified, open-end series
investment company. This Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectus of the Trust dated January
15, 1996 and the prospectus of Mentor Balanced Portfolio dated January 15, 1996.
A copy of either prospectus can be obtained upon request by writing to Mentor
Distributors, Inc., the Trust's distributor, at P.O. Box 1357, Richmond,
Virginia 23286-0109, or by calling Mentor Distributors at 1-800-382-0016.
This Statement is in three parts. Part I contains information with
respect to Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio,
Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, and
Mentor Perpetual Global Portfolio. Part II contains information with respect to
Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor ShortDuration Income
Portfolio, and Mentor Balanced Portfolio, which are the successors to Mentor
Growth Fund, Mentor Strategy Fund, Mentor Short-Duration Income Fund, and Mentor
Balanced Fund, respectively, each of which was previously a series of shares of
Mentor Series Trust, a diversified, open-end series investment company. Part III
provides general information with respect to the Trust and all of the
Portfolios.
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TABLE OF CONTENTS
INTRODUCTION............................................................... II
PART I..................................................................... 1
INVESTMENT RESTRICTIONS.................................................... 1
PART II.................................................................... 6
INVESTMENT RESTRICTIONS.................................................... 6
PART III................................................................... 10
CERTAIN INVESTMENT TECHNIQUES ............................................. 10
MANAGEMENT OF THE TRUST.................................................... 31
INVESTMENT ADVISORY SERVICES............................................... 34
ADMINISTRATIVE SERVICES.................................................... 37
SHAREHOLDER SERVICING PLAN................................................. 38
BROKERAGE TRANSACTIONS..................................................... 39
HOW TO BUY SHARES.......................................................... 42
DISTRIBUTION............................................................... 43
DETERMINING NET ASSET VALUE................................................ 45
REDEMPTIONS IN KIND........................................................ 47
TAXES...................................................................... 47
INDEPENDENT ACCOUNTANTS.................................................... 52
CUSTODIAN.................................................................. 52
PERFORMANCE INFORMATION.................................................... 52
ADVISERS' OFFICERS......................................................... 56
PERFORMANCE COMPARISONS.................................................... 59
SHAREHOLDER LIABILITY...................................................... 65
FINANCIAL STATEMENTS....................................................... 65
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INTRODUCTION
The Mentor Funds is a Massachusetts business trust organized on January
20, 1992. As of the date of this Statement, the Trust consisted of the following
nine portfolios (collectively, the "Portfolios" and each individually, the
"Portfolio"): Mentor Balanced Portfolio (the "Balanced Portfolio"); Mentor
Capital Growth Portfolio (the "Capital Growth Portfolio"); Mentor Perpetual
Global Portfolio (the "Global Portfolio"); Mentor Income and Growth Portfolio
(the "Income and Growth Portfolio"); Mentor Municipal Income Portfolio (the
"Municipal Income Portfolio"); Mentor Short-Duration Income Portfolio (the
"Short-Duration Income Portfolio"); and Mentor Strategy Portfolio (the "Strategy
Portfolio"). With the exception of the Balanced Portfolio, which has only one
class of shares, each Portfolio has two classes of shares of beneficial
interest, Class A shares and Class B shares.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed below as fundamental or to the extent designated as such in
the Prospectus in respect of a Portfolio, the other investment policies
described in this Statement or in the Prospectus are not fundamental and may be
changed by approval of the Trustees. As a matter of policy, the Trustees would
not materially change a Portfolio's investment objective without shareholder
approval.
The Investment Company Act of 1940, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of a
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares present at
a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
PART I
THE FOLLOWING INFORMATION RELATES TO EACH OF THE CAPITAL GROWTH,
QUALITY INCOME, MUNICIPAL INCOME, INCOME AND GROWTH, AND THE GLOBAL PORTFOLIOS,
EXCEPT WHERE OTHERWISE NOTED.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be
changed without approval by the holders of a majority of the outstanding
securities of a Portfolio:
1. The Portfolios will not issue senior securities except that a Portfolio
(other than the Municipal Income Portfolio) may borrow money directly
or through reverse repurchase agreements in amounts of up to one-third
of the value of its net assets, including the amount borrowed; and
except to the extent that a Portfolio may enter into futures
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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.
None of the Portfolios (except for the Quality Income and
Short-Duration Income Portfolios) borrowed money (including through use of
reverse repurchase agreements) or loaned portfolio securities in excess of 5% of
the value of its net assets during the last fiscal year, and no Portfolio
(except for the Quality Income and Short-Duration Income Portfolios) has the
intention of doing so in the coming fiscal year.
The Portfolios (1) will limit the aggregate value of the assets
underlying covered call options or put options written by a Portfolio to not
more than 25% of its net assets, (2) will limit the premiums paid for options
purchased by a Portfolio to 5% of its net assets, (3) will limit the
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margin deposits on futures contracts entered into by a Portfolio to 5% of its
net assets, and (4) will limit investment in warrants to 5% of its net assets to
meet certain state registration requirements. No more than 2% will be warrants
which are not listed on the New York or American Stock Exchange. Also, the
Capital Growth Portfolio and the Income and Growth Portfolio will limit their
investment in restricted securities to 5% of total assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
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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 approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:
1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of
the Portfolios other than the Growth Portfolio and the Strategy
Portfolio may borrow money to the extent contemplated by Restriction 4
below.
2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments in connection with transactions in
futures contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin for this
purpose.)
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short ("short sale
against-the-box"), and unless not more than 25% of the Portfolio's net
assets (taken at current value) is held as collateral for such sales at
any one time.
4. (Growth Portfolio and Strategy Portfolio) Borrow money or pledge its
assets except that a Portfolio may borrow from banks for temporary or
emergency purposes (including the meeting of redemption requests which
might otherwise require the untimely disposition of securities) in
amounts not exceeding 10% (taken at the lower of cost or market value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; provided that a Portfolio will not
purchase additional portfolio securities when such borrowings exceed 5%
of its total assets. (Collateral or margin arrangements with respect
to options, futures contracts, or other financial instruments are not
considered to be pledges.)
(all other Portfolios) Borrow more than 33 1/3% of the value of its
total assets less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities.
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5. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.
6. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old or (in the case of Growth Portfolio) in equity securities for which
market quotations are not readily available.
7. (as to the Growth Portfolio only) Purchase any security if as a result
the Portfolio would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a single
class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
8. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5% of
the Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25% of the
Portfolio's total assets (taken at current value) would be invested in
a single industry; provided that the restriction set out in (i) above
shall apply, in the case of each Portfolio other than the Growth
Portfolio, only as to 75% of such Portfolio's total assets.
9. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Charter, Commonwealth or
Wellesley, as the case may be, owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and Trustees
who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of companies
that invest or deal in real estate (or, in the case of any Portfolio
other than the Growth Portfolio, real estate or limited partnership
interests). (For purposes of this restriction, investments by a
Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the
purchase or sale of real estate or interests in real estate or real
estate mortgage loans.)
11. Make investments for the purpose of exercising control or management.
12. (as to the Growth Portfolio only) Participate on a joint or a joint and
several basis in any trading account in securities.
13. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.
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14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open market
involving only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value) would be
invested in such securities, or except as part of a merger,
consolidation or other acquisition.
15. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common
stocks of companies that invest in or sponsor such programs.
16. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer
than 7 days together with other illiquid assets being limited to 10% of
the Portfolio's assets,) and (ii) loans of portfolio securities
(limited to 33% of the Portfolio's total assets).
17. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository
Receipts listed on exchanges or otherwise traded in the United States
and certificates of deposit, bankers' acceptances and other obligations
of foreign banks and foreign branches of U.S. banks if, giving effect
to such purchase, such obligations would constitute less than 10% of
the Trust's total assets (at current value).
18. (as to the Growth Portfolio only) Purchase warrants if as a result the
Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.
19. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.
20. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total
assets (taken at current value), or through the lending of its
portfolio securities with respect to not more than 25% of its total
assets.
In addition, it is contrary to the current policy of each of the
Portfolios, other than the Growth Portfolio (except as specified below), which
policy may be changed without shareholder approval, to:
1. Invest in warrants (other than warrants acquired by
the Portfolio as a part of a unit or attached to
securities at the time of purchase) if as a result
such investment (valued at the lower of cost or
market value) would exceed 5% of the value of the
Portfolio's net assets, provided that not more than
2% of the Portfolio's net assets may be invested in
warrants not listed on the New York or American Stock
Exchanges.
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2. Purchase or sell commodities or commodity contracts, except
that a Portfolio may purchase or sell financial futures
contracts, options on financial futures contracts, and futures
contracts, forward contracts, and options with respect to
foreign currencies, and may enter into swap transactions.
(This restriction applies to the Growth Portfolio.)
3. Purchase securities restricted as to resale if as a result (i)
more than 10% of the Portfolio's total assets would be
invested in such securities or (ii) more than 5% of the
Portfolio's total assets (excluding any securities eligible
for resale under Rule 144A under the Securities Act of 1933)
would be invested in such securities.
4. Invest in (a) securities which at the time of such investment
are not readily marketable, (b) securities restricted as to
resale, and (c) repurchase agreements maturing in more than
seven days, if, as a result, more than 15% of the Portfolio's
net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c)
above.
5. Invest in securities of other registered investment companies,
except by purchases in the open market involving only
customary brokerage commissions and as a result of which not
more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition.
6. Purchase puts, calls, straddles, spreads, or any combination
thereof (other than futures contracts, options on futures
contracts or indices, and options on foreign currencies), if,
by reason of such purchase, the value of its aggregate
investment therein will exceed 5% of its total assets.
7. Invest in real estate limited partnerships.
Notwithstanding the provisions of clauses 3 and 16 above, the Growth
Portfolio has no intention during the coming year to make short sales of
securities or to maintain a short position in any security.
Shares of beneficial interest in the Mentor Balanced Portfolio have
been registered only in the Commonwealth of Virginia. These shares may not be
offered or sold in any other state without being registered or exempt from
registration.
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PART III
THE FOLLOWING INFORMATION RELATES TO ALL OF THE PORTFOLIOS OF THE
TRUST, EXCEPT WERE OTHERWISE NOTED.
All information with respect to fees, expenses and performance (except
where otherwise indicated) is based on a Portfolio's fiscal year end. All of the
Portfolios have a September 30 fiscal year end. Prior to September 30, 1995,
each of the Balanced, Growth, Short-Duration Income, and Strategy Portfolios had
a December 31 fiscal year end. Information concerning the expenses of those
Portfolios is provided for the fiscal period January 1, 1995 through September
30, 1995. Certain information with respect to certain Portfolios is given for
partial fiscal years. See "Financial Highlights" in the Trust's prospectus for
information concerning the commencement of operations of the Portfolios.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment techniques may not be available to a
Portfolio. See the Prospectus relating to a particular Portfolio for a
description of the investment techniques generally applicable to that Portfolio.
For purposes of this section, a Portfolio's investment adviser or subadviser (if
any) is referred to as an "Adviser".
OPTIONS
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
COVERED CALL OPTIONS. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying
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security. If the option is exercised, the Portfolio realizes a gain or loss
equal to the difference between the Portfolio's cost for the underlying security
and the proceeds of sale (exercise price minus commissions) plus the amount of
the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
COVERED PUT OPTIONS. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during
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the life of the call option since the Portfolio, as holder of the call option,
is able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. In order for a call option
to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. These costs will reduce any profit the Portfolio might have realized had
it bought the underlying security at the time it purchased the call option.
OPTIONS ON FOREIGN SECURITIES. A Portfolio may purchase and sell
options on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
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Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures and related options will, as may be
required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself
to make the future delivery of the security against payment of the agreed
price. Open futures positions on debt securities will be valued at the most
recent settlement price, unless that price does not, in the judgment of persons
acting at the direction of the Trustees as to the valuation of a Portfolio's
assets, reflect the fair value of the contract, in which case the positions
will be valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
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On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular securities when it has the necessary
cash, but expects the rate of return available in the securities markets at that
time to be less favorable than rates currently available in the futures markets.
If the anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise in
the value of the futures position taken in anticipation of the subsequent
purchase.
Successful use by a Portfolio of futures contracts on debt securities
is subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. (Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although
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such futures contracts are expected to become available in the future.) A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Portfolio enters into a futures contract to buy 100 units of the S&P 100
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $184 on that future date, the Portfolio will gain $400 (100 units x
gain of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180 and
the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or subindexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
OPTIONS ON STOCK INDEX FUTURES. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
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OPTIONS ON INDICES. As an alternative to purchasing and selling call
and put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the price of the
underlying security rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the market price of the securities underlying the futures contract. Conversely,
if the price of the underlying security falls below the delivery price of the
contract, the Portfolio's futures position increases in value. The broker then
must make a variation margin payment equal to the difference between the
delivery price of the futures contract and the market price of the securities
underlying the futures contract.
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When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a Portfolio
has purchased puts on futures contracts to hedge its portfolio against a decline
in the market, the securities or index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in
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its portfolio securities. In addition, the prices of futures, for a number of
reasons, may not correlate perfectly with movements in the underlying securities
or index due to certain market distortions. First, all participants in the
futures market are subject to margin deposit requirements. Such requirements may
cause investors to close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying security or index
and futures markets. Second, the margin requirements in the futures markets are
less onerous than margin requirements in the securities markets in general, and
as a result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a Portfolio's
Adviser may still not result in a successful hedging transaction over a short
time period.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security for a
relatively short period (usually
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not more than one week) subject to the obligation of the seller to repurchase
and the Portfolio to resell such security at a fixed time and price
(representing the Portfolio's cost plus interest). It is the Trust's present
intention to enter into repurchase agreements only with member banks of the
Federal Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of the
Trust and only with respect to obligations of the U.S. government or its
agencies or instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which are
collateralized by the securities subject to repurchase. A Portfolio's Adviser
will monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults, a
Portfolio could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, a Portfolio
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if a Portfolio is treated as an unsecured
creditor and required to return the underlying collateral to the seller's
estate.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS; OTHER MORTGAGE-RELATED SECURITIES
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the
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Federal Home Loan Mortgage Corporation ("FHLMC"), but they also may be
collateralized by whole loans or private pass-through certificates (such
collateral collectively hereinafter referred to as "Mortgage Assets"). CMOs may
be issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
mortgage assets are applied to the classes of the series in a pre-determined
sequence.
RESIDUAL INTERESTS. Residual interests are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans. The cash flow generated
by the mortgage assets underlying a series of mortgage securities is applied
first to make required payments of principal of and interest on the mortgage
securities and second to pay the related administrative expenses of the issuer.
The residual generally represents the right to any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital. The
amount of residual cash flow resulting from a series of mortgage securities will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of the mortgage securities, prevailing interest rates,
the amount of administrative expenses, and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on residual interests may
be extremely sensitive to prepayments on the related underlying mortgage assets
in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. In certain circumstances,
there may be little or no excess cash flow payable to residual holders. The
Portfolio may fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals may be subject to certain restrictions on transferability.
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FOREIGN SECURITIES
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates or exchange
control regulations. A Portfolio may incur costs in connection with conversion
between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact of
foreign taxes on the net yield available to the Portfolio and its shareholders.
Income received by a Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Portfolio's assets to be invested
in various countries is not known, and tax laws and their interpretations may
change from time to time and may change without advance notice. Any such taxes
paid by a Portfolio will reduce its net income available for distribution to
shareholders.
FOREIGN CURRENCY TRANSACTIONS
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency.
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By transaction hedging a Portfolio will attempt to protect against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the applicable foreign currency during the period between the date on
which the security is purchased or sold or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, a Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Portfolio may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency a Portfolio is obligated to deliver and if a
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decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
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Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such
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delivery. Such investments may also involve the risk that an entity involved in
the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S.
Treasury securities.
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When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective and policies, not
for investment leverage, but a Portfolio may sell such securities prior to
settlement date if such a sale is considered to be advisable. No income accrues
to a Portfolio on securities in connection with such transactions prior to the
date the Portfolio actually takes delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause a
Portfolio to miss a price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
BANK INSTRUMENTS
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are
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U.S. dollar-denominated deposits issued by branches of major Canadian banks
located in the U.S.; and Yankee Certificates of Deposit ("Yankee CDS"), which
are U.S. dollar- denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the U.S.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. A
Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar rolls
and reverse repurchase agreements involve the risk that, in the event of the
bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio would be
unable to recover the security which is the subject of the agreement, the amount
of cash or other property transferred by the counterparty to the Portfolio under
the agreement prior to such insolvency or bankruptcy is less than the value of
the security subject to the agreement, or the Portfolio may be delayed or
prevented, due to such insolvency or bankruptcy, from using such cash or
property or may be required to return it to the counterparty or its trustee or
receiver.
CONVERTIBLE SECURITIES
A Portfolio may invest in convertible securities. Convertible
securities are fixed income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
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of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for a variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Portfolio's Adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
WARRANTS
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. Warrants acquired in units or attached to securities may
be deemed to be without value for purposes of a Portfolio's policy.
SWAPS, CAPS, FLOORS AND COLLARS
A Portfolio may enter into interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an
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agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
LOW-RATED SECURITIES
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will
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<PAGE>
generally result in an increase in the value of the Portfolio's assets.
Conversely, during periods of rising interest rates, the value of the
Portfolio's assets will generally decline. In addition, the values of such
securities are also affected by changes in general economic conditions and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities generally will not affect cash income derived from such securities,
but will affect the Portfolio's net asset value. A Portfolio will not
necessarily dispose of a security when its rating is reduced below its rating at
the time of purchase, although its Adviser will monitor the investment to
determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
INDEXED SECURITIES
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to
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<PAGE>
zero, and any further declines in the value of the security may then reduce the
principal amount payable on maturity. Finally, indexed securities may be more
volatile than the reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "D-mark"), the Portfolio
holds securities denominated in schillings and the Adviser believes that the
value of schillings will decline against the U.S. dollar, the Adviser may enter
into a contract to sell D-marks and buy dollars.
EURODOLLAR INSTRUMENTS
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The officers and Trustees of the Trust are listed below, along with
their addresses, principal occupations, and present positions, including any
positions held with affiliated persons or Mentor Distributors, Inc.
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
Daniel J. Ludeman(1)(2) Chairman and Trustee Chairman and Chief
901 East Byrd Street Executive Officer since
Richmond, Virginia 23219 July 1991, Mentor
Investment Group, Inc.;
Managing Director of
Wheat, First Securities,
Inc. since August 1989;
Managing Director of Wheat
First Butcher Singer, Inc.
since June 1991; Director,
Mentor Income Fund, Inc.;
Chairman and Trustee, Cash
Resource Trust and Mentor
Institutional Trust.
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Peter J. Quinn, Jr.(1)(2) Trustee President, Mentor
901 E. Byrd Street Distributors, Inc.;
Richmond, Virginia 23219 Managing Director, Mentor
Investment Group, Inc.;
Managing Director, Wheat
First Butcher Singer,
Inc.; formerly, Senior
Vice President/Director of
Mutual Funds, Wheat First
Butcher Singer, Inc.
Stanley F. Pauley Trustee Chairman and Chief
P. O. Box 27205 Executive Officer, E.R.
Richmond, Virginia 23261 Carpenter Company
Incorporated; Trustee,
Cash Resource Trust and
Mentor Institutional
Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business
University of Richmond and Finance, University of
Richmond, Virginia 23173 Richmond; Trustee, Cash
Resource Trust and Mentor
Institutional Trust.
Thomas F. Keller Trustee Dean, Fuqua School of
Duke University Business, Duke University;
Durham, North Carolina 27706 Trustee, Cash Resource
Trust and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Retired. Formerly,
5100 Cary Street Road Chairman and Chief
Richmond, Virginia 23225 Executive Officer,
Hamilton
Beach/Proctor-Silex, Inc.
Trustee, Cash Resource
Trust and Mentor
Institutional Trust.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers
2235 Staples Mill Road Company. Trustee, Cash
Richmond, Virginia 23230 Resource Trust and Mentor
Institutional Trust.
Paul F. Costello President Managing Director, Wheat
901 East Byrd Street First Butcher Singer,
Richmond, Virginia 23219 Inc., Mentor Investment
Group, Inc.; President,
Cash Resource Trust,
Mentor Income Fund, Inc.,
and Mentor Institutional
Trust; Director, Mentor
Perpetual Advisors,
L.L.C.; Senior Vice
President, Mentor
Distributors, Inc.;
formerly, President,
Mentor Series Trust;
Director, President and
Chief Executive Officer,
First Variable Life
Insurance Company;
President and Chief
Financial Officer,
Variable Investors Series
Trust; President and
Treasurer, Atlantic
Capital & Research, Inc.;
Vice President and
Treasurer, Variable Stock
Fund, Inc., Monarch
Investment Series Trust,
and GEICO Tax Advantage
Series Trust; Vice
President, Monarch Life
Insurance Company, GEICO
Investment Services
Company, Inc., Monarch
Investment Services
Company, Inc., and
Springfield Life
Insurance Company.
Terry L. Perkins Treasurer Vice President, Mentor
901 East Byrd Street Investment Group, Inc.;
Richmond, Virginia 23219 Treasurer, Cash Resource
Trust; Cash Resource
Trust, Mentor Income Fund,
Inc., and Mentor
Institutional Trust;
formerly, Treasurer and
Comptroller, Ryland
Capital Management, Inc.;
Treasurer, Mentor Series
Trust.
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Michael Wade Assistant Treasurer Associate Vice
901 East Byrd Street President, Mentor
Richmond, Virginia 23219 Investment Group, Inc.
since April 1994;
Assistant Treasurer,
Cash Resource Trust,
Mentor Income Fund, Inc.,
and Mentor Institutional
Trust; formerly, Senior
Accountant, Wheat First
Butcher Singer, Inc.,
April 1993 through March
1994; Audit Senior, BDO
Seidman, July 1989
through March 1993.
John M. Ivan Secretary Managing Director since
901 East Byrd Street October 1992, Director of
Richmond, Virginia 23219 Compliance since October
1992, Senior Vice
President from 1990 to
October 1992, and
Assistant General Counsel
since 1985, Wheat, First
Securities, Inc.; Clerk,
Cash Resource Trust,
Mentor Institutional
Trust; formerly, Clerk,
Mentor Series Trust.
(1) This Trustee is deemed to be an "interested person" of the Trust as defined
in the Investment Company Act of 1940.
(2) Members of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between meetings
of the Board.
TRUSTEES' COMPENSATION
The table below shows the estimated fees to be paid to each Trustee by
the Trust for fiscal 1995 and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1995 calendar year.
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM ALL
TRUSTEES FROM THE TRUST COMPLEX FUNDS
Daniel J. Ludeman $ 0 $ 0
Arnold H. Dreyfuss 6,500 17,200
Thomas F. Keller 5,500 14,700
Louis W. Moelchert, Jr. 6,000 16,700
Stanley F. Pauley 6,000 16,675
Troy A. Peery, Jr. 6,000 16,175
Peter J. Quinn, Jr. 0 0
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The Trustees do not receive pension or retirement benefits from the
Trust.
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<PAGE>
The Trust's Declaration of Trust provides that the Trustees will be
liable for their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
PRINCIPAL HOLDERS OF SECURITIES
The officers and Trustees of the Trust own as a group less than 1% of
the outstanding shares of any class of each Portfolio. To the knowledge of the
Trust, no person owned of record or beneficially more than 5% of the outstanding
shares of any Portfolio as of December 15, 1995, except as set forth below:
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP
Growth Portfolio-Class A Bank of New York TTEE 70.00
Wheat First Butcher Singer 401K
Wheat First FBO 13.03
Plumbers & Pipe Fitters Local
Union 354 Pen FD J.D. Wright
& Richard G. Hall TTEES UA
DTD
Strategy Portfolio-Class Bank of New York TTEE 41.85
A Wheat First Butcher Singer 401K
Wheat First FBO 20.81
Plumbers & Pipe Fitters Local
Union 354 Pen FD J. D. Wright
& Richard G. Hall TTEES UA
DTD
Global Portfolio-Class A Saxon & Co. 7.76
FBO Vested Interest Omnibus
Asset Account
Quality Portfolio-Class A Wheat First FBO 8.39
Danville Region Medical CTR
S D Account
Attn: William Isemann
Short-Duration Income Wheat First FBO 17.69
Portfolio-Class A John L. Irvin
Wheat First FBO 5.92
B & B Communications Inc.
Robert B. Baine Jr., President
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Wheat First FBO 9.13
Robert L. Pack
Wheat First FBO 8.14
Univ. Path Assoc. PSP Fergus O
Shiel & D. S. Wilkinson TTES
DTD
Balanced Portfolio The Wheat Foundation 89.74
INVESTMENT ADVISORY SERVICES
Commonwealth Advisors, Inc. (formerly Cambridge Investment Advisors,
Inc.) serves as investment adviser to the Capital Growth, Quality Income, Income
and Growth, and Municipal Income Portfolios. Commonwealth Advisors has entered
into sub-advisory arrangements with respect to certain of the Portfolios. Van
Kampen/American Capital Management, Inc. ("Van Kampen") serves as sub-adviser to
the Municipal Income Portfolio; Wellington Management Company ("Wellington") as
sub-adviser to the Income and Growth Portfolio. Each of these sub-advisers has
complete discretion to purchase and sell portfolio securities for its respective
Portfolio within the particular Portfolio's investment objective, restrictions,
and policies. Charter Asset Management, Inc. ("Charter") serves as investment
adviser to the Growth Portfolio. Wellesley Advisors, Inc. ("Wellesley") serves
as investment adviser to the Strategy Portfolio. Commonwealth Investment
Counsel, Inc. ("Commonwealth") serves as investment adviser to the Balanced and
Short-Duration Income Portfolios. Mentor Perpetual Advisors, L.L.C. ("Mentor
Perpetual") serves as investment adviser to the Global Portfolio. Mentor
Investment Group, Inc. (formerly Investment Management Group, Inc.) ("Mentor")
serves as administrator to all of the Portfolios. Each of Commonwealth
Advisors, Charter, Commonwealth, and Wellesley is a wholly-owned subsidiary of
Mentor, which is a wholly-owned subsidiary of Wheat First Butcher Singer, Inc.
("WFBS"). Mentor Perpetual is owned equally by Mentor and Perpetual plc, a
diversified financial services holding company.
Subject to the supervision and direction of the Trustees, each
investment adviser and/or sub-adviser manages the applicable Portfolio in
accordance with the stated policies of that Portfolio and of the Trust. Each
makes investment decisions for the Portfolio and places the purchase and sale
orders for portfolio transactions. Mentor furnishes each of the Portfolios with
certain statistical and research data, clerical help, and certain accounting,
data processing, and other services required by the Portfolios, assists in
preparation of certain reports to shareholders of the Portfolios, tax returns,
and filings with the SEC and state Blue Sky authorities, and generally assists
in all aspects of the Portfolios' operations. The investment advisers,
sub-advisers, and Mentor, as the case may be, bear all their expenses in
connection with the performance of their services (except as may be approved
from time to time by the Trustees) and pay the salaries of all officers and
employees who are employed by
-35-
<PAGE>
them and the Trust.
Each Portfolio's investment adviser and/or sub-adviser provides the
Trust with investment officers who are authorized to execute purchases and sales
of securities. Investment decisions for the Trust and for the other investment
advisory clients of the investment advisers and sub-advisers and their
affiliates are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the investment adviser's or
sub-adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of securities for one or more clients will have an adverse effect on other
clients. In the case of short-term investments, the Treasury area of Mentor
handles purchases and sales under guidelines approved by investment officers of
the Trust. Each investment adviser and sub-adviser employs professional staffs
of portfolio managers who draw upon a variety of resources for research
information for the Trust.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, compensation paid under a Portfolio's 12b-1 plan
and the Shareholder Service Plan, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat and subsidiaries, SEC fees and
related expenses, state Blue Sky qualification fees, charges of the custodian
and transfer and dividend disbursing agents, outside auditing, accounting, and
legal services, charges for the printing of prospectuses and statements of
additional information for regulatory purposes or for distribution, and certain
costs incurred by Mentor in responding to shareholder inquiries as approved by
the Trustees from time to time, to shareholders, certain shareholder report
charges and charges relating to corporate matters are borne by the Portfolio.
MANAGEMENT FEES
The investment adviser of each Portfolio receives an annual management
fee from such Portfolio (which is described in the relevant Prospectus). The
investment adviser pays a portion of that fee to any sub-adviser to the
Portfolio.
The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
-36-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $ 535,270 $ 590,693 $ 465,031
Global Portfolio............................ -- 69,515 174,547
Growth Portfolio............................ 1,105,694 1,327,384 1,143,696
Income and Growth Portfolio................. 45,081 374,462 460,486
Municipal Income Portfolio.................. 4,130 387,074 380,281
Quality Income Portfolio.................... 658,652 893,139 563,032
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... 147,585 1,368,325 1,262,809
</TABLE>
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 48,884 $14,563
Capital Growth Portfolio.................... $ 35,435 -- --
Global Portfolio............................ -- 69,515 10,545
Municipal Income Portfolio.................. 374,138 81,713 --
Quality Income Portfolio.................... 230,311 -- 41,651
Short-Duration Income Portfolio -- 11,536 65,901
</TABLE>
Commonwealth Advisors paid sub-advisory fees to the Portfolios'
sub-advisers in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Capital Growth Portfolio (1) $286,476 $295,347 $126,880
Global Portfolio (2) -- 34,757 49,880
Income and Growth Portfolio 22,521 187,231 193,845
Municipal Income Portfolio 2,065 234,393 190,141
Quality Income Portfolio (3) 400,501 419,570 157,161
</TABLE>
- --------------------
(1) Prior to April 13, 1995, Phoenix Investment Counsel, Inc. ("Phoenix")
served as sub-adviser to the Capital Growth Portfolio. Commonwealth
Advisors paid subadvisory fees of $126,880 to Phoenix for fiscal year
1995.
(2) Prior to April 13, 1995, Scudder, Stevens & Clark ("Scudder") served as
sub-adviser to the Global Portfolio. Commonwealth Advisors paid
subadvisory fees of $49,880 to Scudder for fiscal year 1995.
(3) Prior to April 13, 1995, Pacific Investment Management Company
("Pacific") served as sub-adviser to the Quality-Income Portfolio
(formerly the Cambridge Government Income Portfolio). Commonwealth
Advisors paid $157,161 in subadvisory fees to Pacific for fiscal year
1995.
-37-
<PAGE>
If in any year the aggregate expenses of a Portfolio (including investment
advisory fees but excluding interest, taxes, brokerage and distribution
fees, and extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over that Portfolio, its investment adviser's
compensation may be reduced. The most stringent state expense limitation
applicable to the Trust presently requires reimbursement of expenses in any
year that such expenses exceed the sum of 2.5% of the first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily net
assets, and 1.5% of average daily net assets over $100 million. If a
Portfolio's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount of
the excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount of expenses to be borne by an investment adviser or
sub-adviser will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
ADMINISTRATIVE SERVICES
Mentor Investment Group, Inc. serves as administrator to each of the
Portfolios pursuant to an Administration Agreement. Prior to June 1, 1994,
Cambridge Administrative Services ("CAS") provided administrative services to
the Capital Growth, Quality Income, Municipal Income, and Income and Growth
Portfolios.
Pursuant to the Administration Agreement, Mentor provides continuously
business management services to the Portfolios and, subject to the general
oversight of the Trustees, manages all of the business and affairs of the
Portfolios subject to the provisions of the Trust's Declaration of Trust,
By-laws and the 1940 Act, and other policies and instructions the Trustees may
from time to time establish. Mentor pays the compensation of all officers and
executive employees of the Trust (except those employed by or serving at the
request of an investment adviser or sub-adviser) and makes available to the
Trust the services of its directors, officers, and employees as elected by the
Trustees or officers of the Trust. In addition, Mentor provides all clerical
services relating to the Portfolios' business. As compensation for its services,
Mentor receives a fee from each Portfolio calculated daily at the annual rate of
.10 of 1% of a Portfolio's average daily net assets.
The Administration Agreement must be approved (beginning May 30, 1997)
at least annually with respect to each Portfolio by a vote of a majority of the
Trustees who are not interested persons of Mentor or the Trust. The Agreement
may be terminated at any time without penalty on 30 days notice by Mentor, or
immediately in respect of any Portfolio upon notice by the Trustees or by vote
of a majority of the outstanding voting securities of that Portfolio. The
Agreement terminates automatically in the event of any assignment.
The Portfolios paid administrative service fees in the following
amounts for the periods indicated below (amounts shown reflect fee waivers where
applicable):
-38-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $ 68,158 $ 92,278 $ 66,032
Global Portfolio............................ -- 7,140 19,082
Growth Portfolio............................ -- -- 108,285
Quality Income Portfolio.................... 143,075 151,234 65,234
Municipal Income Portfolio.................. 62,849 97,653 72,055
Income and Growth Portfolio................. 4,509 47,282 69,316
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... -- 29,422 146,572
</TABLE>
The administrators waived administrative fees in the amounts and for
the periods indicated below:
-39-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 2,307 --
Capital Growth Portfolio.................... $ 36,269 -- --
Global Portfolio............................ -- 530 --
Growth Portfolio............................ -- -- --
Income and Growth Portfolio................. 3,005 15,033 --
Municipal Income Portfolio.................. 34,261 -- --
Quality Income Portfolio.................... 41,518 23,563 --
Short-Duration Income Portfolio -- 9,776 --
Strategy Portfolio.......................... 17,363 131,557 --
</TABLE>
During fiscal 1994, the Growth, Strategy, and Balanced Portfolios
reimbursed amounts of $24,000, $21,507, and $6,905, respectively, to Mentor for
certain accounting and operation related costs not covered by their respective
administration arrangements: During fiscal 1995, the amounts of these reimburse-
ments were $6,579, $6,117, and $0, respectively.
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors with respect to each Portfolio. Pursuant to the Service
Plan, financial institutions will enter into shareholder service agreements with
the Portfolios to provide administrative support services to their customers who
from time to time may be record or beneficial owners of shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding .25% of the average daily net assets of the Class A or Class B shares
of the particular Portfolio or Portfolios owned by the financial institution's
customers for whom it is the holder of record or with whom it has a servicing
relationship. The Service Plan is designed to stimulate financial institutions
to render administrative support services to the Portfolios and their
shareholders. These administrative support services include, but are not limited
to, the following functions: providing office space, equipment, telephone
facilities, and various personnel including clerical, supervisory, and computer
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Portfolios; assisting clients in changing dividend
options, account designations and addresses; and providing such other services
as the Portfolios reasonably request. Prior to June 1, 1995, the Balanced,
Growth, ShortDuration Income, and Strategy Portfolios were parties to
shareholder servicing arrangements with Wheat, First Securities, Inc. ("Wheat")
pursuant to which each Portfolio made payments to Wheat at the annual rate of
0.25% of such Portfolio's average net assets.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser, and/or
Mentor, or affiliates thereof, for providing administrative support services to
holders of Class A or Class B shares of the Portfolios. These payments will be
made directly by the investment adviser, a sub-adviser, and/or Mentor, as
applicable, and will not be made from the assets of any of the Portfolios.
SHAREHOLDER SERVICES FEES
During fiscal 1995, the Portfolios incurred shareholder service fees
under the Service Plan (and, in the case of the Balanced, Growth, Short-Duration
Income, and Strategy Portfolios, the shareholder servicing arrangements with
Wheat) as follows (amounts shown reflect fee waivers where applicable):
Balanced Portfolio..................................... $ --
Capital Growth Portfolio............................... 145,322
Global Portfolio....................................... 42,065
Growth Portfolio....................................... 404,213
Income and Growth Portfolio............................ 153,495
Municipal Income Portfolio............................. 158,450
Quality Income Portfolio............................... 234,597
Short-Duration Income Portfolio 32,505
Strategy Portfolio..................................... 371,429
During 1995, Wheat waived $5,965 in shareholder service fees under its
agreement in respect of the Balanced Portfolio.
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Trust usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Trust includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
It is anticipated that most purchases and sales of securities by funds investing
primarily in certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting
-40-
<PAGE>
as principal. Accordingly, those funds would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each of the Portfolios' investment adviser or sub-adviser receives
brokerage and research services and other similar services from many
broker-dealers with which such investment adviser or sub-adviser places a
Portfolio's portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as general
economic and market reviews, industry and company reviews, evaluations of
investments, recommendations as to the purchase and sale of investments,
newspapers, magazines, pricing services, quotation services, news services and
personal computers utilized by the investment adviser's or sub-adviser's
managers and analysts. Where the services referred to above are not used
exclusively by the investment adviser or sub-adviser for research purposes, the
investment adviser or sub-adviser, based upon its own allocations of expected
use, bears that portion of the cost of these services which directly relates to
its non-research use. Some of these services are of value to the investment
adviser or subadviser and its affiliates in advising various of its clients
(including the Portfolios), although not all of these services are necessarily
useful and of value in managing the Portfolios. The management fee paid by a
Portfolio is not reduced because the Portfolio's investment adviser or
sub-adviser or any of their affiliates receive these services even though the
investment adviser or sub-adviser might otherwise be required to purchase some
of these services for cash.
A Portfolio's investment adviser or sub-adviser, as the case may be,
places all orders for the purchase and sale of portfolio investments for the
Portfolio and buys and sells investments for the Portfolio through a substantial
number of brokers and dealers investment adviser or sub-adviser. The investment
adviser or sub-adviser seeks the best overall terms available for the Portfolio,
except to the extent the investment adviser or sub-adviser may be permitted to
pay higher brokerage commissions as described below. In doing so, the investment
adviser or sub-adviser, having in mind the Portfolio's best interests, considers
all factors it deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the security or other
investment, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the Investment
Advisory and Management Agreements, a Portfolio's investment adviser or
sub-adviser may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the 1934 Act) to that adviser
an amount of disclosed commission for effecting
-41-
<PAGE>
securities transactions on stock exchanges and other transactions for the
Portfolio on an agency basis in excess of the commission which another
broker-dealer would have charged for effecting that transaction. The investment
adviser's or sub-adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Trustees may adopt
from time to time. It is the position of the staff of the Securities and
Exchange Commission that Section 28(e) does not apply to the payment of such
greater commissions in "principal" transactions. Accordingly, the investment
adviser and sub-adviser will use its best efforts to obtain the best overall
terms available with respect to such transactions, as described above.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser or sub-adviser may consider sales of shares
of a Portfolio (and, if permitted by law, of the other funds in the Mentor
family) as a factor in the selection of broker-dealers to execute
portfolio transactions for a Portfolio.
The Trustees have determined that portfolio transactions for the Trust
may be effected through Wheat, First Securities, Inc. ("Wheat"). The Trustees
have adopted certain policies incorporating the standards of Rule 17e-l issued
by the SEC under the 1940 Act which requires, among other things, that the
commissions paid to Wheat must be reasonable and fair compared to the
commissions, fees, or other remuneration received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time. Wheat will not participate in brokerage commissions given by the
Trust to other brokers or dealers. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere. The Trust will in no
event effect principal transactions with Wheat in over-the-counter securities in
which Wheat makes a market.
Under rules adopted by the SEC, Wheat may not execute transactions for
the Trust on the floor of any national securities exchange, but may effect
transactions for the Trust by transmitting orders for execution and arranging
for the performance of this function by members of the exchange not associated
with Wheat. Wheat will be required to pay fees charged to those persons
performing the floor brokerage elements out of the brokerage compensation it
receives from the Trust. The Trust has been advised by Wheat that on most
transactions, the floor brokerage generally constitutes from 5% and 10% of the
total commissions paid.
BROKERAGE COMMISSIONS
The Portfolios paid brokerage commissions on brokerage transactions in
the following aggregate amounts for the periods indicated:
-42-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- $ 1,641 $ 3,436
Capital Growth Portfolio.................... $334,227 195,086 416,744
Global Portfolio............................ -- 45,449 148,625
Growth Portfolio............................ 275,570 374,267 1,354,359
Income and Growth Portfolio................. 25,668 116,782 125,986
Municipal Income Portfolio.................. -- -- 4,037
Quality Income Portfolio.................... -- -- 20,250
Short-Duration Income Portfolio -- 1,307 2,717
Strategy Portfolio.......................... 159,275 651,172 1,297,178
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... $113,126 $ 78,085 $22,411
Global Portfolio............................ -- -- --
Growth Portfolio............................ 71,806 34,881 53,120
Income and Growth Portfolio................. 4,303 22,606 47,723
Municipal Income Portfolio.................. -- -- --
Quality Income Portfolio.................... -- -- --
Short-Duration Income Portfolio............. -- -- --
Strategy Portfolio.......................... -- 1,757 1,138
</TABLE>
The brokerage commissions paid to Wheat for fiscal year 1995 amounted
to the following percentages of the aggregate brokerage commissions paid by each
Portfolio:
<TABLE>
<CAPTION>
PERCENT OF AGGREGATE
PERCENT OF AGGREGATE DOLLAR AMOUNT OF
COMMISSIONS BROKERAGE TRANSACTIONS
<S> <C> <C>
Balanced Portfolio.......................... -- --
Capital Growth Portfolio.................... 5.38% 6.49%
Global Portfolio............................ -- --
Growth Portfolio............................ 3.92% 7.07%
Income and Growth Portfolio................. 37.88% 21.21%
Municipal Income Portfolio.................. -- --
Quality Income Portfolio.................... -- --
Short-Duration Income Portfolio -- --
Strategy Portfolio.......................... 0.09% 0.19%
</TABLE>
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<PAGE>
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, Class A shares of the Portfolios are sold
at their net asset value plus an applicable sales charge on days the New York
Stock Exchange is open for business. Class B shares of the Portfolios (where
applicable) are sold at their net asset value with no sales charge on days
the New York Stock Exchange is open for business. The procedure for purchasing
Class A and Class B shares of the Portfolios is explained in the relevant
Prospectus under the section entitled "How to Buy Shares."
Dealers will be compensated on purchases of Class A shares in accordance with
the following schedule:
Amount of Purchase Dealer Commission
------------------ -----------------
Less than $2 million 1.00%
$2 million but less than $3 million .80%
$3 million but less than $50 million .50%
$50 million but less than $100 million .25%
$100 million or more .15%
The above commission will be paid by Mentor Distributors and not a
Portfolio or its shareholders.
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, Inc. in
accordance with its respective Distribution Plan adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940. Prior to June 1, 1995, each of the
Balanced, Growth, Short-Duration Income, and Strategy Portfolios made payments
under Rule 12b-1 plan to Wheat.
During fiscal year 1995, the Portfolios paid the following 12b-1 fees
to Wheat and Mentor Distributors as shown below:
WHEAT MENTOR DISTRIBUTORS TOTAL
Balanced Portfolio.............. -- -- --
Capital Growth Portfolio........ -- $288,262 $ 288,262
Global Portfolio................ -- 68,125 68,125
Growth Portfolio................ $886,494 335,790 1,222,284
Income and Growth Portfolio..... -- 322,260 322,260
Municipal Income Portfolio...... -- 207,611 207,611
Quality Income Portfolio........ -- 334,771 334,771
Short-Duration Income Portfolio 25,133 13,921 39,054
Strategy Portfolio.............. 707,663 397,832 1,105,495
-44-
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1994, Mentor Distributors received the following
contingent deferred sales charges:
MENTOR DISTRIBUTORS
Balanced Portfolio....................... --
Capital Growth Portfolio................. $ 9,588
Global Portfolio......................... 11,406
Growth Portfolio......................... 100,433
Income and Growth Portfolio.............. 12,813
Municipal Income Portfolio............... 404
Quality Income Portfolio................. 3,994
Short-Duration Income Portfolio 4,215
Strategy Portfolio....................... 137,594
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1995, Wheat and Mentor Distributors received the
following contingent deferred sales charges:
WHEAT MENTOR DISTRIBUTORS
Balanced Portfolio.................. -- --
Capital Growth Portfolio............ -- $ 7,52l
Global Portfolio.................... -- 4,920
Growth Portfolio.................... $112,189 105,097
Income and Growth Portfolio......... -- 10,421
Municipal Income Portfolio.......... -- 2,083
Quality Income Portfolio............ -- 4,460
Short-Duration Income Portfolio -- 320
Strategy Portfolio.................. 412,928 274,069
UNDERWRITING COMMISSIONS
The following table shows the approximate amount of underwriting
commissions retained by the principal underwriter for each Portfolio for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Balanced Portfolio.......................... -- -- --
Capital Growth Portfolio.................... 79,450 17,055 1,314
Global Portfolio............................ -- 6,354 1,829
Growth Portfolio............................ -- -- --
Income and Growth Portfolio................. 35,307 32,761 2,708
Municipal Income Portfolio.................. 29,185 12,958 247
Quality Income Portfolio.................... 39,798 7,951 559
Short-Duration Income Portfolio -- -- --
Strategy Portfolio.......................... -- -- --
</TABLE>
-45-
<PAGE>
DETERMINING NET ASSET VALUE
A Portfolio determines its net asset value per share once each day the
New York Exchange (the "Exchange") is open as of the close of regular trading on
the Exchange. Currently, the Exchange is closed Saturdays, Sundays and the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
the Fourth of July, Labor Day, Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued
at prices which, in the opinion of a Portfolio's Adviser most nearly represent
the market values of such securities. Currently, such prices are determined
using the last reported sale price or, if no sales are reported (as in the case
of some securities traded over-the-counter), the last reported bid price, except
that certain U.S. Government securities are stated at the mean between the last
reported bid and asked prices. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which approximates
market value. All other securities and assets are valued at their fair value
following procedures approved by the Trustees. Liabilities are deducted from the
total, and the resulting amount is divided by the number of shares of the class
outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's Adviser determines their fair values. The fair value of such
securities is generally determined as the amount which a Portfolio could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Portfolio in connection with such disposition). In addition,
specific factors are also generally considered, such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the
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<PAGE>
Portfolio's Adviser is typically able to obtain dealer quotations for each of
the securities on at least a weekly basis. On any day when it is not practicable
for the Adviser to obtain an actual dealer quotation for a security, the Adviser
reprices the securities based on changes in the value of a U.S. Treasury
security of comparable duration. When the next dealer quotation is obtained, the
Adviser compares the dealer quote against the price obtained by it using its
U.S. Treasury-spread calculation, and makes any necessary adjustments to its
calculation methodology. The Adviser attempts to obtain dealer quotes for each
security at least weekly, and on any day when there has been an unusual
occurrence affecting the securities which, in the Adviser's view, makes pricing
the securities on the basis of U.S. Treasuries unlikely to provide a fair value
of the securities.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of a Portfolio's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value following procedures approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which a Portfolio's net asset value is not calculated. A Portfolio
calculates net asset value per share, and therefore effects sales, redemptions
and repurchases of its shares, as of the close of the Exchange once on each day
on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when a Portfolio's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the
Trustees.
REDEMPTIONS IN KIND
Although the Trust intends to redeem Class A and Class B shares in
cash, it reserves the right under certain circumstances to pay the redemption
price in whole or in part by a distribution of securities from the respective
Portfolio's investment portfolio. Redemptions
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in kind will be made in conformity with applicable SEC rules, taking such
securities at the same value employed in determining net asset value and
selecting the securities in a manner that the Trustees determine to be fair and
equitable. The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which, with respect to each Portfolio, the Trust is
obligated to redeem Class A or Class B shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the respective class's net asset
value during any 90-day period.
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. As a series of Massachusetts business trust, a
Portfolio will not under present law be subject to any excise or income taxes in
Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies; (b) derive less than 30% of its gross income
from the sale or other disposition of certain assets (including stock or
securities and certain options, futures contracts, forward contracts, and
foreign currencies) held less than three months; (c) distribute with respect to
each taxable year at least 90% of the sum of its taxable net investment income,
its net tax-exempt income, and the excess, if any, of net short-term capital
gains over net long-term capital losses for such year; and (d) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of its total assets consists of cash and cash items,
U.S. Government Securities, securities of other regulated investment companies,
and other securities limited generally with respect to any one issuer to not
more than 5% of the value of its total assets and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any issuer or of two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or businesses. In order to receive the favorable tax
treatment accorded regulated investment companies and their shareholders,
moreover, a Portfolio must in general distribute at least 90% of its interest,
dividends, net short-term capital gain, and certain other income each year.
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If a Portfolio qualifies as a regulated investment company that is
accorded special tax treatment, the Portfolio will not be subject to federal
income tax paid to its shareholders in the form of dividends (including capital
gain dividends).
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all
of its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31 (or later if the Portfolio
is permitted so to elect and so elects), plus any retained amount from the prior
year, the Portfolio will be subject to a 4% excise tax on the undistributed
amounts. A dividend paid to shareholders by a Portfolio in January of a year
generally is deemed to have been paid by the Portfolio on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. A
Portfolio intends generally to make distributions sufficient to avoid imposition
of the 4% excise tax.
EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt form
federal income tax. Distributions that the Portfolio properly designates as
exempt-interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If
the Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
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In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will
inform investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The percentage
is applied uniformly to all distributions made during the year. The percentage
of income designated as tax-exempt for any particular distribution may be
substantially different form the percentage of the Portfolio's income that was
tax-exempt during the period covered by the distribution.
HEDGING TRANSACTIONS. If a Portfolio engages in transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to the Portfolio, defer losses to the Portfolio,
cause adjustments in the holding periods of the Portfolio's securities, or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. A Portfolio will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interests
of the Portfolio.
Under the 30% of gross income test described above (see "Taxation of
the Portfolio"), the Portfolio will be restricted in selling assets held or
considered under Code rules to have been held for less than three months, and in
engaging in certain hedging transactions (including hedging transactions in
options and futures) that in some circumstances could cause certain Portfolio
assets to be treated as held for less than three months.
Certain of a Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and its
taxable income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Portfolio's remaining earnings and profits (including earnings and
profits arising from tax-exempt income), and thereafter as a return of capital
or as gain from the sale or exchange of a capital asset, as the case may be. If
a Portfolio's book income is less than its taxable income, the Portfolio could
be required to make distributions exceeding book income to qualify as a
regulated investment company that is accorded special tax treatment.
RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of capital to
the extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you or your shares.
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SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING
TRANSACTIONS. A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts, and forward contacts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a Portfolio's assets at year end consists of the
debt and equity securities of foreign corporations, the Portfolio may elect to
permit shareholders to claim a credit or deduction on their income tax returns
for their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries. In such a case, shareholders will include in gross income from
foreign sources their pro rata shares of such taxes. A shareholder's ability to
claim a foreign tax credit or deduction in respect of foreign taxes paid by the
Portfolio may be subject to certain limitations imposed by the Code, as a result
of which a shareholder may not get a full credit or deduction for the amount of
such taxes. Shareholders who do not itemize on their federal income tax returns
may claim a credit (but no deduction) for such foreign taxes.
Investment by a Portfolio in certain "passive foreign investment
companies" could subject the Portfolio to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a company;
however, this tax can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund."
SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain or loss
realized upon a taxable disposition of shares will be treated as long-term
capital gain or loss if the shares have been held for more than 12 months, and
otherwise as short-term capital gain or loss. However, if a shareholder sells
shares at a loss within six months of purchase, any loss will be disallowed for
federal income tax purposes to the extent of any exempt-interest dividends
received on such shares. In addition, any loss (not already disallowed as
provided in the preceding sentence) realized upon a taxable disposition of
shares held for six months or less will be treated as long-term, rather than
short-term, to the extent of any long-term capital gain distributions received
by the shareholder with respect to the shares. All or a portion of any loss
realized upon a taxable disposition of Portfolio shares will be disallowed if
other Portfolio shares are purchased within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
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SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply
to investments though defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a Portfolio as an investment through such plans and the precise effect
of an investment on their particular tax situation.
BACKUP WITHHOLDING. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
paid to any individual shareholder who fails to furnish the Portfolio with a
correct taxpayer identification number (TIN), who has under reported dividends
or interest income, or who fails to certify to the Portfolio that he or she is
not subject to such withholding. Shareholders who fail to furnish their current
TIN are subject to a penalty of $50 for each such failure unless the failure is
due to reasonable cause and not wilful neglect. An individual's taxpayer
identification number is his or her social security number.
If a Portfolio invests in stock of certain foreign investment
companies, the Portfolio may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
disposition of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition, would be
taxed to the Portfolio at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge to reflect
the value of the tax deferral deemed to have resulted from the ownership of the
foreign company's stock. Any amount of distribution or gain allocated to the
taxable year of the distribution or disposition would be included in a
Portfolio's investment company taxable income and, accordingly, would not be
taxable to the Portfolio to the extent distributed by the Portfolio as a
dividend to its shareholders.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to state
and federal taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state or local taxes. The foregoing
discussion relates solely to U.S. federal income tax law. Non-U.S. investors
should consult their tax advisers concerning the tax consequences of ownership
of shares of the Portfolio, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced rate of withholding
provided by treaty).
For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in respect
of taxes.
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INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Trust's independent auditors, providing audit services, tax
return review and other tax consulting services and assistance and consultation
in connection with the review of various Securities and Exchange Commission
filings.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of its foreign assets. A custodian's
responsibilities include generally safeguarding and controlling a Portfolio's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION (THROUGH THE PERIOD ENDING SEPTEMBER 30, 1995)
The table below shows the average annual total return for the one- and
five-year periods (where applicable) and for the life of the Portfolios:
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
-------------- ------ ------- ---------------
<S> <C> <C> <C>
Balanced Portfolio*.......................... -- -- --
Capital Growth Portfolio..................... 13.25% -- 5.93%
Global Portfolio............................. 5.17% -- 3.67%
Growth Portfolio*............................ -- -- 13.35%
Income and Growth Portfolio.................. 10.52% -- 9.62%
Municipal Income Portfolio................... 4.26% -- 5.86%
Quality Income Portfolio..................... 6.47% -- 3.34%
Short-Duration Income Portfolio* -- -- 0.49%
Strategy Portfolio*.......................... -- -- 6.80%
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR 5 YEARS SINCE INCEPTION
-------------- ------ ------- ---------------
<S> <C> <C> <C>
Balanced Portfolio*.......................... 13.29% -- 12.66%
Capital Growth Portfolio..................... 15.26% -- 6.60%
Global Portfolio............................. 6.74% -- 4.30%
Growth Portfolio*............................ 24.38% 22.93% 13.79%
Income and Growth Portfolio.................. 12.32% -- 10.53%
Municipal Income Portfolio................... 5.01% -- 6.36%
Quality Income Portfolio..................... 7.33% -- 3.90%
Short-Duration Income Portfolio* 5.29% -- 4.34%
Strategy Portfolio*.......................... 19.73% -- 8.85%
</TABLE>
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- ------------------
* Prior to May 30, 1995, the Balanced, Growth, Short-Duration Income,
and Strategy Portfolios only offered one class of shares. Total return
information for this period is shown under the Class B share table. THE ANNUAL
TOTAL RETURN INFORMATION SHOWN ABOVE FOR THE BALANCED, GROWTH, SHORT-DURATION
INCOME, AND STRATEGY PORTFOLIOS REFLECTS VARIOUS SALES CHARGES CURRENTLY NOT
APPLICABLE TO THE PORTFOLIOS. The Balanced, Growth, Short-Duration, and
Strategy Portfolios are the successors to Mentor Balanced Fund, Mentor Growth
Fund, Mentor Short-Duration Income Fund, and Mentor Strategy Fund, respectively,
each of which was previously a series of shares of beneficial interest of Mentor
Series Trust. For fiscal 1994, none of the Mentor funds bore a front-end sales
charge, but each of Mentor Strategy Fund, Mentor Short-Duration Income Fund,
and Mentor Balanced Fund was subject to a maximum contingent deferred sales
charge of 5%. 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 one-, five-, and ten-year periods (or for such shorter
periods as a Portfolio has been in operation) is determined by calculating the
actual dollar amount of investment return on a $1,000 investment in the
Portfolio at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total return for a
period of one year is equal to the actual return of the Portfolio during that
period. Total return calculations assume deduction of a Portfolio's maximum
contingent deferred sales charge, if applicable, and reinvestment of all
Portfolio distributions at net asset value on their respective reinvestment
dates.
At times, a Portfolio's investment adviser or sub-adviser may reduce
its compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. The per share amount of any such fee reduction or
assumption of expenses during a Portfolio's past ten fiscal years (or for the
life of a Portfolio, if shorter) is reflected in the Trust's Prospectus and the
Portfolio Prospectuses. Any such fee reduction or assumption of expenses would
increase a Portfolio's yield and total return during the period of the fee
reduction or assumption of expenses.
Total return may be presented for other periods or without giving
effect to any contingent deferred sales charge. Any quotation of total return or
yield not reflecting the contingent deferred sales charge would be reduced if
the sales charges were reflected.
ALL DATA ARE BASED ON PAST PERFORMANCE AND DO NOT PREDICT FUTURE
RESULTS.
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YIELD AND TAX-EQUIVALENT YIELD
The thirty-day yield for both classes of shares of certain of the
Portfolios for the period ending September 30, 1995, was as follows:
CLASS A CLASS B
Quality Income Portfolio 6.24% 5.74%
Municipal Income Portfolio 5.53% 5.30%
Income and Growth Portfolio 1.89% 1.25%
A Portfolio's yield is presented for a specified thirty-day period
(the "base period"). Yield is based on the amount determined by (i)
calculating the aggregate amount of dividends and interest earned by the
Portfolio during the base period less expenses accrued for that period, and
(ii) dividing that amount by the product of (A) the average daily number of
shares of the Portfolio outstanding during the base period and entitled to
receive dividends and (B) the net asset value per share on the last day of the
base period. The result is annualized on a compounding basis to determine
the yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first
expected call date) of such obligations based on their market values (or, in
the case of receivables-backed securities such as GNMA's, based on costs).
Dividends on equity securities are accrued daily at their stated dividend
rates.
To the extent that financial institutions and broker/dealers charge
fees in connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying those
fees.
The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1995, was 9.16%. The
tax-equivalent yield for the Class B shares was 8.78% for the same period.
The tax-equivalent yield for both classes of the Municipal Income
Portfolio is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Portfolio would have had to earn to equal its actual
yield, assuming a 39.6% tax rate (the maximum effective federal rate for
individuals) and assuming that income is 100% tax-exempt.
The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal bonds in
the Portfolio's investment portfolio generally remains free from federal regular
income tax but may be subject to state and local taxes. (Some portion of the
Portfolio's income may be subject to federal alternative minimum tax and state
and local taxes.) Capital gains, if any, are subject to federal, state and local
tax. As the table below indicates, a "tax-fee" investment is an attractive
choice for investors, particularly in times of narrow spreads between tax-free
and taxable yields.
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TAXABLE YIELD EQUIVALENT FOR 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
Joint Return $1-39,000 $39,000- $94,250- $143,600- Over
94,250 143,600 256,500 $256,500
Single Return $1-23,350 $23,350- $56,550- $117,950- Over
56,550 117,950 256,500 $256,500
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.025% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
8.50 10.00 11.81 12.32 13.28 14.07
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent.
The table above is for illustrative purposes only. It is not an indicator of
past or future performance of the Portfolio.
ADVISERS' OFFICERS
The following persons are officers of the investment advisers or
subadvisers of the Portfolios, as indicated.
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COMMONWEALTH INVESTMENT COUNSEL, INC.
W. HANCE WEST, JR., CFA MANAGING DIRECTOR, TOTAL RETURN PORTFOLIO
MANAGER
Mr. West has eight years of investment management experience. Mr. West serves
as co- manager for the Mentor Income Fund (formerly RAC Income Fund), a $130
million closed- end bond fund. He holds his undergraduate degree in accounting
from Virginia Polytechnic Institute and his graduate degree in business from
University of Rochester.
JOHN G. DAVENPORT, CFA MANAGING DIRECTOR, CHIEF EQUITY OFFICER AND
PORTFOLIO MANAGER
Mr. Davenport has eleven years of investment management experience. He joined
Commonwealth after heading equity research for Lowe, Brockenbrough, Tierney, &
Tattersall. He earned his undergraduate business degree from the University of
Richmond and his graduate degree in business from the University of Virginia.
Mr. Davenport is also a portfolio manager at Commonwealth Advisors, Inc.
P. BARTON PETERS, CFA SENIOR VICE PRESIDENT, DIRECTOR OF EQUITY RESEARCH
AND PORTFOLIO MANAGER
Mr. Peters has fifteen years of investment management experience and joined
Commonwealth after the sale of his company, Parata Analytics Research, to
Commonwealth. He has an undergraduate degree from the College of William and
Mary and a masters degree in finance and quantitative sciences from Virginia
Commonwealth University.
RICHARD H. SKEPPSTROM II VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Skeppstrom has five years of investment management experience. He has
earned both his undergraduate degree and masters of business administration from
the University of Virginia.
CHRISTOPHER W. RUSBULDT, CFA ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rusbuldt has three years of investment experience. He has an undergraduate
degree from the University of Virginia.
P. MICHAEL JONES, CFA MANAGING DIRECTOR, INCOME PORTFOLIO MANAGER Mr.
Jones has ten years of investment management experience. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He earned his undergraduate degree from the
College of William and Mary. Mr. Jones is also a portfolio manager at
Commonwealth Advisors, Inc.
STEVEN C. HENDERSON ASSOCIATE VICE PRESIDENT, INCOME PORTFOLIO MANAGER
Mr. Henderson has six years of investment management experience. He has an
undergraduate degree from the University of Richmond and a masters in business
administration from George Washington University.
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STEPHEN R. MCCLELLAND VICE PRESIDENT, TOTAL RETURN PORTFOLIO MANAGER
Mr. McClelland has five years of investment management experience, all of which
have been at Commonwealth. He is a Certified Public Accountant and
received his undergraduate degree in accounting from Iowa State University and
his graduate business degree from Virginia Commonwealth University.
KEITH WANTLING ASSOCIATE VICE PRESIDENT, SENIOR RESEARCH ANALYST
Mr. Wantling has four years of experience. Mr. Wantling performs analysis and
screening for credit sensitive private label mortgage-backed securities and
directs the firm's portfolio analysis effort. He holds his undergraduate degree
in accounting information systems from Virginia Polytechnic Institute.
CHARTER ASSET MANAGEMENT, INC.
THEODORE W. PRICE, CFA PRESIDENT, PORTFOLIO MANAGER
Mr. Price has thirty years of investment management experience, with over
twenty-three years' tenure at Charter. He has managed Mentor Growth Portfolio
since its inception. He earned both his undergraduate degree and masters of
business administration from the University of Virginia.
LINDA A. ZIGLAR, CFA SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Ms. Ziglar has sixteen years of investment management experience. Ms. Ziglar
joined Charter from Federated Investors, where she managed $300 million in
equity assets. She holds an undergraduate degree from Randolph-Macon Woman's
College where she graduated summa cum laude. She also holds a graduate
degree in business administration from the University of Pittsburgh.
JEFFREY S. DRUMMOND, CFA VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Drummond has seven years of investment management experience. Mr.
Drummond began his career as a portfolio analyst in the Investment Strategy
Department at Wheat First Butcher Singer, where he shared responsibility
for directing $100 million in assets following the Strategic Sectors Portfolio.
He received his undergraduate degree in finance from the University of Richmond,
where he graduated cum laude.
EDWARD RICK IV RESEARCH ANALYST
Mr. Rick has one year of investment management experience. He received his
undergraduate degree in finance from the University of Richmond, where he
graduated cum laude.
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<PAGE>
MENTOR PERPETUAL ADVISORS, L.L.C.
SCOTT MCGLASHAN FAR EAST SPECIALIST, PORTFOLIO MANAGER
Mr. McGlashan has eighteen years of investment management experience, twelve
years specializing in the Far East, and ten years' tenure in the Perpetual
organization. He has earned degrees from Yale University and Cambridge
University.
ROBERT YERBURY AMERICAN SPECIALIST, PORTFOLIO MANAGER
Mr. Yerbury has twenty-three years of investment management experience, with
over twenty years experience in North American stock markets, and has been
part of the Perpetual team for twelve years. He received his undergraduate
degree in mathematics from Cambridge University.
STEPHEN WHITTAKER UNITED KINGDOM SPECIALIST, PORTFOLIO MANAGER
Mr. Whittaker has fifteen years of investment management experience. Prior to
his employment at Perpetual, Mr. Whittaker was responsible for a wide range of
UK equity funds for the Save & Prosper Group. He earned a law degree from
Manchester University.
MARGARET RODDAN EUROPEAN SPECIALIST, PORTFOLIO MANAGER
Ms. Roddan has ten years of investment management experience. Ms.
Roddan joined the Perpetual organization from Mercury Asset Management,
where she shared responsibility for managing more than $750 million in
continental European equity holdings. She is a graduate of the Investment
Management Programme at the London Business School, studied Finance at City
University, and holds an undergraduate degree in economic history from
Bristol University.
WELLESLEY ADVISORS, INC.
DON R. HAYS PRESIDENT, PORTFOLIO MANAGER
Mr. Hays has over twenty-seven years of investment experience and is Director
of Investment Strategy for Wheat First Butcher Singer, Inc., a position he
has held since 1984. Mr. Hays began his career as an engineer with 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 ANALYST
Mr. Graves has four years of investment management experience and works closely
with Mr. Hays to develop the analytical framework used in managing the Strategy
Portfolio. He earned his undergraduate degree from the University of Richmond.
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<PAGE>
PERFORMANCE COMPARISONS
The performance of Class A and Class B shares, where applicable, of
each Portfolio depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the particular Portfolio is
invested; changes in the expenses of the Trust or Class A or Class B shares of a
particular Portfolio; and various other factors.
The performance of each Portfolio's Class A and Class B shares
fluctuates on a daily basis largely because net earnings and net asset value per
share fluctuate daily. Both net earnings and net asset value per share are
factors in the computation of yield and total return for each class of the
Portfolios.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. THE AGENCIES LISTED BELOW MEASURE PERFORMANCE BASED ON
THEIR OWN CRITERIA RATHER THAN ON THE STANDARDIZED PERFORMANCE MEASURES
DESCRIBED IN THE PRECEDING SECTION.
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified period of
time. From time to time, a Portfolio will quote its Lipper ranking in
advertising and sales literature.
MORNINGSTAR, INC. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3- year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
WEISENBERGER'S MANAGEMENT RESULTS publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
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<PAGE>
A Portfolio's shares also may be compared to the following indices:
DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public utilities,
and transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
CONSUMER PRICE INDEX is generally considered to be a measure of
inflation.
CDA MUTUAL FUND GROWTH INDEX is a weighted performance average of other
mutual funds with growth of capital objectives.
LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc.,
an independent mutual fund rating service.
SHEARSON LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasifederal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers Inc., the index calculates total returns for one month,
three month, twelve month and ten year periods and year-to-date.
SHEARSON LEHMAN GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
RUSSELL GROWTH 1000 (RUSSELL 1000 INDEX) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
SHEARSON LEHMAN AGGREGATE BOND INDEX is a total return index measuring
both the capital price changes and income provided by the underlying universe of
securities, weighted
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<PAGE>
by market value outstanding. The Aggregate Bond Index is comprised of the
Shearson Lehman Government Bond Index, Corporate Bond Index, Mortgage-Backed
Securities Index, and Yankee Bond Index. These indices include: U.S. Treasury
obligations, including bonds and notes; U.S. agency obligations, including those
of the Federal Farm Credit Bank, Federal Land Bank, and the Bank for
Cooperatives; foreign obligations; and U.S. investment-grade corporate debt and
mortgage-backed obligations. All corporate debt included in the Aggregate Bond
Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or a
minimum Fitch rating of BBB.
SALOMON BROTHERS MORTGAGE-BACKED SECURITIES INDEX-15 YEARS includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
SHEARSON LEHMAN MUNICIPAL BOND INDEX is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
21,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of both classes of their shares
compared to similar funds or portfolios using certain indices, reporting
services, and financial publications. These may include the following: Morgan
Stanley Capital International World Index, The Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) index, J.P. Morgan Global
Traded Bond Index, Salomon Brothers World Government Bond Index, and the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). A Portfolio also
may compare its performance to the performance of unmanaged stock and bond
indices, including the total returns of foreign government bond markets in
various countries. All index returns are translated into U.S. dollars. The total
return calculation for these unmanaged indices may assume the reinvestment of
dividends and any distributions, if applicable, may include withholding taxes,
and generally do not reflect deductions for administrative and management costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when comparing
a Portfolio's performance to any index, conditions such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing portfolios using reporting
services, or total return and yield, investors should take into consideration
any relevant differences in portfolios, such as permitted portfolio compositions
and methods used to value portfolio securities and compute net asset value.
Advertisements and other sales literature for a Portfolio may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
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<PAGE>
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market funds
using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its shareholders or to
potential investors. The following illustrates the types of information provided
by these publications.
BUSINESS WEEK publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all distributions.
They do not reflect deduction of any sales charges. Funds are not categorized;
they compete in a large universe of over 2,000 funds. The source for rankings is
data generated by Morningstar, Inc.
INVESTOR'S BUSINESS DAILY publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year to
3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
BARRON'S periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper mutual
fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset classes. "Large
funds" may be those with assets in excess of $25 million; "small funds" may be
those with less than $25 million in assets.
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<PAGE>
THE WALL STREET JOURNAL publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
FORTUNE magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock or
bond fund categories (for example, aggressive growth stock funds, growth stock
funds, small company stock funds, junk bond funds, Treasury bond funds etc.),
with the top-10 stock funds and the top-5 bond funds appearing in the rankings.
The rankings are based on 3-year annualized total return reflecting changes in
net asset value and reinvestment of distributions and not reflecting sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
MONEY magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for five-year
risk adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
FINANCIAL WORLD publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its category,
as well as taking into account its risk, reward to risk, and fees. An A+ rated
fund is one of the best, while a D- rated fund is one of the worst. The source
for Financial World rating is Schabacker investment management in Rockville,
Maryland.
FORBES magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based
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<PAGE>
strictly on performance at net asset value over the given cycles. Funds
performing in the top 5% receive an A+ rating; the top 15% receive an A rating;
and so on until the bottom 5% receive an F rating. Each fund exhibits two
ratings, one for performance in "up" markets and another for performance in
"down" markets.
KIPLINGER'S PERSONAL FINANCE MAGAZINE (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also
provides a risk-adjusted grade in both rising and falling markets. Funds are
graded against others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
U.S. NEWS AND WORLD REPORT periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5 and
10 years and the last six bear markets. Total return reflects changes in net
asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
THE 100 BEST MUTUAL FUNDS YOU CAN BUY authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three years
the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's judgment,
"excellent" risk-adjusted return or "superior" return with low levels of risk.
Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
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<PAGE>
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
FINANCIAL STATEMENTS
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<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 88.81%
BASIC INDUSTRIES 1.33%
Alco Standard Corporation 25,400 $ 2,152,650
Citation Corporation* 77,250 1,390,500
3,543,150
BUILDING 2.66%
Blount, Inc.-Class A 57,550 2,740,819
Clayton Homes, Inc. 183,200 4,351,000
7,091,819
CAPITAL GOODS & CONSTRUCTION 1.77%
Fastenal Company 48,440 1,768,060
Flextronics International, Ltd.* 108,600 2,796,450
Computational System* 10,000 162,500
4,727,010
CONSUMER CYCLICAL 9.29%
Apple South, Inc. 126,850 2,885,837
Chromcraft Revington, Inc.* 109,000 2,670,500
Consolidated Products Company* 89,150 1,470,975
Landry's Seafood Restaurant* 100,000 1,800,000
Legget & Platt, Inc. 59,600 1,467,650
Outback Steakhouse* 47,000 1,445,250
Quality Dining, Inc.* 163,000 2,974,750
Regal Cinemas, Inc.* 106,325 4,372,615
Rio Hotel & Casino, Inc.* 104,900 1,363,700
Sonic Corporation* 94,200 2,143,050
Wabash National Corporation 61,900 2,189,713
24,784,040
CONSUMER STAPLES 1.93%
Performance Food Group* 52,500 1,220,625
Richfood Holdings, Inc. 155,700 3,921,694
5,142,319
ENERGY 0.89%
Cairn Energy USA, Inc.* 116,850 1,489,838
Nuevo Energy Company* 38,800 873,000
2,362,838
</TABLE>
19
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 7.72%
Concord Electronic Fleet Services, Inc.* 115,200 $ 3,513,600
Credit Acceptance Company* 45,600 1,231,200
Envoy Corporation* 113,400 1,360,800
First Financial Management Corporation 24,250 2,367,406
Jayhawk Acceptance Corporation* 87,200 1,275,300
Leader Financial Corporation 90,500 3,133,563
Markel Corporation* 66,360 4,877,460
National Commerce Bancorp 114,996 2,817,402
20,576,731
HEALTH 19.97%
Advantage Health Corporation* 51,200 1,740,800
Biomet, Inc.* 168,350 2,904,037
Columbia HCA Healthcare Corporation 64,300 3,126,587
Community Health Systems* 70,600 2,850,475
Compdnet Corporation* 103,200 3,018,600
Gelman Sciences, Inc.* 99,600 2,191,200
Health Management Associates* 67,300 2,162,013
Healthdyne Technologies* 143,200 1,951,100
Healthsource, Inc.* 57,700 2,776,813
Idexx Laboratories, Inc.* 74,200 2,763,950
Manor Care, Inc. 92,900 3,170,213
Omnicare, Inc. 118,300 4,613,700
Phycor, Inc.* 148,650 5,091,262
Physician Sales & Services, Inc.* 70,600 3,388,800
Ren Corporation* 116,400 2,313,450
Renal Treatment Centers* 80,600 2,982,200
Respironics, Inc.* 74,500 1,434,125
Vencor, Inc.* 149,325 4,778,400
53,257,725
RETAIL 8.85%
Barnes and Noble, Inc.* 66,800 2,555,100
Big B, Inc. 181,800 2,704,275
Casey's General Stores, Inc. 172,950 3,912,994
Corporate Express, Inc.* 80,950 1,973,156
Dollar General Corporation 41,041 1,205,579
Heilig-Meyers Company 14,800 344,100
</TABLE>
20
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL (CONTINUED)
Moovies, Inc.* 89,400 $ 1,754,475
Movie Gallery, Inc.* 76,700 3,278,925
Office Depot, Inc.* 89,600 2,699,200
Revco D. S., Inc.* 86,000 2,021,000
S & K Famous Brands, Inc.* 131,000 1,146,250
23,595,054
TECHNOLOGY 26.02%
3Com Corporation* 55,300 2,516,150
ACC Corporation 98,300 1,621,950
Acxiom Corporation* 62,800 1,774,100
Applied Materials, Inc. 19,050 1,947,862
Atmel Corporation* 48,200 1,626,750
Benchmark Electronics, Inc.* 42,800 1,203,750
Cellstar Corporation* 41,400 1,293,750
Cincinnati Microwave, Inc.* 143,700 2,173,463
Cisco Systems, Inc.* 38,800 2,677,200
Computer Management Sciences* 12,500 212,500
Cybex Corporation* 68,900 1,722,500
Danka Business Systems 107,000 3,852,000
Dell Computers Corporation* 18,800 1,598,000
Diamond Multimedia Systems* 84,050 2,710,612
DSC Communications Corporation* 52,300 3,098,775
Emulex Corporation* 80,500 1,066,625
Frontier Corporation 189,300 5,040,113
Gateway 2000, Inc.* 46,300 1,417,937
Informix Corporation* 62,900 2,044,250
Kent Electronics Corporation* 54,250 2,380,218
LAM Research Corporation* 14,700 878,325
Linear Technology Corporation 88,000 3,652,000
LSI Logic Corporation* 47,900 2,766,225
Mysoftware Company* 104,200 1,328,550
Ontrak Systems* 55,700 1,538,713
Palmer Wireless, Inc.* 86,900 1,933,525
Quantum Corporation* 16,000 350,000
SDL, Inc.* 68,900 1,946,425
Silicon Valley Group* 29,700 1,147,163
Symmetricom, Inc.* 142,250 3,200,625
Triquint Semiconductor, Inc.* 64,850 1,483,444
Uniphase Corporation* 46,650 1,644,413
US Long Distance Corporation* 105,700 1,592,106
Worldcom, Inc.* 123,362 3,963,004
69,403,023
</TABLE>
21
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION 2.54%
American Freightways Corporation* 117,350 $ 1,760,250
Atlantic Southeast Airlines, Inc. 92,600 2,164,525
Swift Transportation Company, Inc.* 100,900 1,740,525
USA Truck, Inc.* 84,700 1,101,100
6,766,400
MISCELLANEOUS 5.84%
ABR Information Services* 108,150 2,730,787
Accustaff, Inc.* 81,750 3,004,312
Career Horizons, Inc.* 111,300 3,005,100
Olsten Corporation 50,300 1,955,413
Romac International* 79,750 1,355,750
Scientific Games Holding* 34,900 1,304,388
Xilinx, Inc.* 46,600 2,242,625
15,598,375
TOTAL COMMON STOCKS (COST $160,128,016) 236,848,484
SHORT-TERM INVESTMENT 9.63%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $26,600,000
U.S. Treasury Bill, due 12/28/95,
(cost $25,689,361) $25,689,361 25,689,361
TOTAL INVESTMENTS (COST $185,817,377) 98.44% 262,537,845
OTHER ASSETS LESS LIABILITIES 1.56% 4,156,579
NET ASSETS 100.00% $266,694,424
</TABLE>
* Securities not currently producing income.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 99.93%
BASIC MATERIALS 4.43%
Morton International, Inc. 80,800 $ 2,504,800
Nalco Chemical Company 40,000 1,365,000
3,869,800
CAPITAL GOODS & CONSTRUCTION 11.87%
AMP, Inc. 30,000 1,155,000
Linear Technology Company 66,600 2,763,900
Sherwin Williams Company 68,700 2,404,500
W.W. Grainger, Inc. 34,700 2,095,012
York International Corporation 46,000 1,937,750
10,356,162
CONSUMER CYCLICAL 23.76%
Albertson's, Inc. 58,000 1,979,250
Gannett Company 21,000 1,147,125
May Department Stores Company 64,500 2,821,875
McDonald's Corporation 24,000 918,000
Newell Company 119,900 2,967,525
R.R. Donnelley & Sons 73,600 2,870,400
Sonoco Products Company 101,350 2,812,462
Sunbeam-Oster 17,500 260,313
Sysco Corporation 100,400 2,735,900
Unifi, Inc. 90,200 2,209,900
20,722,750
CONSUMER STAPLES 10.94%
Avon Products 21,900 1,571,325
Johnson & Johnson 39,900 2,957,587
Merck & Company, Inc. 38,000 2,128,000
Pfizer, Inc. 54,000 2,882,250
9,539,162
ENERGY 5.56%
Enron Corporation 41,900 1,403,650
Mobile Corporation 17,000 1,693,625
Schlumberger, Ltd. 26,800 1,748,700
4,845,975
</TABLE>
23
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 12.10%
American Express Company 67,000 $ 2,973,125
Banc One Corporation 69,000 2,518,500
Federal National Mortgage Association 21,800 2,256,300
United Asset Management Corporation 69,900 2,804,738
10,552,663
HEALTH 0.78%
Columbia HCA Healthcare Corporation 14,000 680,750
TECHNOLOGY 15.99%
General Electric Company 51,700 3,295,875
Hewlett Packard Company 21,000 1,750,875
Intel Corporation 20,000 1,202,500
Loral Corporation 43,700 2,490,900
Motorola, Inc. 37,300 2,848,788
Premier Industrial Corporation 94,300 2,357,500
13,946,438
TRANSPORTATION & SERVICES 2.68%
Werner Enterprises, Inc. 112,800 2,340,600
MISCELLANEOUS 11.82%
Corning, Inc. 64,700 1,852,037
Interpublic Group Company 64,000 2,544,000
General Motors Corporation-Class E 24,000 1,092,000
Olsten Corporation 39,500 1,535,563
Tyco International, Ltd. 52,200 3,288,600
10,312,200
TOTAL COMMON STOCKS (COST $76,614,326) 87,166,500
SHORT-TERM INVESTMENT 0.17%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $100,000
U.S. Treasury Note, 11.75%, due 11/15/14,
(cost $145,965) $ 145,965 145,965
TOTAL INVESTMENTS (COST $76,760,291) 100.10% 87,312,465
OTHER ASSETS LESS LIABILITIES (0.10%) (82,504)
NET ASSETS 100.00% $ 87,229,961
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 79.94%
BASIC MATERIALS 5.66%
Alco Standard Corporation 26,500 $ 2,245,875
American Buildings Company* 43,000 1,015,875
Federal Paper Board Company, Inc. 62,800 2,409,950
J&L Specialty Steel, Inc. 48,000 1,008,000
NL Industries, Inc.* 132,400 2,184,600
The Scotts Company - Class A* 96,200 2,128,425
Union Carbide Corp Holding 58,000 2,305,500
13,298,225
COMMERCIAL SERVICES & PRODUCTS 1.21%
Paychex, Inc. 61,537 2,846,086
CAPITAL GOODS & CONSTRUCTION 4.10%
AGCO Corporation 48,600 2,211,300
Bel Fuse, Inc.* 82,600 1,011,850
Insituform Technologies* 147,400 2,063,600
Microchip Technology, Inc.* 57,800 2,189,175
USA Waste Services, Inc.* 111,200 2,168,400
9,644,325
CONSUMER CYCLICAL 2.88%
Clear Channel Communications* 36,000 2,727,000
First Team Sports* 82,000 1,312,000
Primark Corporation* 109,700 2,728,787
6,767,787
CONSUMER STAPLES 4.51%
Amgen, Inc.* 45,000 2,244,375
Dura Pharmaceuticals* 39,700 1,181,075
Richfood Holdings, Inc. - Class A 95,000 2,392,812
Terra Industries, Inc. 176,700 2,517,975
Watson Pharmaceuticals* 55,400 2,271,400
10,607,637
ENERGY 0.98%
Panhandle Eastern Corporation 84,900 2,313,525
</TABLE>
25
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL 23.05%
Alex. Brown, Inc. 47,300 $ 2,761,137
Bank of New York Company, Inc. 50,800 2,362,200
City National Corporation 162,200 2,149,150
Concord Electronic Fleet Services, Inc.* 80,400 2,452,200
Credit Acceptance Corporation* 93,700 2,529,900
First USA, Inc. 43,400 2,354,450
Green Tree Financial Corporation 44,300 2,702,300
Hibernia Corporation - Class A 220,300 2,230,537
Lehman Brothers Holdings, Inc. 94,000 2,173,750
MBNA Corporation 64,950 2,703,543
Mercury Finance Company 110,000 2,681,250
Meridian Bancorp, Inc. 57,900 2,214,675
Morgan Stanley, Inc. 25,800 2,480,025
North Fork Bancorp, Inc. 111,000 2,303,250
Republic New York Corporation 38,100 2,228,850
Standard Federal Bancorp, Inc. 60,300 2,351,700
Student Loan Marketing Association 40,600 2,192,400
Synovus Financial Corporation 87,200 2,278,100
T. Rowe Price Associates, Inc. 60,500 3,100,625
The Money Store, Inc. 14,400 682,200
Travelers, Inc. 48,500 2,576,563
UJB Financial Corporation 66,900 2,140,799
Waterhouse Investor Service 100,000 2,550,000
54,199,604
HEALTH 6.36%
Loewen Group, Inc. 69,400 2,862,750
ORNDA Healthcorp* 110,000 2,337,500
Research Industries Corporation* 44,100 1,284,412
Respironics, Inc.* 127,300 2,450,525
Service Corporation International 65,600 2,566,600
Target Therapeutics, Inc.* 49,300 3,451,000
14,952,787
INDUSTRIAL PRODUCTS 4.73%
JLG Industries, Inc. 69,000 3,105,000
Owens-Corning Fiberglass Company* 49,700 2,217,863
Thermo Electron Corporation* 59,250 2,747,719
Toll Brothers, Inc.* 161,600 3,050,200
11,120,782
</TABLE>
26
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL 2.21%
Compucom Systems, Inc.* 177,000 $ 1,150,500
Discount Auto Parts* 38,000 1,149,500
Staples, Inc.* 102,375 2,892,094
5,192,094
TECHNOLOGY 19.20%
Analog Devices, Inc.* 60,800 2,105,200
Andrew Corporation* 43,500 2,658,938
Aspen Technology, Inc.* 41,600 1,248,000
BMC Software, Inc.* 49,000 2,254,000
Cognex Corporation* 57,500 2,774,375
Continuum Company, Inc.* 61,100 2,344,713
Cordis Corporation* 27,500 2,330,625
Dell Computer Corporation* 39,300 3,340,500
Indigo N.V.* 18,200 420,875
Intervoice, Inc.* 99,500 2,276,063
KLA Instruments Corporation* 29,700 2,383,425
Maxim Integrated Products, Inc.* 43,200 3,196,800
Mylex Corporation* 137,100 2,330,700
Oracle Systems Corporation* 52,300 2,007,013
Parametric Technologies Corporation* 50,000 3,075,000
Pioneer Standard Electronics, Inc. 118,800 2,079,000
TCA Cable TV, Inc. 76,400 2,196,500
Vicor Corporation* 109,000 2,636,438
Wind River Systems* 63,000 1,480,500
Zebra Technologies* 37,900 2,018,175
45,156,840
TRANSPORTATION 1.16%
Wisconsin Central Transportation Corporation* 41,000 2,736,750
UTILITIES 2.37%
Equifax, Inc. 61,100 2,558,563
US Robotics Corporation* 35,200 3,000,800
5,559,363
</TABLE>
27
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS 1.52%
Corrections Corporation of America* 27,000 $ 1,299,375
DSC Communications Corporation* 80,300 2,268,475
3,567,850
TOTAL COMMON STOCKS (COST $150,219,271) 187,963,655
SHORT-TERM INVESTMENT 22.87%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/2/95,
collateralized by $36,400,000
U.S. Treasury Note, 11.75%, 11/15/14
(cost $53,775,569) $53,775,569 53,775,569
TOTAL INVESTMENTS (COST $203,994,840) 102.81% 241,739,224
OTHER ASSETS LESS LIABILITIES (2.81%) (6,598,058)
NET ASSETS 100.00% $235,141,166
</TABLE>
* Securities not currently producing income.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 57.74%
BASIC INDUSTRIES 10.72%
Aluminum Company of America 51,000 $2,696,625
Goodrich BF 8,700 573,112
IMC Global, Inc. 9,000 570,375
International Paper Company 46,400 1,948,800
International Specialty Products, Inc. 32,600 297,475
Precision Castparts 11,700 427,050
Rayonier, Inc. 5,100 199,537
Rhone Poulenc SA~ 16,055 325,114
Wyman-Gordon Company* 7,200 99,450
7,137,538
CAPITAL GOODS & CONSTRUCTION 4.79%
BE Aerospace, Inc.* 42,700 357,612
Boeing Company 7,000 477,750
Centex Construction Products, Inc.* 36,200 475,125
Curtiss-Wright Corporation 9,700 429,225
Giddings & Lewis, Inc. 6,000 104,625
Sequa Corporation* 18,100 484,175
Standard Pacific Corporation 77,200 540,400
York International Corporation 7,500 315,938
3,184,850
CONSUMER STAPLES 3.98%
Chiquita Brands International 13,600 232,900
Dimon Incorporated 17,000 255,000
Hills Stores Company* 27,549 313,370
Interstate Bakeries Corporation 20,200 426,725
Kmart Corporation 25,000 362,500
Universal Corporation 47,000 1,057,500
2,647,995
ENERGY 10.38%
Amerada Hess Corporation 18,000 875,250
Anderson Exploration* 18,216 229,977
Ashland Oil, Inc. 8,300 277,013
Burlington Resources, Inc. 19,200 744,000
Cooper Cameron Corporation* 3,348 86,630
Enserch Corporation 10,600 174,900
Gerrity Oil & Gas Corporation* 87,000 271,875
Gulf Canada Resources, Ltd.* 69,300 294,525
Lone Star Technologies, Inc.* 25,100 238,450
Noble Drilling Corporation* 59,500 461,125
Oryx Energy* 26,500 344,500
Petroleum Heat & Power Company 57,600 489,600
Seagull Energy Corporation* 26,000 526,500
Sonat Offshore Drilling, Inc. 11,500 375,188
</TABLE>
29
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY (CONTINUED)
Teekay Shipping Corp.* 3,400 $ 81,600
U.S.X. Marathon Group, Inc. 28,300 558,925
Unocal Corporation 21,400 609,900
YPF Associadad 15,000 270,000
6,909,958
FINANCIAL 11.28%
ACE, Ltd. 32,500 1,117,187
California Federal Bank* 15,556 245,007
California Federal Bank Certificates* 1,555 8,941
Chubb Corporation 7,300 700,800
CIGNA Corporation 20,900 2,176,213
Danielson Holding Company* 56,000 420,000
Horace Mann Educator 6,800 187,000
Koger Equity, Inc. REIT* 37,900 374,263
Lehman Brothers Holding, Inc. 24,840 574,425
Loews Corporation 2,400 349,200
Long Island Bancorp 4,700 115,150
Newhall Land & Farming Company 26,100 349,088
Old Republic International Corporation 16,000 462,000
Patroit American Hospital - REIT* 2,400 61,500
Paul Revere Corporation 10,000 188,750
Tucker Properties Company 11,000 122,375
Zurich Reinsurance Company* 1,900 56,525
7,508,424
TECHNOLOGY 3.20%
Alcatel Alsthom 14,900 253,300
B.C.E., Inc. 25,400 847,725
Cooper Industries, Inc. 3,812 134,373
Portugal Telecom ADS* 1,300 25,025
Raychem Corporation 9,500 427,500
Worldcom, Inc.* 13,781 442,714
2,130,637
TRANSPORTATION & SERVICES 3.40%
AMR Corporation* 6,000 432,750
Bergesen Dyas 5,000 111,095
Canadian Pacific, Ltd. 23,500 376,000
Flightsafety International 7,300 334,887
Midwest Express Holding Company* 700 15,750
Nordic American Tanke - Warrants* 20,000 97,500
OMI Corporation* 25,900 181,300
Overseas Shipholding Group 25,000 496,875
Trans World Airlines* 34,200 220,162
2,266,319
</TABLE>
30
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
UTILITIES 2.08%
Illinova Corporation 10,000 $ 271,250
Niagara Mohawk Power 30,700 402,937
Public Service Company of New Mexico* 27,200 445,400
Unicom Corporation 8,600 260,150
1,379,737
MISCELLANEOUS 4.50%
Brascan, Ltd.-Class A 19,200 314,400
CBI Industries 16,600 394,250
Comsat Corporation 17,500 393,750
Corning, Inc. 17,300 495,213
Eastman Kodak Company 10,500 622,125
Essex Property Trust, Inc. 19,900 350,738
W.M.X. Technologies, Inc. 14,800 421,800
2,992,276
FOREIGN SECURITIES 3.41%
CAE, Inc. 75,000 517,049
Onex Corporation 23,400 259,419
St. Lawrence Cement, Inc. 45,000 276,691
Pichney SA 7,000 447,511
Technip SA 7,500 493,176
Telecom Italia SPA 61,000 100,659
Pohjola Insurance Company* 10,000 177,308
2,271,813
TOTAL COMMON STOCKS (COST $33,483,327) 38,429,547
PREFERRED STOCKS 2.39%
BASIC MATERIALS 0.96%
Boise Cascade Corporation 9,000 302,625
Reynolds Metals Company 6,500 336,375
639,000
FINANCIAL 1.43%
American R E Partners 3,143 18,858
Glendale Federal Bank 21,700 933,100
951,958
TOTAL PREFERRED STOCKS (COST $1,044,653) 1,590,958
</TABLE>
31
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
CORPORATE BONDS 7.00%
BASIC MATERIALS 0.36%
Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 $ 241,665
CAPITAL GOODS & CONSTRUCTION 0.15%
Lockheed Corporation, 6.75%, 3/15/03 100,000 100,942
CONSUMER CYCLICAL 0.69%
Sears Roebuck Company, 9.25%, 4/15/98 175,000 186,926
Time Warner Entertainment, Inc., 8.88%, 10/01/12 250,000 271,828
458,754
CONSUMER STAPLES 0.35%
Gillette Company, 5.75%, 10/15/05 250,000 235,022
FINANCIAL 3.27%
American General Finance Corporation,
5.88%, 7/01/00 250,000 243,982
Associates Corporation of North America,
5.25%, 3/30/00 250,000 238,380
Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 261,530
Comerica Bank, 7.13%, 12/01/13 250,000 237,850
Dean Witter Discover, 6.25%, 3/15/00 100,000 99,203
First National Bank, 8.00%, 9/15/04 250,000 267,682
Ford Motor Credit, 8.88%, 6/15/99 100,000 107,942
Great Western Financial, 6.38%, 7/01/00 250,000 247,668
Home Savings of Americas, 6.00%, 11/01/00 250,000 242,723
Toronto Dominion Bank, 6.13%, 11/01/08 250,000 231,607
2,178,567
TRANSPORTATION 0.39%
AMR Corporation, 6.13%, 11/01/24 250,000 255,450
UTILITIES 1.79%
Duke Power Company, 7.00%, 6/01/00 100,000 102,506
Florida Power & Light Company, 5.38%, 4/01/00 250,000 239,575
Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 238,265
Philadelphia Electric Company, 7.50%, 1/15/99 100,000 103,116
Southwestern Public Service Company, 6.88%, 12/01/99 250,000 254,282
Union Electric Company, 6.75%, 10/15/99 250,000 253,580
1,191,324
TOTAL CORPORATE BONDS (COST $4,774,490) 4,661,724
</TABLE>
32
<PAGE>
MENTOR INCOME & GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
GOVERNMENT BONDS 23.92%
Government National Mortgage Association, 6.50%,
9/15/23-4/15/24 $ 1,429,808 $ 1,379,750
Government National Mortgage Association, 7.00%, 1/15/24 2,276,232 2,250,602
U.S. Treasury Bond, 5.13%, 3/31/98 2,500,000 2,457,125
U.S. Treasury Bond, 7.50%, 11/15/16 3,500,000 3,841,950
U.S. Treasury Note, 6.88%, 2/28/97 2,000,000 2,028,300
U.S. Treasury Note, 6.50%, 4/30/97 2,000,000 2,020,260
U.S. Treasury Note, 4.75%, 9/30/98 1,000,000 968,520
U.S. Treasury Note, 5.75%, 8/15/03 1,000,000 973,980
Total Government Bonds (cost $15,209,920) 15,920,487
SHORT-TERM INVESTMENT 9.05%
REPURCHASE AGREEMENT
Swiss Bank
Dated 9/29/95, 6.43%, Due 10/02/95,
collateralized by $5,890,000,
U.S. Treasury Note, 7.13%, 2/29/00
(cost $6,024,000) 6,024,000 6,024,000
TOTAL INVESTMENTS (COST $60,536,390) 100.10% 66,626,716
OTHER ASSETS LESS LIABILITIES (0.10%) (60,905)
NET ASSETS 100.00% $ 66,565,811
</TABLE>
* Securities not currently producing income.
American Depository Receipts.
REIT -- Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS 90.10%
AUSTRALIA 0.17%
Broken Hill Proprietary Company* 2,434 $ 33,572
CANADA 1.36%
Sherritt, Inc. 20,000 264,580
DENMARK 1.75%
Danisco A/S 4,100 179,001
Sophus Berendsen 1,500 162,367
341,368
FINLAND 1.93%
Nokia AB-A 2,400 168,419
Cultor OY 5,500 208,419
376,838
FRANCE 3.52%
AXA 3,060 161,283
Carrefour Supermarch 320 187,691
LVMH Moet Hennessy 850 160,262
Roussel-UCLAF 1,150 178,314
687,550
GERMANY 2.89%
Allianz AD Holding 96 173,324
Veba AG 5,900 233,894
Wella AG- Preferred Stock 220 157,033
564,251
GREAT BRITAIN 11.92%
Argyll Group, PLC 20,000 106,277
B.A.T. Industries, PLC 15,000 125,492
British Aerospace PLC 11,000 127,342
British Gas PLC 30,500 128,066
British Telecom 20,000 125,255
Glaxo Wellcome 10,000 121,301
Grand Metro 25,000 175,942
H.W. Smith Group PLC 15,000 87,536
Inchcape PLC 20,000 101,849
</TABLE>
34
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Land Securities 10,000 $ 97,262
Prudential Corporation PLC 20,000 119,561
Rank Organisation PLC 15,000 100,821
Scott & Newcastle 15,000 143,521
Smithkline Beecham 15,000 151,824
Standard Chartered 20,000 142,651
Sun Alliance Group PLC 20,000 115,291
Tate & Lyle PLC 15,000 106,514
Transport Development Group 45,000 150,163
Unigate 15,000 100,583
2,327,251
HONG KONG 4.99%
Bank of East Asia 15,000 48,597
Cheung Kong Holdings 33,000 179,682
Citic Pacific Limited 20,000 60,398
Dah Sing Financial 12,000 27,005
Henderson Investment 53,000 44,212
Hong Kong Electric 25,000 83,581
Hong Kong Telecom, Ltd.~ 200 363
Hong Kong & China Gas 20,000 32,204
HSBC Holdings PLC 12,000 166,839
Hopewell Holdings 27,000 18,333
Hutchison Whampoa, Ltd. 14,000 75,867
Hysan Developement 28,000 67,175
Liu Chong Hing Investment 30,000 31,428
National Mutual Asia 25,000 19,238
Sun Hung Kai Property 3,000 24,347
Swire Pacific Limited 12,000 95,059
974,328
INDONESIA 0.06%
Sorini (Sorbitol) 2,000 11,344
ITALY 0.61%
Spirti SPA 19,000 119,529
JAPAN 13.02%
Acom Company, Ltd. 5,000 162,312
Chudenko Corporation 3,000 117,588
</TABLE>
35
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Daiichi Pharmaceutical 7,000 $ 96,382
Dainippon Ink & Chemical 1,000 46,935
Hitachi, Ltd. 15,000 162,814
Kao Corporation 6,000 74,171
Mitsubishi Heavy Industries 7,000 53,467
Mitsubishi Motors Company 10,000 83,719
Mitsui Bank & Trust 1,000 9,296
NEC Corporation 8,000 110,955
Nichiei Company 1,000 63,920
Nippon Meat Packery 12,000 160,402
Nippon Yusen Kabushi 10,000 58,995
NKK Corporation 30,000 79,900
PS Corporation 7,000 137,889
Raito Kogyo 4,000 82,814
Rinnai 5,000 109,548
Shizouka Bank 13,000 177,688
Sumitomo Electric 10,000 121,608
Sumitomo Realty & Development 9,000 62,864
Taisho Pharmaceutical 7,000 130,854
Tokyo Electric Power 4,040 110,034
Tokyo Electron, Ltd. 2,000 86,633
Toshiba Corporation 6,000 43,719
Yokogawa Bridge Corporation 6,000 87,437
Yokohama Reito 10,000 109,548
2,541,492
MALAYSIA 0.37%
Land & General Holdings 3,000 7,876
Petronas Gas Berhad 10,000 34,905
Sriwani Holdings 20,000 29,117
71,898
NETHERLANDS 3.60%
Fortis Amev NV 3,000 174,959
Philips Electronics 3,600 175,522
Polygram NV 2,900 188,524
Wolter Kluwer 1,780 163,446
702,451
</TABLE>
36
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
PHILIPPINES 0.53%
Filinvest Land 100,000 $ 32,239
Pilipino Telephone 74,300 70,579
102,818
SINGAPORE 1.13%
Development Bank Singapore 5,000 56,902
DBS- Land 40,000 118,581
Straits Trading Company 20,000 45,803
221,286
SPAIN 1.93%
Banco Popular Espano 1,200 186,836
Gas Natural 1,500 189,194
376,030
SWEDEN 3.86%
Ericsson LM 15,000 193,441
MO OCH Domsjoe AB-B 2,900 182,009
Securitas AB B-F 5,400 193,554
Volvo AB 7,500 183,535
752,539
SWITZERLAND 0.98%
Roche Holding AG 27 190,671
THAILAND 1.86%
PTT Exploration 5,000 48,615
Shinawatra Computer 1,000 23,192
Siam City Bank, Ltd. 50,000 67,743
Thai Military Bank, Ltd. 37,000 147,440
Tipco Asphalt Company 15,000 76,509
363,499
UNITED STATES 32.50%
Aetna Life & Casualty 4,000 293,500
Arethusa Off-Shore, Ltd. 12,000 247,500
Capital One Financial 10,000 293,750
</TABLE>
37
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
CITC Seoul Exel IDR 2 $ 22,060
Columbia Gas Systems* 8,000 309,000
Columbia HCA Healthcare 4,000 194,500
Compaq Computer Corporation* 4,000 193,500
CWM Mortgage 14,000 189,000
Deere & Company 3,000 244,125
Dovatron International* 6,000 207,750
Equifax 6,000 251,250
Gilead Sciences, Inc.* 8,000 176,000
Gujarat Ambuja 5,000 42,500
HBO & Company 4,000 250,000
Jardine Matheson Holding 18,000 121,500
Jardine Strategic Holding 18,125 52,925
Jardine Strategic-Warrants* 3,125 1,125
Kohl's Corporation* 5,000 259,375
Korea-Europe Fund 18 84,690
LG Electronics 6,400 76,800
Lockheed Martin Corporation 4,000 268,500
Motorola, Inc. 4,000 305,500
Office Depot, Inc. 10,000 301,250
PT Indonesia Satellite A 1,800 63,225
Readers Digest 6,000 282,750
Reynolds & Reynolds Company 7,000 240,625
Schlumberger, Ltd. 3,200 208,800
SCI Systems* 6,000 207,000
Scott Paper Company 4,000 194,000
Taipei Fund 1,000 76,380
Teekay Shipping Corporation 12,000 288,000
The Carbide/Graphite Group 10,000 141,250
Worldcom, Inc.* 8,000 257,000
6,345,130
VENEZUELA 1.12%
Venezolana De Prerredicidos (4/13/94, $260,293)* (a) (b) 35,600 218,050
TOTAL COMMON STOCKS (COST $16,612,885) 17,586,475
CORPORATE BOND 0.81%
MALAYSIA
Telekom Malaysia Berhad, 4.00%, 10/3/04
(9/22/94, cost $170,000) (a) (b) $ 170,000 158,738
</TABLE>
38
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 6.67%
Repurchase Agreement
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/2/95,
collateralized by $1,310,000,
U.S. Treasury Note, 6.75%, 2/28/97
(cost $1,302,557) $1,302,557 $ 1,302,557
TOTAL INVESTMENTS (COST $18,085,442) 97.58% 19,047,770
OTHER ASSETS LESS LIABILITIES 2.42% 473,363
NET ASSETS 100.00% $19,521,133
</TABLE>
* Securities not currently producing income.
~ American Depository Receipts.
(a) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(b) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 92.84%
ASSET-BACKED SECURITIES 5.20%
Advanta Mortgage Loan Trust, Series 1993-3 A5, 5.55%,
1/25/25 $ 1,892,821 $ 1,775,561
Old Stone Credit Corporation Home Equity Trust,
Series 1993-1 B1, 6.00%, 3/15/08 1,970,813 1,920,813
World Omni, Series 1993-B, 5.05%, 8/15/99 826,786 810,788
TOTAL ASSET-BACKED SECURITIES 4,507,162
U.S. GOVERNMENT SECURITIES AND AGENCIES 42.10%
FEDERAL HOME LOAN MORTGAGE CORPORATION - REMIC 8.77%
5.50%, 9/15/21 5,000,000 4,410,700
6.00%, 7/15/20 3,500,000 3,182,340
7,593,040
FEDERAL NATIONAL MORTGAGE ASSOCIATION - REMIC 7.01%
PO, Class G92-56B, 7/25/20 1,557,953 1,369,538
PO, Class G93-37B, 11/25/22 5,000,000 4,292,700
PO, 1993 Class 202T, 11/25/23 1,073,529 411,296
6,073,534
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 19.94%
6.00%, 12/15/08 - 6/15/09 7,464,908 7,257,234
6.00%, 10/01/25, TBA (a) 10,000,000 10,012,500
17,269,734
TREASURY SECURITIES 6.38%
U.S. Treasury Bond, 7.50%, 11/15/24* 1,750,000 1,946,420
U.S. Treasury Note, 6.50%, 8/15/05* 3,500,000 3,584,455
5,530,875
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES 36,467,183
NON-CONVERTIBLE CORPORATE BONDS 21.31%
ENERGY 1.81%
Occidental Petroleum, 8.75%, 2/14/03 1,500,000 1,568,385
</TABLE>
40
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
NON-CONVERTIBLE CORPORATE BONDS (CONTINUED)
FINANCE 17.99%
Developers Diversified Realty, 7.63%, 5/15/00 $ 2,000,000 $ 2,000,300
Lehman Brothers, Inc., 9.88%, 10/15/00 4,000,000 4,480,560
Nationsbank Corporation, 9.38%, 9/15/09 3,500,000 4,167,380
Salomon, Inc., 6.00%, 1/12/98 3,000,000 2,925,360
Travelers, Inc., 6.88%, 6/01/25 2,000,000 2,007,480
15,581,080
UTILITIES 1.51%
Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,308,650
TOTAL NON-CONVERTIBLE CORPORATE BONDS 18,458,115
COLLATERALIZED MORTGAGE OBLIGATIONS 16.78%
Chase Mortgage Finance Corporation,
Series 1993-L2 M, 7.00%, 10/25/24 3,089,857 2,960,948
First Boston Mortgage Securities Corporation,
Series 1993-5 M2, 7.30%, 7/25/23 2,448,703 2,401,345
General Electric Capital Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%, 2/25/09 2,308,576 2,138,411
Securitized Asset Sales, Inc., Series 1994-5 AM, 7.00%,
7/25/24 7,401,233 7,039,165
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 14,539,869
RESIDUAL INTERESTS 7.45%
General Mortgage Securities, Inc., 1995-1, 6/25/20 20,644 190,242
General Mortgage Securities II, Inc., 1995-2, 6/27/25 41,643 569,731
National Mortgage Funding I, Inc., 1995-1, 4/28/25 38,943 584,275
National Mortgage Funding I, Inc., 1995-2, 5/22/25 42,531 519,362
National Mortgage Funding I, Inc., 1995-3, 5/22/25 40,435 943,943
National Mortgage Funding I, Inc., 1995-4, 3/20/21 18,900 290,898
National Mortgage Funding I, Inc., 1995-5, 3/25/22 17,606 915,938
National Mortgage Funding I, Inc., 1995-6, 8/27/25 43,953 785,170
National Mortgage Funding I, Inc., 1995-7, 9/17/25 45,000 831,465
National Mortgage Funding I, Inc., 1995-8, 9/28/25 45,000 822,118
TOTAL RESIDUAL INTERESTS 6,453,142
TOTAL LONG-TERM INVESTMENTS (COST $79,796,076) 80,425,471
</TABLE>
41
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENT 17.77%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $15,950,000
U.S. Treasury Bill, 12/28/95
(cost $15,396,050) $15,396,050 $15,396,050
TOTAL INVESTMENTS (COST $95,192,126) 110.61% 95,821,521
OTHER ASSETS LESS LIABILITIES (10.61%) (9,194,630)
NET ASSETS 100.00% $86,626,891
</TABLE>
INVESTMENT ABBREVIATIONS
PO - Principal Only
REMIC - Real Estate Mortgage Investment Conduit
(a) At September 30, 1995, the cost of securities purchased on a when-issued
basis totaled $10,001,875.
* $5,250,000 principal amount of these securities have been segregated for a
commitment to purchase when-issued securites at September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
ASSET-BACKED SECURITIES 7.88%
General Motors Acceptance Corporation, 6.30%, 6/15/99 $ 514,977 $ 515,394
Old Stone Credit Corporation, 6.20%, 6/15/08 816,186 800,596
World Omni 1993 B, 5.05%, 8/15/99 335,184 328,698
Total Asset-Backed Securities (cost $1,628,485) 1,644,688
U.S. GOVERNMENT SECURITIES AND AGENCIES 61.45%
Federal Home Loan Mortgage Corporation
Series 1323 B, PAC 1, 6.47%, 7/15/97 90,253 90,004
Federal National Mortgage Association
11.00%, 7/01/01 271,467 286,507
10.00%, 6/01/05* 627,833 663,199
Government National Mortgage Association II, TBA, 6.00%,
10/01/25 (a) 3,175,000 3,178,969
U.S. Treasury Note, 7.50%, 10/31/99* 8,175,000 8,607,376
Total U.S. Government Securities and Agencies
(cost $12,603,208) 12,826,055
COLLATERALIZED MORTGAGE OBLIGATION 2.56%
Ryland Acceptance Corporation, 9.63%, 9/25/17,
(cost $529,944) 539,618 534,081
CORPORATE BONDS 25.68%
Developers Diversified Realty, 7.63%, 5/15/00 200,000 200,030
Lehman Brothers, Inc., 9.88%, 10/15/00 1,350,000 1,512,189
Mississippi Power & Electric, 8.80%, 4/1/05 750,000 785,190
Occidental Petroleum, 8.75%, 2/14/03 1,000,000 1,045,590
Paine Webber, 9.18%, 3/12/99 750,000 796,335
Salomon Inc., 8.62%, 2/17/97 1,000,000 1,020,390
Total Corporate Bonds (cost $5,322,892) 5,359,724
TOTAL INVESTMENTS (COST $20,084,529) 97.57% 20,364,548
OTHER ASSETS LESS LIABILITIES 2.43% 507,997
NET ASSETS 100.00% $20,872,545
</TABLE>
(a) At September 30, 1995 cost of securities purchased on a when-issued basis
totaled $3,182,383.
* $3,400,000 principal amount of these securities have been segregated for a
commitment to purchase when-issued securities at September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES 97.16%
ARIZONA 3.73%
Pima County Arizona, 7.25%, 7/15/10 $2,000,000 $2,239,040
CALIFORNIA 11.02%
California Educational Facilities, College of
Osteopathic Medicine, 7.50%, 6/01/18 965,000 1,089,958
Carson Improvement Board Act 1915, Special
Assessment District 92, 7.38%, 9/02/22 730,000 748,761
Los Angeles Convention, Series A, 5.13%, 8/15/21 1,750,000 1,558,322
Orange County Community Facilities District,
Series A, 7.35%, 8/15/18 300,000 353,121
San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,010,670
San Francisco City Sewer Revenue Refunding,
5.38%, 10/01/22 2,000,000 1,846,380
6,607,212
COLORADO 8.04%
Arapahoe County, Capital Improvement, 7.00%, 8/31/26 1,000,000 1,034,330
Colorado HFA, SFM, Series A-3, 7.00%, 11/01/24 640,000 663,309
Denver City & County Airport Revenue, 7.75%, 11/15/13 1,000,000 1,194,160
Denver City & County Airport Revenue, 8.50%, 11/15/23 1,700,000 1,929,500
4,821,299
DISTRICT OF COLUMBIA 1.38%
Metropolitan Washington, General Airport Revenue,
Series A, 6.63%, 10/01/19 800,000 829,328
FLORIDA 5.54%
Dade County, 6.50%, 10/01/26 680,000 721,072
Hillsborough County, 6.25%, 12/01/34 1,250,000 1,285,287
Sarasota County, Health Facilities Authority Revenue,
10.00%, 7/01/22 1,190,000 1,314,569
3,320,928
GEORGIA 3.55%
Cobb County Development Authority Revenue Bonds,
Series 92A, 8.00%, 6/01/22 1,000,000 1,020,000
Monroe County Development Authority PCR, 6.75%, 1/01/10 1,000,000 1,105,550
2,125,550
ILLINOIS 11.27%
Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,068,220
Chicago Heights Residential Mortgage,
(effective yield-2.67%) (a), 6/01/09 3,465,000 1,317,324
</TABLE>
44
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
ILLINOIS (CONTINUED)
Chicago O'Hare International Airport Special
Facilities Revenue, 6.75%, 1/01/18 $1,350,000 $1,402,528
Chicago, Capital A, (effective yield-1.62%) (a),
7/01/16 2,000,000 516,540
Illinois Health Facilities Authority Revenue,
9.50%, 10/01/22 1,250,000 1,352,313
Robins, Illinois Residential, 9.25%, 10/15/14 1,000,000 1,100,720
6,757,645
INDIANA 0.45%
Indiana Transportation Finance Authority,
Series A, (effective yield-1.59%) (a), 6/01/17 1,000,000 269,070
IOWA 1.11%
Student Loan Liquidity Corporation, Student Loan
Revenue, Series C, 6.95%, 3/01/06 625,000 667,169
KENTUCKY 3.41%
Jefferson County, Hospital Revenue, 8.29%, 10/01/08 500,000 556,250
Kenton County Airport Board Revenue, OID, 7.50%,
2/01/20 1,400,000 1,486,072
2,042,322
MAINE 1.72%
Maine State Housing Authority, Series C, 6.88%,
11/15/23 1,000,000 1,030,740
MASSACHUSETTS 4.39%
Massachusetts State Health and Educational Facilities
Authority, OID Revenue Bonds, Series A, 6.00%,
10/01/23 2,000,000 1,557,380
Massachusetts State Health and Education, 6.88%,
4/01/22 1,000,000 1,077,560
2,634,940
MICHIGAN 0.89%
Romulus Community Schools, Refunding, (effective
yield-1.34%) (a), 5/01/20 2,385,000 531,426
MONTANA 0.80%
Montana State Resource Recovery Revenue Bonds, 7.00%,
12/31/19 500,000 482,430
NEBRASKA 0.69%
Nebraska Finance Authority, SFM, 9.10%, 9/15/24 400,000 411,500
</TABLE>
45
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
NEVADA 0.89%
Henderson Local Improvement District, Special
Assessment, Series A, 8.50%, 11/01/12 $ 500,000 $ 532,015
NEW YORK 7.82%
Clifton Springs Hospital Refunding & Improvement,
8.00%, 1/01/20 930,000 937,896
Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 1,065,350
New York City, Series H, 7.20%, 2/01/13 1,500,000 1,595,985
New York State Dorm Authority, 6.75%, 7/01/24 1,000,000 1,087,320
4,686,551
NORTH DAKOTA 1.82%
Ward County, Healthcare Facilities, 8.88%, 11/15/24 1,000,000 1,093,270
OKLAHOMA 1.71%
Oklahoma City, Industrial and Cultural Facilities
Trust, 6.75%, 9/15/17 1,000,000 1,027,960
PENNSYLVANIA 3.96%
Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 495,535
Pennsylvania Intergovernmental Cooperative Authority,
Special Tax Revenue, 6.80%, 6/15/12 750,000 843,817
Philadelphia Hospital and Higher Education Facilities,
6.50%, 11/15/08 1,000,000 1,034,770
2,374,122
RHODE ISLAND 0.77%
West Warwick, Series A, G.O. Bonds, 6.80% - 7.30%,
7/15/98 - 7/15/08 435,000 460,431
TENNESSEE 7.66%
Memphis, Shelby County Airport Authority, Special
Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,682,070
Tennessee Housing, 7.38%, 7/01/23 2,750,000 2,911,508
4,593,578
TEXAS 4.94%
Brazos Higher Education Authority Student Loan Revenue,
7.10%, 11/01/04 1,000,000 1,097,420
Dallas-Fort Worth International Airport Facility
Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,048,680
Texas State Department of Housing and Community Affairs
Refunding, Series C, 9.54%, 7/02/24 750,000 812,812
2,958,912
</TABLE>
46
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C>
UTAH 3.54%
Bountiful Hospital Revenue, 9.50%, 12/15/18 $ 245,000 $ 262,701
Utah State Housing Finance Commission, 7.20%, 1/01/27 1,750,000 1,857,958
2,120,659
WEST VIRGINIA 6.06%
Harrison County, 6.75%, 8/01/24 2,000,000 2,127,900
West Virginia State Hospital Finance Authority Revenue,
7.50%, 1/01/18 1,500,000 1,503,765
3,631,665
TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $55,629,527) 58,249,762
SHORT-TERM MUNICIPAL SECURITIES (B) 1.33%
OHIO 0.67%
Hamilton County, 4.80%, 3/01/17, VRDN 400,000 400,000
NEW YORK 0.66%
City of New York, A-7, 4.80%, 8/01/21, VRDN 100,000 100,000
New York, New York, Series B, 4.65%, 10/01/21, VRDN 100,000 100,000
New York City Municipal Water, 4.40%, 6/15/24, VRDN 200,000 200,000
400,000
TOTAL SHORT-TERM MUNICIPAL SECURITIES (COST $800,000) 800,000
TOTAL INVESTMENTS (COST $56,429,527) 98.49% 59,049,762
OTHER ASSETS LESS LIABILITIES 1.51% 903,417
NET ASSETS 100.00% $59,953,179
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<S> <C>
GO - General Obligation PCR - Pollution Control Revenue
HFA - Housing Finance Authority PFA - Public Financing Authority
IDA - Industrial Development Authority SFM - Single Family Mortgage
OID - Original Issue Discount VRDN - Variable Rate Demand Note, rate shown represents
current interest rate at 9/30/95.
</TABLE>
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
(b) Interest rates represent annualized yield to date of maturity. For each
security, cost (for financial reporting and federal income tax purposes) and
carrying value are the same.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
MENTOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Mentor
Mentor Capital Mentor
Growth Growth Strategy
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
ASSETS
Investments, at market value * (Note 2)
Investments securities $236,848,484 $87,166,500 $187,963,655
Repurchase agreements 25,689,361 145,965 53,775,569
Total investments 262,537,845 87,312,465 241,739,224
Cash - 1,125 -
Receivables
Investments sold 6,719,367 2,354,746 146,250
Fund shares sold 16,217,235 264,849 7,170,445
Dividends and interest 63,296 128,332 105,916
Forward foreign currency exchange contracts held
(Note 8) - - -
Closed forward foreign currency contracts - - -
Due from Management Company - - -
Deferred expenses (Note 2) 27,607 - 65,544
Other assets - - -
Total assets 285,565,350 90,061,517 249,227,379
LIABILITIES
Payables
Investments purchased 3,885,112 2,485,380 9,187,919
Fund shares redeemed 14,876,548 228,102 4,790,689
Dividends - - -
Closed forward foreign currency contracts - - -
Accrued expenses and other liabilities 109,266 118,074 107,605
Total liabilities 18,870,926 2,831,556 14,086,213
NET ASSETS $266,694,424 $87,229,961 $235,141,166
Net Assets represented by: (Note 2)
Additional paid-in capital $165,184,322 $75,969,320 $194,466,839
Undistributed net investment income (loss) - - 47,636
Accumulated distributions in excess of net investment
income - - -
Accumulated net realized gain (loss) on investment
transactions 24,789,634 708,467 2,882,307
Net unrealized appreciation of investments and foreign
currency related transactions 76,720,468 10,552,174 37,744,384
NET ASSETS $266,694,424 $87,229,961 $235,141,166
NET ASSET VALUE PER SHARE
Class A Shares $ 16.08 $ 16.02 $ 15.24
Class B Shares $ 16.05 $ 15.79 $ 15.21
OFFERING PRICE PER SHARE
Class A Shares $ 17.06(a) $ 17.00(a) $ 16.17(a)
Class B shares $ 16.05 $ 15.79 $ 15.21
REDEMPTION PROCEEDS PER SHARE
Class A Shares $ 16.08 $ 16.02 $ 15.24
Class B Shares (d) $ 15.41 $ 15.16 $ 14.60
SHARES OUTSTANDING
Class A Shares 1,266,659 1,846,405 688,803
Class B Shares 15,350,398 3,651,052 14,773,679
Total Shares Outstanding 16,617,057 5,497,457 15,462,482
</TABLE>
* Investments at cost $185,817,377, $76,760,291, $203,994,840, $60,536,390,
$18,085,442, $95,192,126, $20,084,529 and $56,429,527 respectively.
(a) Computation of offering price: 100/94.25 of net asset value.
(b) Computation of offering price: 100/95.25 of net asset value.
(c) Computation of offering price: 100/99 of net asset value.
(d) Computation of redemption proceeds: 96/100 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor Mentor Mentor Mentor
Income and Perpetual Quality Short-Duration Municipal
Growth Global Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
$60,602,716 $17,745,213 $80,425,471 $ 20,364,548 $59,049,762
6,024,000 1,302,557 15,396,050 - -
66,626,716 19,047,770 95,821,521 20,364,548 59,049,762
- 35,318 49,968 3,132,129 -
344,489 1,389,696 1,913,965 - -
193,515 457,457 181,376 428,678 13,529
507,061 54,182 820,591 406,415 1,075,321
- 20 - - -
- 3,831 - - -
- - 41,651 - -
- 33,238 - 37,701 -
- - 6,585 - -
67,671,781 21,021,512 98,835,657 24,369,471 60,138,612
903,812 1,423,528 11,757,662 3,169,405 -
93,176 14,563 191,227 193,977 32,033
- - 242,891 108,828 132,279
- 19,676 - - -
108,982 42,612 16,986 24,716 21,121
1,105,970 1,500,379 12,208,766 3,496,926 185,433
$66,565,811 $19,521,133 $86,626,891 $ 20,872,545 $59,953,179
$58,165,300 $17,642,535 $99,907,822 $ 20,712,902 $60,073,272
- (40,808) - - -
(4) - (242,890) (85,490) (52,543)
2,310,185 956,483 (13,667,436) (34,886) (2,687,785)
6,090,330 962,923 629,395 280,019 2,620,235
$66,565,811 $19,521,133 $86,626,891 $ 20,872,545 $59,953,179
$ 17.13 $ 15.88 $ 13.29 $ 12.68 $ 14.92
$ 17.14 $ 15.67 $ 13.31 $ 12.67 $ 14.95
$ 18.18(a) $ 16.85(a) $ 13.95(b) $ 12.81(c) $ 15.66(b)
$ 17.14 $ 15.67 $ 13.31 $ 12.67 $ 14.95
$ 17.13 $ 15.88 $ 13.29 $ 12.68 $ 14.92
$ 16.45 $ 15.04 $ 12.78 $ 12.16 $ 14.35
1,161,248 431,462 1,840,920 79,010 1,371,150
2,723,279 808,434 4,669,766 1,568,467 2,641,371
3,884,527 1,239,896 6,510,686 1,647,477 4,012,521
</TABLE>
49
<PAGE>
MENTOR FUNDS
STATEMENTS OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Mentor
Mentor Capital Mentor
Growth Growth Strategy
Portfolio* Portfolio Portfolio*
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 966,811 $ 349,284 $ 2,468,076
Dividends (Net of withholding taxes)*** 486,045 947,404 1,008,606
Total investment income (Note 2) 1,452,856 1,296,688 3,476,682
EXPENSES
Distribution fees (Note 5) 1,222,284 288,262 1,105,495
Management fee (Note 4) 1,143,696 465,031 1,262,809
Shareholder services fees (Note 5) 404,213 145,322 371,429
Transfer agent fee 203,678 282,107 192,068
Administration fee (Note 4) 108,285 66,032 146,572
Custodian and accounting fees 103,778 41,911 75,012
Registration expenses 92,518 32,032 135,544
Shareholder reports and postage expenses 70,207 36,707 75,405
Legal and Audit fees 55,886 32,895 57,572
Organizational expenses 6,377 4,834 15,072
Directors' fees and expenses 6,195 5,254 6,690
Miscellaneous 1,798 4,187 450
Total expenses 3,418,915 1,404,574 3,444,118
Deduct
Waiver of administration fee (Note 4) - - -
Waiver of management fee (Note 4) - - -
NET EXPENSES 3,418,915 1,404,574 3,444,118
NET INVESTMENT INCOME (LOSS) (1,966,059) (107,886) 32,564
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS
Net realized gain (loss) on investments
and futures contracts (Note 2) 24,885,052 5,567,739 13,062,170
Change in unrealized appreciation (depreciation) 38,888,234 8,926,628 30,325,565
Net realized and unrealized gain (loss) on
investments and futures contracts 63,773,286 14,494,367 43,387,735
Net increase in net assets from operations $61,807,227 $14,386,481 $43,420,299
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Net of interest expense $125,954 for the Mentor Quality Income Portfolio and
$170,196 for the Mentor Short-Duration Income Portfolio.
*** Withholding taxes were $2,161, $8,690, $27,135, $15,273 and $32,044 for the
Mentor Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy
Portfolio, Mentor Income and Growth Portfolio and Mentor Perpetual Global
Portfolio, respectively for the period ended September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor Mentor Mentor Mentor
Income and Perpetual Quality Short-Duration Municipal
Growth Global Income Income Income
Portfolio Portfolio Portfolio Portfolio* Portfolio
<S> <C> <C> <C> <C>
$ 1,641,651 $ 78,660 $ 7,539,556** $ 980,167** $ 4,455,047
954,545 313,054 - - -
2,596,196 391,714 7,539,556 980,167 4,455,047
322,260 68,125 334,771 39,054 207,611
460,486 185,092 563,032 65,901 380,281
153,495 42,065 234,597 32,505 158,450
175,478 40,084 220,401 40,460 133,905
69,316 19,082 106,885 - 72,055
58,810 25,280 68,335 18,070 42,662
44,727 19,139 43,798 17,815 30,923
36,473 7,004 54,672 6,552 38,850
29,828 4,551 51,170 4,869 33,184
1,957 6,640 4,485 - 8,405
4,831 1,946 7,316 652 4,991
1,962 18 7,304 - 5,826
1,359,623 419,026 1,696,766 225,878 1,117,143
- - 41,651 - -
- 10,545 - 65,901 -
1,359,623 408,481 1,655,115 159,977 1,117,143
1,236,573 (16,767) 5,884,441 820,190 3,337,904
2,495,422 862,461 (1,948,938) 258,876 (2,056,061)
5,833,996 942,613 5,945,462 423,995 4,099,300
8,329,418 1,805,074 3,996,524 682,871 2,043,239
$ 9,565,991 $ 1,788,307 $ 9,880,965 $ 1,503,061 $ 5,381,143
</TABLE>
51
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Capital Growth
Mentor Growth Portfolio Portfolio Mentor Strategy Portfolio
Period Year Year Year Period Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 9/30/95 9/30/94 9/30/95* 12/31/94
<S> <C> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN NET
ASSETS FROM:
OPERATIONS
Net investment income (loss) $ (1,966,059) $ (2,273,855) $ (107,886) $ 29,871 $ 32,564 $ (879,139)
Net realized gain (loss) on
investments and futures
contracts 24,885,052 13,751,586 5,567,739 1,128,751 13,062,170 (10,179,850)
Change in unrealized
appreciation (depreciation) 38,888,234 (20,155,668) 8,926,628 (2,465,351) 30,325,565 5,285,954
Increase (decrease) in net
assets from operations 61,807,227 (8,677,937) 14,386,481 (1,306,729) 43,420,299 (5,773,035)
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - - (87,466) - (14,753)
Class B - - - - - -
In excess of net investment
income - (7,106)
Class A - - - - - -
Class B - (14,441,603) - - -
Net realized gain on
investments
Class A - - (2,027,725) (241,102) - -
Class B - (186,774) (4,095,792) (445,582) - -
Net decrease from
distributions - (14,628,377) (6,123,517) (774,150) - (21,859)
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from
portfolio share
transactions 14,761,239 26,454,231 16,680,084 (24,022,232) 12,447,061 62,891,677
Increase (decrease) in net
assets 76,568,466 3,147,917 24,943,048 (26,103,111) 55,867,360 57,096,783
NET ASSETS
Beginning of period 190,125,958 186,978,041 62,286,913 88,390,024 179,273,806 122,177,023
End of period $266,694,424 $190,125,958 $87,229,961 $62,286,913 $235,141,166 $179,273,806
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** For the period from March 29, 1994 (commencement of operations) to September
30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
<TABLE>
<CAPTION>
Mentor Income and Growth Mentor Perpetual Global Mentor Quality Income
Portfolio Portfolio Portfolio
Year Year Year Period Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94 9/30/95 9/30/94** 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
$ 1,236,537 $ 853,291 $ (16,767) $ (25,881) $ 5,884,441 $ 8,732,749
2,495,422 1,523,312 862,461 17,822 (1,948,938) (8,118,106)
5,833,996 (248,910) 942,613 20,310 5,945,462 (5,963,957)
9,565,955 2,127,693 1,788,307 12,251 9,880,965 (5,349,314)
(464,855) (300,723) - - (1,780,925) (2,342,783)
(771,682) (476,423) - - (4,084,639) (5,799,239)
(38,935) - - - (130,142) -
(64,635) - - - (298,487) -
(298,324) (204,420) - - - -
(712,920) (470,138) - - - -
(2,351,351) (1,451,704) - - (6,294,193) (8,142,022)
(1,640,309) 32,339,234 863,287 16,857,288 (24,989,530) (53,605,255)
5,574,295 33,015,223 2,651,594 16,869,539 (21,402,758) (67,096,591)
60,991,516 27,976,293 16,869,539 - 108,029,649 175,126,240
$66,565,811 $60,991,516 $19,521,133 $16,869,539 $ 86,626,891 $108,029,649
</TABLE>
53
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Short-Duration Mentor Municipal Income
Income Portfolio Portfolio
Period Year Year Year
Ended Ended Ended Ended
9/30/95* 12/31/94*** 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
FROM:
OPERATIONS
Net investment income (loss) $ 820,190 $ 509,400 $ 3,337,904 $ 3,986,208
Net realized gain (loss) on
investments and futures contracts 258,876 (293,762) (2,056,061) (527,018)
Change in unrealized appreciation
(depreciation) 423,995 (143,976) 4,099,300 (7,578,461)
Increase (decrease) in net assets
from operations 1,503,061 71,662 5,381,143 (4,119,271)
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (7,777) (509,400) (1,233,641) (1,463,600)
Class B (812,803) - (2,106,334) (2,444,169)
In excess of net
investment income
Class A (2,635) - - -
Class B (39,850) (41,639) - -
Net realized gain on investments
Class A - - - (189,589)
Class B - - - (340,533)
Net decrease from distributions (863,065) (551,039) (3,339,975) (4,437,891)
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from
portfolio share transactions 3,088,707 17,623,219 (13,301,743) (450,171)
Increase (decrease) in net assets 3,728,703 17,143,842 (11,260,575) (9,007,333)
NET ASSETS
Beginning of period 17,143,842 - 71,213,754 80,221,087
End of period $20,872,545 $17,143,842 $59,953,179 $71,213,754
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
*** For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Growth
Portfolio Mentor Capital Growth Portfolio
Period Year Year Year Year
Ended Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.37 $ 14.88 $ 15.26 $ 14.21 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.01) 0.02 0.09 0.14 0.08
Net realized and unrealized gain
(loss) on investments 2.72 2.91 (0.30 ) 1.02 0.03
Total from investment operations 2.71 2.93 (0.21 ) 1.16 0.11
LESS DISTRIBUTIONS
Dividends from net investment income - - (0.04 ) (0.11) (0.08)
In excess of net investment income - - - - -
Distributions from capital gains - (1.79) (0.13 ) - -
Distributions in excess of capital - - - - -
Total Distributions - (1.79) (0.17 ) (0.11) (0.08)
NET ASSET VALUE, END OF PERIOD $ 16.08 $ 16.02 $ 14.88 $ 15.26 $ 14.21
Total Return 20.27% 20.18 % (1.37%) 8.21 % 0.78%
Ratios/Supplemental Data
Net assets, end of period (in
thousands) $ 20,368 $29,582 $21,181 $31,360 $ 20,864
Ratio of expenses to average net
assets 1.36%(a) 1.87 % 1.70% 1.49 % 1.14%(a)
Ratio of expenses to average net asset
excluding waiver 1.36%(a) 1.87 % 1.70% 1.59 % 1.43%(a)
Ratio of net investment income
(loss) to average net assets (0.65%)(a) 0.27 % 0.53% 0.96 % 1.54%(a)
Portfolio turnover rate 70% 157 % 149% 192 % 61%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Strategy
Portfolio Mentor Income and Growth Portfolio
Period Year Year Year
Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93(b)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.45 $ 15.27 $ 14.88 $ 14.14
INCOME FROM INVESTMENT OPERATIONS
Net investment income - 0.40 0.31 0.09
Net realized and unrealized gain (loss) on investments 1.79 2.14 0.64 0.73
Total from investment operations 1.79 2.54 0.95 0.82
LESS DISTRIBUTIONS
Dividends from net investment income - (0.40) (0.30) (0.08)
In excess of net investment income - (0.03) - -
Distributions from capital gains - (0.25) (0.26) -
Distributions in excess of capital - - - -
Total distributions - (0.68) (0.56) (0.08)
NET ASSET VALUE, END OF PERIOD $ 15.24 $ 17.13 $ 15.27 $ 14.88
Total Return 13.31% 17.24% 6.54% 5.54%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 10,503 $19,888 $17,773 $ 9,849
Ratio of expenses to average net assets 1.65%(a) 1.69% 1.75% 1.56%(a)
Ratio of expenses to average net asset excluding waiver 1.65%(a) 1.69% 1.75% 1.94%(a)
Ratio of net investment income (loss) to average net assets (0.06%)(a) 2.53% 2.20% 2.35%(a)
Portfolio turnover rate 122% 62% 78% 13%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
(b) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
(c) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
<TABLE>
<CAPTION>
Mentor Perpetual
Global Portfolio Mentor Quality Income Portfolio
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94 (c) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
$14.23 $ 14.18 $ 12.75 $ 14.04 $ 14.39 $ 14.30
0.05 (0.01) 0.84 0.84 1.06 0.44
1.60 0.06 0.61 (1.30) (0.31) 0.09
1.65 0.05 1.45 (0.46) 0.75 0.53
- - (0.85) (0.83) (1.06) (0.44)
- - (0.06) - (0.04) -
- - - - - -
- - - - - -
- - (0.91) (0.83) (1.10) (0.44)
$15.88 $ 14.23 $ 13.29 $ 12.75 $ 14.04 $ 14.39
11.60% 0.35% 11.82% (3.39%) 5.41% 3.37%
$6,854 $ 8,882 $24,472 $30,142 $47,780 $36,740
2.06% 2.09%(a) 1.32% 1.38% 1.04% 0.36%(a)
2.11% 3.18%(a) 1.36% 1.39% 1.22% 1.21%(a)
0.26% (0.10%)(a) 6.73% 6.33% 7.31% 8.00%(a)
155% 2% 368% 455% 102% 9%
</TABLE>
57
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor
Short-Duration
Income
Portfolio Mentor Municipal Income Portfolio
Period Year Year Year Year
Ended Ended Ended Ended Ended
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $12.74 $ 14.42 $ 16.05 $ 14.76 $ 14.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.22 0.81 0.82 0.92 0.32
Net realized and unrealized gain (loss)
on investments (0.03) 0.51 (1.54) 1.32 0.47
Total from investment operations 0.19 1.32 (0.72) 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net investment income (0.22) (0.82) (0.81) (0.92) (0.32)
In excess of net investment income (0.03) - - (0.03) -
Distributions from capital gains - - (0.10) - -
Distributions in excess of capital - - - - -
Total Distributions (0.25) (0.82) (0.91) (0.95) (0.32)
NET ASSET VALUE, END OF PERIOD $12.68 $ 14.92 $ 14.42 $ 16.05 $ 14.76
Total Return 1.51% 9.46% (4.83%) 16.00% 5.34%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $1,002 $20,460 $25,056 $29,245 $ 18,801
Ratio of expenses to average net assets 0.71%(a) 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to average net asset
excluding waiver 1.00%(a) 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment income to average
net assets 4.10%(a) 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate 126% 43% 87% 88% 0%
</TABLE>
* For the period from June 16, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Growth Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.13) (0.15) (0.08) (0.06) (0.09) 0.02
Net realized and unrealized gain (loss)
on investments 4.03 (0.47) 2.07 1.94 4.30 (1.10)
Total from Investment Operations 3.90 (0.62) 1.99 1.88 4.21 (1.08)
LESS DISTRIBUTIONS
Dividends from net investment income - - - - - (0.05)
Distributions in excess of net investment
income - - - - - -
Distributions from capital gains - (1.00) (1.02) (1.23) (0.42) (0.13)
Distributions in excess of capital gains - (0.01) - - - -
Total Distributions - (1.01) (1.02) (1.23) (0.42) (0.18)
NET ASSET VALUE, END OF PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37
Total Return 32.10% (4.48%) 15.60% 15.46% 50.30% (11.21%)
Ratios/Supplemental Data
Net assets, end of period (in thousands) $246,326 $190,126 $186,978 $136,053 $108,719 $83,540
Ratio of expenses to average net assets 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25%
Ratio of expenses to average net asset
excluding waiver 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25%
Ratio of net investment income (loss) to
average net assets (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) 0.26%
Portfolio Turnover Rate 70% 77% 64% 50% 40% 50%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
Year Year Year Year
Ended Ended Ended Ended
9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.80 $ 15.23 $ 14.22 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.25 (0.04) 0.05 0.46
Net realized and unrealized gain (loss)
on investments 2.53 (0.26) 1.02 0.04
Total from Investment Operations 2.78 (0.30) 1.07 0.50
LESS DISTRIBUTIONS
Dividends from net investment income - - (0.05) (0.46)
In excess of net investment
income - - (0.01) -
Distributions from capital gains (1.79) (0.13) - -
Distributions in excess of capital gains - - - -
Total Distributions (1.79) (0.13) (0.06) (0.46)
NET ASSET VALUE, END OF PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22
Total Return 19.26 % (2.00 %) 7.52% 0.61%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $57,648 $41,106 $57,030 $ 25,468
Ratio of expenses to average net assets 2.56% 2.46% 2.24% 1.86%(a)
Ratio of expenses to average net asset
excluding waiver 2.56% 2.46% 2.34% 2.16%(a)
Ratio of net investment income to
average net assets (0.41%) (0.22%) 0.21% 0.83%(a)
Portfolio turnover rate 157% 149% 192% 61%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
*** Reflects operations for the period of October 29, 1993 (commencement of
operations), to December 31, 1993.
(a) Annualized.
(b) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
<TABLE>
<CAPTION>
Mentor Strategy Portfolio Mentor Income and Growth Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94 12/31/93*** 9/30/95 9/30/94 9/30/93(b)
<S> <C> <C> <C> <C> <C>
$ 12.24 $ 12.70 $ 12.50 $ 15.28 $ 14.91 $ 14.14
- (0.06) - 0.28 0.21 0.05
2.97 (0.40) 0.20 2.14 0.61 0.77
2.97 (0.46) 0.20 2.42 0.82 0.82
- - - (0.28) (0.19) (0.05)
- - - (0.03) - -
- - - (0.25) (0.26) -
- - - - - -
- - - (0.56) (0.45) (0.05)
$ 15.21 $ 12.24 $ 12.70 $ 17.14 $ 15.28 $ 14.91
24.26% (3.61%) 1.60% 16.32 % 5.66 % 5.54%
$224,638 $179,274 $122,177 $46,678 $43,219 $ 18,127
2.08%(a) 2.19% 2.06% 2.43 % 2.44 % 2.31%(a)
2.08%(a) 2.19% 2.06% 2.43 % 2.44 % 2.69%(a)
0.25%(a) (0.54%) 0.08% 1.78 % 1.51 % 1.60%(a)
122% 143% 0% 62 % 78 % 13%
</TABLE>
61
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Perpetual
Global Portfolio Mentor Quality Income Portfolio
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95 9/30/94(c) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.15 $ 14.18 $ 12.76 $ 14.06 $ 14.40 $ 14.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.05) (0.04) 0.79 0.82 0.99 0.41
Net realized and unrealized gain
(loss) on investments 1.57 0.01 0.61 (1.37) (0.31) 0.10
Total from Investment Operations 1.52 (0.03) 1.40 (0.55) 0.68 0.51
LESS DISTRIBUTIONS
Dividends from net investment
income - - (0.79) (0.75) (0.99) (0.41)
In excess of net investment
income - - (0.06) - (0.03) -
Distributions from capital gains - - - - - -
Distributions in excess of
capital gains - - - - - -
Total Distributions - - (0.85) (0.75) (1.02) (0.41)
NET ASSET VALUE, END OF PERIOD $ 15.67 $ 14.15 $ 13.31 $ 12.76 $ 14.06 $ 14.40
Total Return 10.74% (0.21%) 11.33% (3.97%) 4.86% 3.24%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $12,667 $ 7,987 $62,155 $77,888 $127,346 $ 65,661
Ratio of expenses to average
net assets 2.72% 2.79%(a) 1.74% 1.88% 1.54% 0.83%(a)
Ratio of expenses to average
net asset excluding waiver 2.79% 3.93%(a) 1.79% 1.90% 1.72% 1.67%(a)
Ratio of net investment income
(loss) to average net assets (0.40%) (0.82%)(a) 6.24% 6.21% 6.81% 7.53%(a)
Portfolio Turnover Rate 155% 2% 368% 455% 102% 9%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(a) Annualized.
(c) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
(d) Reflects operations for the period from April 29, 1994 (commencement of
operations), to December 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
<TABLE>
<CAPTION>
Mentor Short-Duration
Income Portfolio Mentor Municipal Income Portfolio
Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/95* 12/31/94(d) 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
$ 12.18 $ 12.50 $ 14.43 $ 16.06 $ 14.78 $ 14.29
0.59 0.41 0.74 0.74 0.82 0.29
0.52 (0.29) 0.52 (1.54) 1.32 0.49
1.11 0.12 1.26 (0.80) 2.14 0.78
(0.59) (0.41) (0.74) (0.73) (0.82) (0.29)
(0.03) (0.03) - - (0.04) -
- - - (0.10) - -
- - - - - -
(0.62) (0.44) (0.74) (0.83) (0.86) (0.29)
$ 12.67 $ 12.18 $ 14.95 $ 14.43 $ 16.06 $ 14.78
9.22% 0.95% 9.01% (5.34%) 15.27% 5.28%
$19,871 $ 17,144 $39,493 $46,157 $50,976 $24,265
1.20%(a) 1.29%(a) 1.92% 1.74% 1.21% 0.50%(a)
1.70%(a) 1.29%(a) 1.92% 1.86% 1.89% 1.76%(a)
5.04%(a) 4.90%(a) 5.07% 4.93% 5.42% 5.80%(a)
126% 166% 43% 87% 88% 0%
</TABLE>
63
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1: ORGANIZATION
Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. On April 12, 1995 the name of the Trust was changed to Mentor Funds
("Mentor Funds"). On April 12, 1995 the portfolios of Mentor Series Trust were
merged into newly formed portfolios of Mentor Funds. Mentor Funds consists of
nine separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1995, as
follows:
Mentor Growth Portfolio (formerly
Mentor Growth Fund)
("Growth Portfolio")
Mentor Capital Growth Portfolio
(formerly Cambridge Capital Growth
Portfolio)
("Capital Growth Portfolio")
Mentor Strategy Portfolio (formerly
Mentor Strategy Fund)
("Strategy Portfolio")
Mentor Income and Growth Portfolio
(formerly Cambridge Income
and Growth Portfolio)
("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio
(formerly Cambridge Global Portfolio)
("Global Portfolio")
Mentor Quality Income Portfolio
(formerly Cambridge Government
Income Portfolio)
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
(formerly Mentor Short-Duration
Income Fund)
("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio
(formerly Cambridge Municipal
Income Portfolio)
("Municipal Income Portfolio")
Mentor Balanced Portfolio
(formerly Mentor Balanced Fund)
("Balanced Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The Balanced Portfolio is not currently being offered to new investors. These
financial statements do not include the Balanced Portfolio.
Mentor Funds currently issues two classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for Quality Income Portfolio
and Municipal Income Portfolio and 1% for Short-Duration Income Portfolio)
payable at the time of purchase. Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption which decreases depending on when
shares were purchased and how long they have been held.
64
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios:
(a) Valuation of Securities
Listed securities held by the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio and Global Portfolio traded on
national stock exchanges and over-the-counter securities quoted on the NASDAQ
National Market System are valued at the last reported sales price or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by the Board of Trustees of the Portfolios as the primary market. Securities
traded in the over-the-counter market, other than those quoted on the NASDAQ
National Market System, are valued at the last available bid price. Short-term
investments with remaining maturities of 60 days or less are carried at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Board of Trustees.
U.S. Government obligations held by the Quality Income Portfolio, Short-Duration
Income Portfolio and Income and Growth Portfolio are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Portfolio's Board of Trustees. In determining value, the
pricing services use information with respect to transactions in such
securities, market transactions in comparable securities, various relationships
between securities, and yield to maturity.
Municipal bonds held by the Municipal Income Portfolio are valued at fair value.
An independent pricing service values the Portfolio's municipal bonds taking
into consideration yield, stability, risk, quality, coupon, maturity, type of
issue, trading characteristics, special circumstances of a security or trading
market, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
pricing service does not rely exclusively on quoted prices. The Board of
Trustees has determined that the fair value of debt securities with remaining
maturities of 60 days or less shall be their amortized cost value unless the
particular circumstances of the security indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, assets and liabilities at the daily
65
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
rate of exchange, purchases and sales of investment, income and expenses at the
rate of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
(b) Repurchase Agreements
It is the policy of Mentor Funds to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book entry system,
or to have segregated within the custodian bank's vault all securities held as
collateral in support of repurchase agreement investments. Additionally,
procedures have been established by Mentor Funds to monitor, on a daily basis,
the market value of each repurchase agreement's underlying securities to ensure
the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings
Each of the Portfolios (except for Municipal Income Portfolio) may, under
certain circumstances, borrow money directly or through dollar-roll and reverse
repurchase agreements (arrangements in which the Portfolio sells a security for
a percentage of its market value with an agreement to buy it back on a set
date). Each Portfolio may borrow up to one-third of the value of its net assets.
There were no reverse repurchase agreements outstanding at September 30, 1995.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the period ended September 30, 1995 was
approximately $5,286,560 or $0.77 per share based on average shares outstanding
during the year at a weighted average interest rate of 5.23%. The maximum amount
of borrowings outstanding at any week-end during the year was $10,574,536
(including accrued interest), at a weighted average interest rate of 5.23%, and
was 12.19% of total assets.
The average daily balance of reverse repurchase agreements outstanding for
short-duration income portfolio during the period ended September 30, 1995 was
approximately $4,790,610 or $3.14 per share based on average shares outstanding
during the year at an interest rate ranging between 5.80% -- 6.20%. The maximum
amount of borrowings outstanding at any week-end during the year was $8,201,367
(including accrued interest), as of
66
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
April 18, 1995, at a weighted average interest rate of 6.00% and was 33.19% of
total assets.
(d) Security Transactions and Investment Income
Security transactions for the Portfolios are accounted for on the trade date.
Realized gain and losses are computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date. Interest income (except for
Municipal Income Portfolio) is recorded on the accrual basis. Interest income
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including original
issue discount as required by the Internal Revenue Code. Dividends to
shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(e) Federal Income Taxes
No provision for federal income taxes has been made since it is each Portfolio's
policy to comply with the provisions applicable to regulated investment
companies under the Internal Revenue Code and to distribute to its shareholders
within the allowable time limit substantially all taxable income and realized
capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may by considered a tax preference
item to shareholders.
At September 30, 1995, Quality Income Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $11,750,000. Pursuant to the Code,
such capital loss carryforwards expire as follows: $820,000 in 2001 and
$3,680,000 in 2002 and $7,250,000 in 2003.
At September 30, 1995, Short-Duration Income Portfolio for federal tax purposes,
had a capital loss carryforward of approximately $35,000. Pursuant to the
Internal Revenue Code, such capital loss carryforward will expire in 2003.
At September 30, 1995, Municipal Income Portfolio for federal tax purposes, had
a capital loss carryforward of approximately $895,000. Pursuant to the Internal
Revenue Code, such capital loss carryforward will expire in 2003.
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the
67
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
extent permitted by the Internal Revenue Code, and thus will reduce the amount
of the distributions to shareholders which would otherwise relieve the
Portfolios of any liability for federal tax.
(f) When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued or delayed delivery transactions. To
the extent the Portfolios engage in such transactions, they will do so for the
purpose of acquiring portfolio securities consistent with their investment
objectives and policies and not for the purpose of investment leverage. The
Portfolios will record a when-issued security and the related liability on the
trade date. Until the securities are received and paid for, the Portfolios will
maintain security positions such that sufficient liquid assets will be available
to make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.
(g) Futures contracts
In order to gain exposure to or protect against declines in security values,
Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income
Portfolio may buy and sell futures contracts. The Portfolios may also buy or
write put or call options on these futures contracts.
The Portfolios generally sell futures contracts to hedge against declines in the
value of portfolio securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or cost
effective than actually buying securities. The Portfolios will segregate assets
to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the period ended September 30, 1995, Quality Income
Portfolio had a realized gain of $645,273, Short-Duration Income Portfolio and
Municipal Income Portfolio recorded realized losses of $28,629 and $892,033
respectively on closed futures contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities.
68
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(h) Options
In order to produce incremental earnings or protect against changes in the value
of portfolio securities, the Quality Income Portfolio may buy and sell put and
call options, write covered call options on portfolio securities and write
cash-secured put options.
The Portfolio generally purchases put options or writes covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolio may also use options for speculative purposes, although it does not
employ options for this at the present time. The Portfolio will segregate assets
to cover its obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolio will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid. For the period ended
September 30, 1995 Quality Income Portfolio had a realized gain of $134,642 on
closed options contracts.
The risk in writing a call option is that the Portfolio gives up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty.
(i) Residual Interests
A derivative security is any investment that derives its value from an
underlying security, asset, or market index. The Quality Income Portfolio
invests in mortgage security residual interests ("residuals") which are
considered derivative securities. The Portfolio's investment in residuals has
been primarily in securities issued by proprietary mortgage trusts. While these
entities have been highly leveraged, often having indebtedness of up to 95% of
their total value, the Portfolio has not incurred any indebtedness in the course
of making these residual investments; nor have the Portfolio's assets been
pledged to secure the indebtedness of the issuing structure or the Portfolio's
investment in the residuals. In consideration of the risk associated with
investment in residual
69
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
securities, it is the Portfolio's policy to limit its exposure at the time of
purchase to no more than 20% of its total assets. The Portfolio will continue to
invest in residual securities because, in the opinion of the Investment Manager,
these investments can play a key role in fulfilling the Portfolio's objective of
achieving high monthly income through providing a means of economic leverage.
(j) Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
(k) Distributions
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for net
operating losses and deferral of wash sales.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Quality Income Portfolio, Short-Duration Income Portfolio and Municipal
Income Portfolio on the record date. Dividends are declared and paid
semi-annually to all shareholders invested in Capital Growth Portfolio on the
record date, dividends are declared and paid annually to all shareholders
invested in the Growth Portfolio, Strategy Portfolio and Global Portfolio on the
record date, and dividends are declared and paid quarterly to all shareholders
invested in Income and Growth Portfolio on the record date. Dividends will be
reinvested in additional shares of the same class and Portfolio on payment dates
at the ex-dividend date net asset value without a sales charge unless cash
payments are requested by shareholders in writing. Capital gains realized by
each Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Commonwealth Investment Advisors, Inc., (formerly Cambridge Investment Advisors,
Inc.), ("Investment Adviser"), receives for its services an annual investment
advisory fee not to exceed the following percentages of the average daily net
assets of the particular Portfolio: Capital Growth Portfolio, 0.80%; Quality
Income Portfolio, 0.60%; Municipal Income Portfolio, 0.60%; Income and Growth
Portfolio, 0.75%; and Global Portfolio, 1.10%. The Investment Adviser may, from
time to time, voluntarily waive some or all of its investment advisory fee and
may terminate any such voluntary waiver at any time at its sole discretion.
The Investment Adviser pays the sub-adviser to Municipal Income Portfolio an
annual fee of
70
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
0.30%. The sub-adviser to the Income and Growth Portfolio receives from the
Investment Adviser an annual fee expressed as a percentage of that Portfolio's
assets as follows: 0.325% on the first $50 million in Portfolio assets, 0.275%
on the next $150 million in assets, and 0.200% on assets over $500 million. No
performance or incentive fees are paid to the sub-advisers. Under certain
Sub-Advisory Agreements, the particular sub-adviser may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Adviser and may terminate any such voluntary waiver at any time in its sole
discretion.
The Growth Portfolio has entered into an Investment Advisory and Management
Agreement with Charter Asset Management, Inc. ("Charter"), a wholly-owned
subsidiary of Mentor Investment Group, Inc., (formerly Investment Management
Group, Inc.) ("Mentor") which is a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc. Under this agreement, Charter's management fee is accrued
daily and paid monthly at an annual rate of 0.70% applied to the average daily
net assets of the Portfolio.
The Strategy Portfolio has entered into an Investment Advisory Agreement with
Wellesley Advisors, Inc. ("Wellesley"), a wholly-owned subsidiary of Mentor.
Under this agreement, Wellesley's management fee is accrued daily and paid
monthly at an annual rate of 0.85% applied to the average daily net assets of
the Portfolio.
The Short-Duration Income Portfolio has entered into an Investment Advisory
Agreement with Commonwealth Investment Counsel, Inc. ("Commonwealth"), a
wholly-owned subsidiary of Mentor. Under this agreement, Commonwealth's
management fee is accrued daily and paid monthly at an annual rate of 0.50%
applied to the average daily net assets of the Portfolio.
For the period ended September 30, 1995 the Investment Adviser and sub-advisers,
Charter, Wellesley and Commonwealth earned and voluntarily waived the following
advisory fees:
<TABLE>
<CAPTION>
Adviser Adviser Fee Sub Adviser
Fee Voluntarily Fee
Portfolio Earned Waived Earned
<S> <C> <C> <C>
Growth $1,143,696 - -
Capital Growth 465,031 - -
Strategy 1,262,809 - -
Income and Growth 460,486 - $ 193,845
Global 185,092 $10,545 -
Quality Income 563,032 - -
Short-Duration Income 65,901 65,901 -
Municipal Income 380,281 - 190,141
<CAPTION>
</TABLE>
71
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate 0.10% of the average daily net
assets of each Portfolio. In order to limit the Portfolio's expenses during its
start-up period, Mentor agreed to waive its fee for the first year of each
Portfolios' operations. This waiver period elapsed on April 30,
1995 for the Short-Duration Income Portfolio. In addition, the Growth Portfolio
and Strategy Portfolio provide direct reimbursement to
Mentor for certain accounting and operation related costs not covered under the
Administration Agreement. For the period ended September 30, 1995, the Growth
Portfolio and Strategy Portfolio paid $6,579 and $6,117 respectively to Mentor
for these direct reimbursements.
For the period ended September 30, 1995 Mentor earned the following
administrative fees:
<TABLE>
<CAPTION>
Administrative
Administrative Fee
Fee Voluntarily
Portfolio Earned Waived
<S> <C> <C>
Growth $108,285 -
Capital Growth 66,032 -
Strategy 146,572 -
Income and Growth 69,316 -
Global 19,082 -
Quality Income 106,885 $ 41,651
Short-Duration Income - -
Municipal Income 72,055 -
<CAPTION>
</TABLE>
Charter, Wellesley, and Commonwealth have agreed to reimburse the Portfolios for
the operating expenses (exclusive of interest, taxes, brokerage and
distributions fees, and extraordinary expenses) in excess of the most
restrictive expense limitation imposed by state securities commissions with
jurisdiction over the Portfolios. The most stringent state expense limitation
applicable to the Portfolios requires reimbursement of expenses not including
expenses under the Portfolios' Distribution Plan, in any year that such expenses
exceed 2.5% of the first $30,000,000 of average daily net assets, 2% of the next
$70,000,000 of average daily net assets, and 1.5% of the average daily net
assets over $100,000,000. During the period ended September 30, 1995, no
reimbursement from Charter, Wellesley or Commonwealth was required as a result
of such state expense limitations.
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan)
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor
Distribu-
72
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
tors, Inc. ("Mentor Distributors") (formerly, Cambridge Distributors, Inc.) a
wholly-owned subsidiary of Mentor, Mentor Distributors was appointed distributor
of the Portfolios. To compensate Mentor Distributors for the services it
provides and for the expenses it incurs under the Distribution Agreement, the
Portfolios pay a distribution fee, which is accrued daily and paid monthly at
the annual rate of 0.75% of the Portfolios' average daily net assets for the
Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio and Global Portfolio, 0.50% of the average daily net assets of
the Quality Income Portfolio and Municipal Income Portfolio, and 0.30% of the
average daily net assets for the Short-Duration Income Portfolio.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of each Portfolio. Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Portfolios to provide administrative support services to their customers who
from time to time may be owners of record or beneficial owners of Class A or
Class B shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding .25 of 1% of the average daily net assets of
the Class A or Class B shares of the particular Portfolio or Portfolios
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship.
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the period ended September 30, 1995, distribution fees and shareholder servicing
fees were as follows:
<TABLE>
<CAPTION>
Shareholder-Servicing
Distribution Fees
Portfolio Fees Class A Class B
<S> <C> <C> <C>
Growth $1,222,284 $ 8,517 $395,696
Capital Growth 288,262 49,218 96,104
Strategy 1,105,495 9,417 362,012
Income and Growth 322,260 45,843 107,652
Global 68,125 14,893 27,172
Quality Income 334,771 66,334 168,263
Short-Duration Income 39,054 1,569 30,936
Municipal Income 207,611 54,057 104,393
<CAPTION>
</TABLE>
Distribution fees are only applicable to Class B shares.
73
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments), for the
period ended September 30, 1995, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
<S> <C> <C>
Growth $144,141,344 $137,124,525
Capital Growth 105,485,484 85,952,151
Strategy 196,082,992 199,429,668
Income and Growth 35,406,377 41,334,627
Global 25,080,716 24,953,356
Quality Income 351,397,916 405,788,314
Short-Duration Income 29,355,976 26,775,678
Municipal Income 26,715,099 42,198,478
<CAPTION>
</TABLE>
NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
The cost of investments for federal income tax purposes amounted to
$186,115,335, for the Growth Portfolio, $76,760,291 for the Capital Growth
Portfolio, $204,015,264 for the Strategy Portfolio, $60,560,645 for the Income
and Growth Portfolio, $18,087,647 for the Global Portfolio, $95,192,126 for the
Quality Income Portfolio, $20,084,529 for the Short-Duration Income Portfolio
and $56,429,527 for Municipal Income Portfolio at September 30, 1995. Gross
unrealized appreciation and depreciation of investments at September 30, 1995
based on such costs were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Portfolio Appreciation Depreciation Appreciation
<S> <C> <C> <C>
Growth $ 78,797,576 $(2,375,066) $ 76,422,510
Capital Growth 11,314,295 (762,121) 10,552,174
Strategy 40,434,604 (2,710,644) 37,723,960
Income and Growth 7,103,546 (1,037,475) 6,066,071
Global 1,626,071 (665,948) 960,123
Quality Income 999,511 (370,116) 629,395
Short-Duration Income 303,364 (23,345) 280,019
Municipal Income 3,047,351 (427,116) 2,620,235
<CAPTION>
</TABLE>
74
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8: FORWARD CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At
September 30, 1995 Global Portfolio had outstanding forward contracts as set
forth below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Contracts In Exchange Net Unrealized
Settlement Date to Deliver/Receive For Appreciation
<S> <C> <C> <C>
Sales
10/2/95 Malaysian Ringgit 62,333 $24,814 $20
</TABLE>
NOTE 9: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Period Mentor Growth Portfolio Year
Ended 9/30/95 Ended 12/31/94
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 1,270,059 $ 19,846,126
Shares issued upon reinvestment of distributions - -
Shares redeemed (3,410) (53,044)
Change in net assets from capital share
transaction 1,266,649 $ 19,793,082
CLASS B**:
Shares sold 2,282,441 $ 32,813,557 2,621,726 $ 35,199,222
Shares issued upon reinvestment of distributions - - 1,176,364 14,274,538
Shares redeemed (2,585,359) (37,845,400) (1,714,715) (23,019,529)
Change in net assets from capital share
transaction (302,918) $ (5,031,843) 2,083,375 $ 26,454,231
<CAPTION>
</TABLE>
75
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 100,226 $ 949,902 155,406 $ 2,353,285
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio+ 671,791 10,681,477 - -
Shares issued upon reinvestment of distributions 125,218 1,954,221 21,385 320,355
Shares redeemed (473,840) (7,405,251) (809,281) (12,181,621)
Change in net assets from capital share
transactions 423,395 $ 6,180,349 (632,490) $ (9,507,981)
CLASS B:
Shares sold 329,014 $ 1,869,220 484,356 $ 7,254,585
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio+ 1,255,213 19,669,182 - -
Shares issued upon reinvestment of distributions 256,857 3,961,731 29,045 435,097
Shares redeemed (968,058) (15,000,398) (1,479,886) (22,203,933)
Change in net assets from capital share
transactions 873,026 $ 10,499,735 (966,485) $(14,514,251)
</TABLE>
<TABLE>
<CAPTION>
PeriodMentor Strategy Portfolio Year
Ended 9/30/95 Ended 12/31/94
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 690,271 $ 10,122,356
Shares issued upon reinvestment of distributions - -
Shares redeemed (1,062) (15,555)
Change in net assets from capital share
transactions 689,209 $ 10,106,801
CLASS B**:
Shares sold 2,247,821 $ 31,437,475 5,670,538 70,664,481
Shares issued upon reinvestment of distributions 1,708 20,979 - -
Shares redeemed (2,121,049) (29,118,194) (642,107) (7,772,804)
Change in net assets from capital share
transactions 128,480 $ 2,340,260 5,028,431 $62,891,677
</TABLE>
76
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 255,128 $ 3,928,730 621,368 $ 9,508,705
Shares issued upon reinvestment of distributions 49,436 741,971 31,362 474,885
Shares redeemed (307,376) (4,818,528) (150,563) (2,281,176)
Change in net assets from capital share
transactions (2,812) $ (147,827) 502,167 $ 7,702,414
CLASS B:
Shares sold 602,055 $ 9,529,693 1,909,839 $29,152,862
Shares issued upon reinvestment of distributions 98,685 1,467,195 59,116 895,345
Shares redeemed (806,196) (12,489,370) (356,385) (5,411,387)
Change in net assets from capital share
transactions (105,456) $ (1,492,482) 1,612,570 $24,636,820
</TABLE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94(a)
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 142,470 $ 2,073,646 713,962 $10,133,334
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (335,189) (4,810,857) (89,781) (1,281,155)
Change in net assets from capital share
transactions (192,719) $(2,737,211) 624,181 $ 8,852,179
CLASS B:
Shares sold 417,981 $ 6,078,915 593,033 $ 8,409,160
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (174,218) (2,478,417) (28,362) (404,051)
Change in net assets from capital share
transactions 243,763 $ 3,600,498 564,671 $ 8,005,109
</TABLE>
77
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 132,285 $ 1,706,716 175,391 $ 2,326,934
Shares issued upon reinvestment of distributions 89,969 1,159,149 104,113 1,395,612
Shares redeemed (745,107) (9,570,406) (1,319,559) (17,795,382)
Change in net assets from capital share
transactions (522,853) $ (6,704,541) (1,040,055) $(14,072,836)
CLASS B:
Shares sold 421,513 $ 5,506,753 895,699 $ 12,254,465
Shares issued upon reinvestment of distributions 223,602 2,883,354 290,900 3,906,462
Shares redeemed (2,078,944) (26,675,096) (4,142,540) (55,693,346)
Change in net assets from capital share
transactions (1,433,829) $(18,284,989) (2,955,941) $(39,532,419)
</TABLE>
<TABLE>
<CAPTION>
Mentor Short-Duration
Period Income Portfolio Period
Ended 9/30/95 Ended 12/31/94***
Shares Dollar Shares Dollar
<S> <C> <C> <C> <C>
CLASS A*:
Shares sold 80,087 $ 1,015,595
Shares issued upon reinvestment of distributions 322 4,089
Shares redeemed (1,399) (17,786)
Change in net assets from capital share
transactions 79,010 $ 1,001,898
CLASS B**:
Shares sold 1,116,509 $ 14,138,694 2,235,823 $ 27,846,704
Shares issued upon reinvestment of distributions 56,501 708,003 29,697 366,811
Shares redeemed (1,011,667) (12,759,888) (858,396) (10,590,296)
Change in net assets from capital share
transactions 161,343 $ 2,086,809 1,407,124 $ 17,623,219
</TABLE>
78
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
Year Year
Ended 9/30/95 Ended 9/30/94
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 71,110 $ 1,021,048 192,548 $ 2,946,139
Shares issued upon reinvestment of distributions 45,425 658,265 51,632 797,051
Shares redeemed (483,463) (6,926,047) (328,132) (4,975,320)
Change in net assets from capital share
transactions (366,928) $ (5,246,734) (83,952) $ (1,232,130)
CLASS B:
Shares sold 247,851 $ 3,605,763 723,926 $ 11,283,387
Shares issued upon reinvestment of distributions 99,198 1,439,916 109,721 1,694,171
Shares redeemed (903,907) (13,100,688) (809,227) (12,195,599)
Change in net assets from capital share
transactions (556,858) $ (8,055,009) 24,420 $ 781,959
</TABLE>
* For the period from June 5, 1995 (issuance of Class A shares) to September
30, 1995.
** For the period from January 1, 1995 to September 30, 1995.
*** For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
+ On September 27, 1995, Capital Growth Portfolio acquired the net assets of
Mentor/Cambridge Growth Portfolio in exchange for Class A and Class B
shares of the Capital Growth Portfolio pursuant to a plan of reorganization
approved by the shareholders of Mentor/Cambridge Growth Portfolio on
September 21, 1995. The acquisition was accomplished by a tax free exchange
of 1,927,004 shares of the Capital Growth Portfolio for the net assets of
Mentor/Cambridge Growth Portfolio. The net assets of Mentor/Cambridge
Growth Portfolio on that date including $3,953,496 of unrealized
appreciation on investments, were combined with Capital Growth Portfolio.
The aggregate net assets of Capital Growth Portfolio and Mentor/Cambridge
Growth Portfolio immediately before the acquisition were $56,351,987 and
$30,350,659, respectively. The net assets of Capital Growth Portfolio
immediately after the acquisition were $86,702,646.
(a) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
79
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of the Growth Portfolio, Capital Growth
Portfolio, Strategy Portfolio, Income and Growth Portfolio, Perpetual Global
Portfolio, Quality Income Portfolio, Short-Duration Portfolio and Municipal
Income Portfolio, portfolios of Mentor Funds (the Funds) as of September 30,
1995 and the related statements of operations for the year or period then ended
(pages 50 to 51), the statements of changes in net assets for each of the years
or periods in the two year period then ended (pages 52 to 54) and the financial
highlights for Class A and Class B shares for each of the years or periods in
the six year period then ended (pages 55 to 63). These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
as of September 30, 1995 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, Perpetual Global Portfolio, Quality Income Portfolio,
Short-Duration Portfolio and Municipal Income Portfolio, portfolios of Mentor
Funds as of September 30, 1995, the results of their operations for the year
then ended, the changes in their net assets for each of the aforementioned years
or periods in the two year period then ended and the financial highlights for
each of the years or periods as indicated on pages 55 to 63, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 10, 1995
80
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
PERCENT OF NET ASSETS SHARES MARKET VALUE
COMMON STOCKS 65.30%
BASIC MATERIALS 6.71%
Nalco Chemical Company 1,200 $ 40,950
Sherwin Williams Company 1,200 42,000
Sonoco Products Company 2,698 74,870
Unifi, Inc. 2,355 57,698
215,518
CAPITAL GOODS & CONSTRUCTION 7.67%
Amp, Inc. 1,100 42,350
General Electric Company 1,230 78,412
W.W. Grainger, Inc. 850 51,319
York International Company 1,760 74,140
246,221
CONSUMER CYCLICAL 6.10%
Gannett Company 1,000 54,625
Newell Company 3,020 74,745
R.R. Donnelley & Sons 1,700 66,300
195,670
CONSUMER STAPLES 10.77%
Interpublic Group Company 1,890 75,128
Johnson & Johnson, Inc. 1,025 75,978
McDonald's Corporation 1,770 67,702
Pfizer, Inc. 900 48,037
Sysco Corporation 2,900 79,025
345,870
ENERGY 2.32%
Schlumberger, Ltd. 1,140 74,385
FINANCIAL 8.56%
American Express Company 1,700 75,437
Banc One Corporation 1,812 66,138
Federal National Mortgage Association 650 67,275
United Asset Management Company 1,640 65,805
274,655
RETAIL 6.28%
Albertson's, Inc. 1,980 67,568
Avon Products Company 890 63,857
May Department Stores 1,600 70,000
201,425
TECHNOLOGY 9.51%
General Motors Corporation - Class E 1,200 $ 54,600
Intel Corporation 920 55,315
Linear Technology Corporation 1,200 49,800
Motorola, Inc. 1,000 76,375
Premier Industrial Corporation 2,770 69,250
305,340
TRANSPORTATION 2.20%
Werner Enterprises, Inc. 3,400 70,550
MISCELLANEOUS 5.18%
Corning, Inc. 1,600 45,800
Olsten Corporation 1,200 46,650
Tyco International, Ltd. 1,170 73,710
166,160
TOTAL COMMON STOCKS (COST $1,773,254) 2,095,794
FIXED INCOME SECURITIES 34.79%
U.S. GOVERNMENT AND AGENCIES SECURITIES 26.67%
U.S. TREASURY BONDS 12.38%
7.38% 5/15/96 $ 75,000 75,764
7.88% 11/15/04 60,000 66,743
7.25% 5/15/16 40,000 42,784
7.13% 2/15/23 95,000 100,706
7.50% 11/15/24 100,000 111,224
397,221
U.S. TREASURY NOTES 12.73%
6.50% 8/15/97 125,000 126,408
6.50% 4/30/99 120,000 122,012
6.13% 7/31/00 40,000 40,145
7.75% 2/15/01 30,000 32,314
7.50% 5/15/02 45,000 48,406
5.88% 2/15/04 40,000 39,132
408,417
FEDERAL HOME LOAN BANK 1.56%
8.32% 1/30/98 $50,000 $ 50,309
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (COST $816,325] 855,947
CORPORATE BONDS 5.02%
Case Equipment Loan, 4.40%, 11/15/98 14,247 14,195
Nationsbank Corporation, 9.38%, 9/15/09 35,000 41,674
Norwest Corporation, 6.80%, 5/15/02 60,000 60,450
Traveler's, Inc., 8.63%, 2/01/07 40,000 44,950
TOTAL CORPORATE BONDS (COST $159,877) 161,269
SHORT-TERM INVESTMENT 3.10%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 9/29/95, 6.40%, due 10/02/95,
collateralized by $70,000 U.S. Treasury Note,
11.75%, 11/15/14 (cost $99,557) 99,557 99,557
TOTAL FIXED INCOME SECURITIES (COST $1,075,759) 1,116,773
TOTAL INVESTMENTS (COST $2,849,013) 100.09% 3,212,567
OTHER ASSETS LESS LIABILITIES (0.09%) (2,994)
NET ASSETS 100.00% $3,209,573
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
MENTOR
BALANCED
PORTFOLIO
ASSETS
Investments, at market value * (Note 2) $3,212,567
Receivables
Investments sold 54,924
Dividends and interest 21,307
Other assets 3,331
Total assets 3,292,129
LIABILITIES
Payable for investments purchased 82,175
Accrued expenses and other liabilities 381
Total liabilities 82,556
NET ASSETS $3,209,573
Net Assets represented by:
Additional paid-in capital $2,663,556
Undistributed net investment income 77,407
Accumulated net realized gain on
investment transactions 105,056
Net unrealized appreciation of investments (Note 6) 363,554
Net Assets $3,209,573
Shares Outstanding 216,091
NET ASSET VALUE PER SHARE $ 14.85
*Investments at cost $2,849,013.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1995
MENTOR
BALANCED
PORTFOLIO*
INVESTMENT INCOME
Dividends $ 28,094
Interest 61,868
Total investment income 89,962
Expenses
Distribution fee (Note 4) 17,894
Management fee (Note 3) 14,563
Shareholder servicing fee (Note 4) 5,965
Custodian and accounting fees 5,028
Registration expenses 2,119
Shareholder reports and postage expenses 674
Legal and audit fees 4,055
Directors' fees and expenses 271
Miscellaneous expenses 41
Total expenses 50,610
Deduct
Waiver of distribution fee (Note 4) 17,894
Waiver of management fee (Note 3) 14,563
Waiver of shareholder servicing fee (Note 4) 5,965
NET EXPENSES 12,188
NET INVESTMENT INCOME 77,774
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments sold 112,161
Change in unrealized appreciation
(depreciation) of investments 379,762
Net realized and unrealized gain on investments 491,923
Net increase in net assets resulting
from operations $569,697
*For the period from January 1, 1995 to September 30, 1995.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MENTOR
BALANCED PORTFOLIO
PERIOD PERIOD
ENDED ENDED
9/30/95* 12/31/94**
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 77,774 $ 50,691
Net realized gain (loss) on investments sold 112,161 (7,105)
Change in unrealized appreciation (depreciation)
of investments 379,762 (16,208)
Increase in net assets from operations 569,697 27,378
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (7,781) (43,277)
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Change in net assets from capital
share transactions (263,442) 2,926,998
Net increase in net assets 298,474 2,911,099
NET ASSETS
Beginning of period 2,911,099 -
End of period $3,209,573 $2,911,099
</TABLE>
*For the period from January 1, 1995 to September 30, 1995.
**For the period from June 21, 1994 (commencement of operations) to December 31,
1994.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
MENTOR BALANCED
PORTFOLIO
PERIOD PERIOD
ENDED ENDED
9/30/95* 12/31/94**
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 12.50
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.36 0.22
Net realized and unrealized
gain (loss) on investments 2.08 (0.09)
Total from investment operations 2.44 0.13
LESS DISTRIBUTIONS
Dividends from net investment income (0.03) (0.19)
NET ASSET VALUE, END OF PERIOD $ 14.85 $ 12.44
Total Return 19.28% 1.00%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 3,210 $ 2,911
Ratio of expenses to
average net assets 0.50%(a) 0.50%(a)
Ratio of expenses to average
net assets excluding waiver 2.12%(a) 2.72%(a)
Ratio of net investment income
to average net assets 3.26%(a) 3.32%(a)
Portfolio turnover rate 65% 71%
(a) Annualized.
* For the period from January 1, 1995 to September 30, 1995.
** For the period from June 21, 1994 (commencement of operations) to
December 31, 1994.
See notes to financial statements.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
NOTE 1: ORGANIZATION
The Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. On April 12, 1995 the name of the Trust was changed to Mentor Funds
("Mentor Funds"). On April 12, 1995 the portfolios of Mentor Series Trust were
merged into newly formed portfolios of Mentor Funds. Mentor Funds consists of
nine separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1995, as
follows:
Mentor Growth Portfolio (formerly Mentor Growth Fund)
("Growth Portfolio")
Mentor Capital Growth Portfolio (formerly Cambridge Capital Growth
Portfolio) ("Capital Growth Portfolio")
Mentor Strategy Portfolio (formerly Mentor Strategy Fund)
("Strategy Portfolio")
Mentor Income and Growth Portfolio (formerly Cambridge Income and Growth
Portfolio) ("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio (formerly Cambridge Global Portfolio)
("Global Portfolio")
Mentor Quality Income Portfolio (formerly Cambridge Government Income
Portfolio) ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio (formerly Mentor Short-Duration
Income Fund) ("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio (formerly Cambridge Municipal Income
Portfolio) ("Municipal Income Portfolio")
Mentor Balanced Portfolio (formerly Mentor Balanced Fund)
("Balanced Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The financial statements included in this report are for the Balanced Portfolio
(hereinafter referred to as the "Portfolio").
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolio:
(a) Valuation of Securities - Listed securities held by the Portfolio and
traded on national stock exchanges and over-the-counter securities quoted on the
NASDAQ National Market System are valued at the last reported sales price or,
lacking any sales, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by the Board of Trustees of the Portfolio as the primary market.
Securities traded in the over-the-counter market, other than those quoted on the
NASDAQ National Market System, are valued at the last available bid price.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value. Securities for which
<PAGE>
market quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the general
supervision of the Board of Trustees.
U.S. Government obligations held by the Portfolio are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Portfolio's Board of Trustees. In determining value,
the dealers use information with respect to transactions in such securities,
market transactions in comparable securities, various relationships between
securities, and yield to maturity.
(b) Repurchase Agreements- It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system, or to have segregated within the custodian bank's
vault all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by Mentor Funds to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Fund's adviser to be creditworthy pursuant to guidelines established by
the Mentor Fund's Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Security Transactions and Investment Income - Security transactions for the
Portfolio are accounted for on a trade date basis. Dividend income is recorded
on the ex-dividend date and interest is recorded on the accrual basis. Interest
income includes interest and discount earned (net of premium) on short term
obligations, and interest earned on all other debt securities including original
issue discounts as required by the Internal Revenue Code. Realized and
unrealized gains and losses on investment security transactions are calculated
on an identified cost basis.
(d) Federal Income Taxes - No provision for federal income taxes has been made
since it is the Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains, if any.
(e) Distributions to Shareholders- Distributions from net investment income and
net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Portfolio.
NOTE 3: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Portfolio has entered into an Investment Advisory Agreement with
Commonwealth Investment Counsel, Inc. ("Commonwealth"), a wholly-owned
subsidiary of Mentor Investment Group, Inc. (formerly Investment Management
Group, Inc.) ("Mentor"), which is a wholly-owned subsidiary of Wheat First
Butcher Singer, Inc. ("Wheat"). Under this agreement, Commonwealth's management
fee is accrued daily and paid monthly at an annual rate of 0.75% applied to the
average daily net assets of the Portfolio. In order to limit the Portfolio's
expenses, during the period ended September 30, 1995, Commonwealth has agreed to
reduce its compensation to the extent that expenses of the Portfolio (exclusive
of brokerage, interest, taxes, deferred organization expenses, and
<PAGE>
payments under the Portfolio's Distributions Plan) exceed an annual rate of
0.50% of the Portfolio's average net assets. For the period ended September 30,
1995, Commonwealth earned and voluntarily waived advisory fees of $14,563 for
the Portfolio.
Administrative personnel and services are provided by Mentor to the Portfolio,
under an Administration Agreement, at an annual rate of .10 of 1% of the average
daily net assets of the Portfolio. In order to limit the Portfolio's expenses
during its start-up period, Mentor agreed to waive its fee for the first year of
the Portfolio's operations.
Commonwealth has agreed to reimburse the Portfolio for the operating expenses
(exclusive of interest, taxes, brokerage and distributions fees, and
extraordinary expenses) in excess of the most restrictive expense limitation
imposed by state securities commissions with jurisdiction over the Portfolio.
The most stringent state expense limitation applicable to the Portfolio requires
reimbursement of expenses in any year that such expenses exceed 2.5% of the
first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of
average daily net assets, and 1.5% of the average daily net assets over
$100,000,000. During the period ended September 30, 1995, no reimbursement from
Commonwealth was required as a result of such state expense limitations.
NOTE 4: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under a Distribution Agreement between the Portfolio and Mentor Distributors,
Inc. ("Mentor Distributors") (formerly Cambridge Distributors, Inc.) a
wholly-owned subsidiary of Mentor, was appointed distributor of the Portfolio.
To compensate Mentor Distributors for the services it provides and for the
expenses it incurs under the Distribution Agreement, the Portfolio has adopted a
Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940, under which the Portfolio pays a distribution fee, which is accrued daily
and paid monthly at the annual rate of 0.75% of the Portfolio's average daily
net assets.
Effective, June 21, 1994 the Portfolio commenced payment of certain compensation
to Wheat under a Shareholder Service Agreement for administrative support
services at an annual rate of 0.25% of the Portfolio's average daily net assets.
The total charges to be borne by the Portfolio, under the Distribution and
Shareholder Service Agreements is expected to remain at an annual rate of 1% of
the Portfolio's average daily net assets. For the period ended September 30,
1995 Wheat earned and voluntarily waived distribution and shareholder services
fees of $17,894 and $5,965 respectively.
NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities,
aggregated $1,972,063 and $2,102,048 respectively, for the the period ended
September 30, 1995.
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
At September 30, 1995, the cost of investments for federal income tax purposes
amounted to $2,849,013 and net unrealized appreciation aggregated $363,554, of
which $375,775 related to appreciated securities and $12,221 related to
depreciated securities.
<PAGE>
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Period Period
Ended Ended
9/30/95* 12/31/94**
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
Shares sold 6,784 $ 90,000 233,931 $2,926,998
Shares issued upon reinvestment of distribution 3,998 51,058 - -
Shares redeemed (28,622) (404,500) - -
Change in net assets from capital share
transactions (17,840) $(263,442) 233,931 $2,926,998
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
**For the period from June 21, 1994 (commencement of operations) to December 31,
1994.
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statement of assets and liabilities of the
Mentor Balanced Portfolio, a portfolio of Mentor Funds, including the
portfolio of investments, as of September 30, 1995, and the related statement
of operations for the period from January 1, 1995 to September 30, 1995, and
the statements of changes in net assets and financial highlights for the period
from January 1, 1995 through September 30, 1995 and the period from June 21,
1994 (commencement of operations) to December 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Mentor Balanced
Portfolio, a portfolio of Mentor Funds, as of September 30, 1995, and the
results of its operations for the period from January 1, 1995 through
September 30, 1995, and the changes in its net assets and financial
highlights for the period from January 1, 1995 through September 30, 1995 and
the period from June 21, 1994 to December 31, 1994 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 10, 1995
